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MindMap Gallery Financial Reporting CFA Level 2
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Financial Reporting CFA Level 2
Financial reporting CFA Level 210%-15% mind map, covering inter-company investment, employee benefits, multinational operations, financial institutions, financial report quality evaluation, and comprehensive financial report analysis.
Edited at 2023-09-13 19:57:50
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- Plant asexual reproduction
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Financial Reporting CFA Level 2
- bacteria
This is a mind map about bacteria, and its main contents include: overview, morphology, types, structure, reproduction, distribution, application, and expansion. The summary is comprehensive and meticulous, suitable as review materials.
- Plant asexual reproduction
This is a mind map about plant asexual reproduction, and its main contents include: concept, spore reproduction, vegetative reproduction, tissue culture, and buds. The summary is comprehensive and meticulous, suitable as review materials.
- Reproductive development of animals
This is a mind map about the reproductive development of animals, and its main contents include: insects, frogs, birds, sexual reproduction, and asexual reproduction. The summary is comprehensive and meticulous, suitable as review materials.
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- Outline
financial report 10%-15%
intercompany investment ★★★
Classification
Financial asset investment
Passive investment, no significant influence 20%, non-control
monetary assets
Classify
Financial assets measured at amortized cost amortized cost
Bonds held for the purpose of obtaining cash flows of principal and interest
Financial assets measured at fair value through other comprehensive income Fair value through other comprehensive income, FVCOI
Bonds intended to obtain cash flow of principal and interest, but may be sold at any time
Financial assets measured at fair value and changes included in current profit and loss Fair value through profit or loss,FVPL
Bonds held without earning principal and interest
Stocks held for trading purposes
Bonds held for the purpose of obtaining cash flows of principal and interest (to match assets and liabilities in accounting measurements)
Financial derivatives (excluding hedging instruments) & rights-containing securities
Stocks held not for trading purposes can be classified into either category
rearrange
Equity assets cannot be reclassified
Bonds can be reclassified when business models change
Impairment
expected impairment model
Disclosure
Disclosure of fair value of financial asset investments
investment in associates
Significant influence, non-control, shareholding 20%-50%
Basis for judgment of significant impact
board seat
Participate in decision-making
major transactions
On-site management personnel
technology dependence
accounting
equity method
one-line consolidation
Consolidated profit does not consolidate revenue
The investor's balance sheet B/S records equity investment
When the investee makes a profit, the equity investment amount will be increased
When the investee distributes dividends, it is regarded as a return of principal and the amount of equity investment is reduced.
Equity investment amount at the end of the period = Investment income at the beginning of the period - Dividends
When the investment loss or impairment reaches 0, the equity method is stopped; when the investee makes a profit and the amount exceeds the losses and impairments that have not been reduced in the previous period, the equity method is restarted.
The investor's income statement I/S records investment income
Investment cost (purchase price)
goodwill
Not amortized
The excess of fair value over book value
Depreciation and amortization based on years
Book value of identifiable net assets
Investor and Associate Transactions
Downstream trading: the investor sells goods to the investee
Countercurrent trading upstream: vice versa
Risks of selling products to each other: Inflated income and profits
response
Before selling to a third party, profits are recorded as unrealized profits and are reduced when disclosed.
After selling to a third party, investment income increases
impairment
IFRS
If the book value of the equity investment is greater than the recoverable amount, it is depreciated; the loss is included in the income statement, and the equity investment amount is reduced.
USGAAP
If the fair value of an equity investment is lower than the book value, if it is permanent, the impairment will be treated in the same way as IFRS.
No reversal allowed
Precautions
Pay attention to whether the use of equity method is appropriate and whether it has a significant impact
The equity method overestimates the investor’s net profit margin
Only the profits of the investee are counted, not income.
Consider the investee’s net profit, not cash income
fair value measurement method
IFRS
Consider venture capital, mutual funds, unit trusts, investment-linked insurance funds
US GAAP unlimited
Method: No adjustments to net profit and dividends, no amortization, no goodwill
proportionate consolidation
List the investee's assets, liabilities, income, and profits item by item; compared with the equity method, the assets and liabilities under the ratio consolidation method are higher, and the net profit and net assets are the same.
joint venture
Jointly controlled by multiple investors
equity method
business combination business combination
Control, subsidiary, holding more than 50% of the shares
Merge method
absorb merge merge
A B=A
New consolidation
A B=C
Acquisition: Acquisition as a subsidiary
A B=A B
accounting
Acquisition method, parent company’s perspective
Consolidated Balance Sheet: Fully Consolidated
Consolidating Identifiable Assets and Liabilities
Consolidation = parent book, subsidiary book fair
Consolidated goodwill
Consolidated total assets = Book value of the parent company’s identifiable assets Fair value of the subsidiary’s identifiable assets Goodwill
The acquisition price is higher than the fair value of the subsidiary's identifiable assets, forming goodwill
partial goodwill
Acquisition consideration - shareholding ratio × fair value of the subsidiary's identifiable net assets
full goodwill
Overall value of the subsidiary - fair value of the subsidiary's identifiable net assets
IFRS disclosures can be made in whole or in part US GAAP requires disclosure of overall goodwill
summary
Below, bargain purchase is included in the income statement as a gain
minority interests
Under part of the goodwill
Proportion without acquisition × fair value of identifiable net assets of subsidiaries
under overall goodwill
Proportion of no acquisitions × (fair value of identifiable net assets of subsidiaries overall goodwill)
US GAAP only allows overall goodwill
That is, assuming that all purchases are made, the unpurchased portion
Consolidated stockholders' equity
Equity of the parent company Minority interests of the subsidiary
Consider part or all of the goodwill situation
Consolidated Income Statement
Net profit attributable to parent company = Net profit of parent company Partial profit from acquisition
Subsequent measurement
Fair value adjustment: Subsidiary assets are measured at fair value
Eliminate insider trading
Goodwill impairment
IFRS
Goodwill is allocated to the smallest cash unit (subsidiary) cash-generating unit
Unit impairment loss = book value – recoverable amount
The current unit is devalued to 0, and other non-cash assets in the unit continue to be deducted.
USGAAP
Goodwill is allocated to each reporting unit, i.e. operating divisions, subsidiaries
Impairment test: Book value > fair value, impairment
Impairment loss = Carrying value of goodwill Fair value of identifiable net assets in the reporting unit – Fair value of the reporting unit
The goodwill in the segment is reduced to 0, and other assets in the segment are no longer impaired.
pooling of interest method pooling of interest method
The assets and liabilities of both parties in the consolidated statement are measured at their original book value.
something else
contingent liabilities
IFRS
Can be measured reliably, max (original recognized amount, estimated repayment amount required to settle)
USGAAP
Fair value measurement on acquisition
contingent assets
IFRS does not allow recognition of contingent assets
USGAAP
Fair value measurement on acquisition
contingent consideration
Measured at fair value
Changes in the fair value of assets and liabilities are included in the consolidated income statement
Changes in equity value are included in the statement of changes in owners’ equity
in-process R&D
Fair value measurement, intangible assets, failure → impairment, success → amortization
restructuring costs
Included in current expenses
SPE
The main beneficiary of a VIE should consolidate the VIE as a subsidiary
Isolate specific business activities and isolate risks
Employee Benefits ★★★
Post-employment benefits
health care plans health care plans
medical insurancemedical care
life insurance
pension plan
DC plans defined contribution pension plan
employer
Deposit pension funds into the account and include them in current expenses
No investment risk
employee
Bear investment risks
Account migration with employees and job changes
DB plans defined benefit pension plan
employer
Retirement payment fixed pension
Set up a pension trust plan
bankruptcy quarantine
pre-fund
Requires some operating expenses
Investment risk borne by employer
Employers can terminate DB plans early
employee
Does not bear investment risks and bears the risk of early termination of the plan
IFRS & US GAAP require disclosure of pension surplus funded status
Fair value of pension assets - present value of future benefits (pension liabilities)
There is a disclosure cap
Measurement
pension liabilities
abbreviation
USGAAP
PBO, projected benefit obligation
IFRS
PVDBO, present value of the defined benefit obligation
actuarial assumptionsactuarial assumptions
Assumptions related to annual benefit amount
salary growth rate
employee mobility
Length of service
Life after retirement, number of cash flow periods
Minimum service years vesting
cash flow discount rate
Adjustments to assumptions result in actuarial losses or gains
calculate
Calculate salary level at retirement
Calculate annual benefit payment
The amount of benefit you can receive every year after retirement = pre-retirement salary level × coefficient × length of service
Calculate the present value of all benefits at retirement
Discounted until now
pension costs
Pension costs that are not capitalized are included in current profits and losses or other comprehensive income.
constitute
Service cost
Upfront service cost
Plan changes occur
IFRS
credited to income statement
USGAAP
Included in OCI, subsequent amortization will be entered into the income statement based on the estimated average service years of the affected employees.
Current service cost
Pension costs incurred by employees during the year of service
Enter the income statement
Net interest cost or income
Pension liability interest - pension asset expected return
Disclosure
IFRS
The net amount is disclosed and included in the current profit and loss.
USGAAP
Disclosed separately and included in current profit and loss
The impact of remeasurement remeasurement
Remeasurement of assets: difference between actual investment and expected investment
IFRS
Difference = actual income - pension assets at the beginning of the period × discount rate
Net income from pension assets
USGAAP
Difference = actual income - pension assets at the beginning of the period × expected income
Actuarial gain or loss
Included in OCI
Liability Remeasurement: Adjustments to Actuarial Assumptions
Actuarial gains and losses
Included in OCI
Subsequent measurement
IFRS
Included in other comprehensive income and not amortized
USGAAP
Accumulated actuarial gains and losses are amortized using the buffer method
corridor approach
If the accumulated actuarial gains or losses exceed a certain range, the excess will be amortized
Number of Periods: Average Expected Remaining Service Years
total periodic pension cost, TPPC
Total periodic pension cost, TPPC = current service cost, previous service cost, interest cost - actual income from pension assets, actuarial loss (-actuarial gain)
Net pension assets at the end of the period - Net pension assets at the beginning of the period = Employer contributions - Total pension costs
Δfund status = employer contribution-TPPC
Precautions
IFRS (only discount rate is considered)
P&L Pension cost included in current profit and loss = current service cost, previous service cost, net interest cost (from liabilities) - net interest income (from assets)
OCI’s pension costs included in other comprehensive income = (expected income-actual income) actuarial loss (-actuarial gain)
US GAAP (with expected rate of return)
P&L Pension cost included in current profit and loss = current service cost (interest cost - expected income) prior service cost before amortization amortized actuarial loss (-actuarial gain)
OCI’s pension cost included in other comprehensive income = upfront service cost - (actual income - expected income) actuarial loss (-actuarial gain) - amortized upfront service cost - amortized actuarial loss (amortized actuarial gain)
Calculation (Liabilities & Costs)
projected unit credit method
Calculate salary level at retirement
Calculate benefits
Calculate the present value of all benefits at retirement
The present value of the benefit in the previous step is allocated to each year of the service period, and the annual unit benefit is obtained annual unit credit=PV(annual benefit payment)/n
Use the results of the previous step to calculate the current service cost, interest cost, and ending or beginning pension liability balance for a certain accounting period.
Analyze and adjust
Influencing factors
future wage growth
Positively related to pension liabilities
Positively related to pension interest costs
Positively related to service costs
Discount Rate
Negatively related to pension liabilities
Negatively and positively related to pension interest
Relationship to interest depends on duration
Expected return on pension assets
US GAAP requires estimates of expected earnings
Expected earnings determine net interest cost in pension costs
The ending balance of pension funds is the fair value of assets, which is actual income, not expected income. Expected income has no impact on the balance sheet.
Inversely proportional to net interest cost
Inversely proportional to pension costs included in current profits and losses
Report adjustments
Income statement adjustments
IFRS → US GAAP
Pension costs removed from operating expenses
Service costs are added to operating expenses
Pension interest cost adjusted to interest expense
Actual investment income on pension assets adjusted to investment income
Adjusted profit volatility increases
cash flow adjustment
Payments are treated as operating cash outflows
The difference between employer contributions and total pension costs is considered financing
If the payment is large, the difference will be regarded as financing cash CFF outflow, after tax
balance sheet
Disclosure of differences
Other benefits payment methods
share-based payment
Way
stock grants stock grants
unrestricted stock outright stock grant
Confirmed as an expense in the current period
restricted stock restricted stock
Fair value on grant date is expensed
performance shares performance shares
Performance determines the number of awards and may be manipulated by performance
stock options
Service period: from grant date to vesting date
Fair value measurement, amortization during the service period, reduction in retained earnings, increase in paid-in capital
Non-fair value, requires option pricing
No cash settlement, equity settlement
stock appreciation rights stock appreciation rights
simulated stocks
cash settlement
Fair value measurement, amortization over service period Avoid share dilution but cash outflow
accounting disclosures
Disclose executive compensation & fair value measurement method in annual report and shareholder proxy statement
Transnational operations ★★★
Currency types in cross-border operations
reporting currencypresentation currency
The currency unit used in financial reporting
functional currency functional currency
currency of the operating environment
IFRS standards
Currency that affects the price of products and services
Currency in the competitive and regulatory environment that affects the price of products and services
most important
Currency that affects the costs of labor, materials, etc. invested in products and services
Currency used for financing
Currency of operating income
Recognize the subsidiary’s functional currency as the parent company’s functional currency
The subsidiary operation is an extension of the parent operation and has no independent management rights.
Transactions between subsidiaries and parents account for a large proportion of subsidiaries’ business
The cash flow of the subsidiaries affects the cash flow of the parent, and the subsidiaries can remit money to the parent.
The subsidiary’s operating cash flow is insufficient to repay its own debts and needs to be supplemented by the parent
local currencylocal currency
Currency of the place of business
Foreign Currency Transactions: Exchange Gains and Losses
Disclosure
The transaction occurs & the transaction is settled in the same accounting period → included in the current income statement
Transaction occurrence & transaction settlement in different accounting periods
Record unrealized exchange gains and losses for the current period to the income statement
The realized exchange gains and losses will be recorded in the next period to the income statement.
Accounts payable need to be adjusted
Impact on reports
Can be disclosed in other operating income or expenses, as well as non-operating income and expenses
Reduced comparability between companies
There is a big difference between unrealized and realized
Foreign currency statement conversion
Different exchange rates for different subjects
current rate current rate
Balance sheet date currency
average exchange rate
Average exchange rate during the accounting period
historical exchange rate
Exchange rate at the time of transaction
Balancing: Cumulative translation adjustment, CTA, belongs to owner’s equity; When a subsidiary is sold, it will be included in the current profit and loss.
current rate method current rate method
Be applicable
Assets & liabilities are translated using the spot exchange rate on the balance sheet date
Owner's equity, except retained earnings, is translated using historical exchange rates
The retained earnings at the beginning of the period are obtained from the converted statements of the previous period and do not need to be converted.
Income and expenses are translated at the exchange rate at the time of transaction, sometimes the average exchange rate for the period is used instead of the exchange rate at the time of occurrence
Dividends are converted at the exchange rate on the date of declaration
Influence
Total assets are greater than total liabilities, the difference → net asset exposure, and vice versa, net liability exposure
net asset exposure
Foreign currency ↑, positive cumulative translation adjustment ↑, negative cumulative translation adjustment ↓, owners’ equity ↑
Exchange gains and losses are included in other comprehensive income
Temporal method Temporal method
Be applicable
Monetary assets and liabilities, settled at prevailing exchange rates
Cash and cash equivalents, receivables, payables, long-term and short-term debt
Ignore unrealized gains or losses
Non-monetary assets and liabilities measured at current value are converted at the exchange rate used to determine the current value (generally the current exchange rate)
Non-monetary assets and liabilities measured at historical cost, translated at historical exchange rates
Fixed assets, inventories, intangible assets
Deferred revenue, unearned revenue
Owner's equity, except retained earnings, is translated using historical exchange rates
The retained earnings at the beginning of the period are obtained from the converted statements of the previous period and do not need to be converted.
Income and expenses are translated at the exchange rate at the time of transaction, sometimes the average exchange rate for the period is used instead of the exchange rate at the time of occurrence
Expenses related to non-monetary assets, cost of goods sold, and depreciation of fixed assets are converted using the same exchange rate as the corresponding assets.
Dividends are converted at the exchange rate on the date of declaration
Influence
Assets translated using the current exchange rate are greater than liabilities translated using the current exchange rate, and the difference is the net asset exposure, and conversely the net liability exposure
net asset exposure
Foreign currency ↑, resulting in translation gains; foreign currency ↓, resulting in translation losses
Inventory valuation method affects the exchange rate used
Compared
Judgment of financial indicators
Determine appreciation or depreciation
column ratio expression
Determine the conversion exchange rate and size used in the numerator and denominator
Judgment changes
hyperinflation discount
USGAAP
Three-year cumulative 100% is defined as hyperinflation, and the tense method is used for the conversion of subsidiaries in hyperinflation areas
temporal method
IFRS
Restated based on local inflation rate
Monetary assets and liabilities are not restated
Restatement of Nonmonetary Assets and Liabilities
Changes in the price level
In owner's equity (excluding retained earnings)
Restated based on the price level from the original accounting date to the balance sheet date
The income statement is restated based on changes in the price index from the original confirmation date of the transaction to the balance sheet date.
Imbalance, resulting in purchasing power gains and losses, i.e. inflation gains and losses
Statement after restatement after conversion from current exchange rate
current rate current rate
Other impacts
effective tax rate
Affected by tax jurisdiction
Sales revenue
exchange rate uncertainty
exchange rate fluctuations
Sensitivity analysis, impact on profits
Financial Institutions ★★
feature
systemically important
Many financial assets
Fair value measurement fluctuates greatly
Classification
banking
investment medium
Public funds, hedge funds, market makers, brokers
insurance company
Supervision
Basel committeeBasel committee
Minimum capital requirements
Minimum liquidity requirements
Stable source of funds
other organizations
financial stability board
international association of deposit insurance institutions
International Association of Insurance Supervisors, IAIS
International Organization of Securities Commissions, IOSCO
bank analysis
CAMELS analysis method
6 elements
Capital adequacy ratioCapital adequacy
Definition: The ratio of risk-weighted assets adjusted based on risk to different levels of capital
risk weighted assets
The higher the risk, the greater the weight.
Capital stratification
Core tier 1 capital, also known as common equity tier 1 capital
Include
common stock
Common stock issuance premium issuance surplus
retained earnings retained earnings
Accumulated other comprehensive income AOCI
Basel III requirements: capital adequacy ratio ≥4.5%
other tier 1 capital other tier 1 capital
Capital with no fixed maturity date and no mandatory interest payment obligations, with priority lower than deposits and other debts, non-cumulative preference shares
total tier 1 capital Basel III requirements: capital adequacy ratio ≥ 6%
Tier 2 capital
Capital with a maturity of more than 5 years, with priority lower than deposits and general bank debt, long-term subordinated debt
total capital Basel III requirements: capital adequacy ratio ≥8%
Asset quality Asset quality
Asset type
loan
Loan losses
Loan loss allowance allowance for loan lost, loan asset allowance account in the balance sheet
Provision for loan loss, income statement account, change in loan loss provision
Loan quality: whether loan losses are adequately provided for
Loan loss provision/bad debt write-off
Loan loss impairment/bad debt write-off net charge-off
Loan loss provisions/Non-performing loans
The larger the ratio, the more adequate the loss estimate is.
Stock investment
Pay attention to unrealized losses, which are more likely to turn into realized losses as time passes.
Highly Liquid Assets
Minimal risk, cash, repurchase, peers, etc.
Analysis Dimensions
Asset composition
Asset credit quality
Asset liquidity
Degree of asset diversification
Management capabilityManagement capability
Profit while managing risks
Pay attention to the independence of the board of directors, the influence of the board of directors on management, disclosure of related transactions, and audit opinions
Earning sufficiency
Principle: Make enough money, high quality and growing trending upward profits
Source of profit
net interest income
Loan interest - interest on interest-paying debt, net interest margin of spread
Continuous
Service revenue
Personal finance, asset custody, payment and settlement, etc.
trading income
Securities and foreign currency transactions
Accounting estimates that affect profits
Loan impairment provision
fair value estimate
Level 1: Active market quotes
optimal
Layer 2: Observable Data
Layer 3: Model estimation
Goodwill, deferred income tax assets, etc.
Liquidity position
Liquidity coverage ratio, LCR
LCR = highly liquid assets/monthly cash outflow under stress conditions
Basel III requires indicators to be greater than 100%
Net stable funding ratio, NSFR
NSFR = Stable Funding Available / Stable Funding Required
Both funds are weighted values
Basel III requires indicators to be greater than 100%
Links liquidity and liquidity needs
Sensitivity to market risk Sensitivity to market risk
Sources of market risk
maturity mismatch
Assets and liabilities repricing frequency is different
Assets and liabilities are denominated in different currencies and reference rates
VaR
The potential loss of an asset within a given period of time at a certain level of confidence
Method: Each factor is scored from 1 to 5 and then weighted average. The larger the value, the worse it is.
other factors
governmental support
Government shareholding
Banking system positioning
global bank
community bank
company culture
The competitive environment
Regional bank, conservative
Global Bank, Radical
Off-balance sheet items
complex financial instruments
VIE
Pension plan trust size
Business segment
Foreign exchange risk exposure
Risk factors in annual report & negative situation list issued by lawyer
Information required to be disclosed by Basel III
Insurance company analysis
Base
Income mainly comes from premiums and investment income
The premium collected is called float in the account.
Property and Casualty Insurance property & casualty insurance company, P&C insurer
business model
product type
Property insurance
Accident insurance
multiple peril policies
Sales channels
direct writing
agency writing
independent agent
exclusive agent exclusive agent
insurance broker insurance broker
Profitability
cyclical
soft market soft
Low premiums and strict underwriting conditions force competitors to withdraw and turn the market into a strong one
Strong market hard
High premiums and loose underwriting conditions attract competitors, turning the market into a weak market
profitability indicator
subtopic
investment income
Quality: Ability to assess risk risk insured assessment
Loss and loss adjustment rates
(Loss fee Loss adjustment fee)/(Net premium earned)
loss expense
Losses due to claims
loss adjusted expense loss adjusted expense
Adjustments to estimated losses in previous periods
net premium earned
Recognized premium income
Efficiency: Ability to obtain premiums
underwriting expense ratio
Underwriting fee/net premium
underwriting expense
Fees, commissions, etc. incurred by underwriting
net premium written
Premiums collected are deducted from premiums paid to reinsurers
The lower the better
combined ratio
Loss rate Underwriting rate
Greater than 100%, loss
High value, weak cycle
Dividend ratio
Measures the relationship between cash outflows and premium earnings, a liquidity indicator
=dividend/net premium earned
Combined ratio after dividends
Joint Ratio - Dividend Ratio
fluidity
capital requirements
No unified standard
life and health insurance life and health insurance company, L&H insurer
Business model
product type
life insurance
death compensation
health insurance
Compensation for medical expenses
Distribution channel
Direct Selling & Consignment Sales
Profitability
cash flow
Benefit payment to the beneficiary
Early contract surrender, payment of accumulated cash value
Precautions
The fee comes from the interest paid on the income, and the income situation comes from the actuarial assumptions.
Amortization of customer acquisition costs requires assumptions
Securities fair value relies on estimates
index
financial reporting metrics
other
Proportion of total income payments to net premiums received
Commissions and fees as a percentage of net premiums collected
investment income
Cash flow prediction is easy, investment pursues higher returns
Focus on diversification, asset allocation, performance, interest rate risk, liquidity
fluidity
Low liquidity requirements
Current assets to current liabilities measure liquidity
capital requirements
No unified requirements
Financial report quality evaluation ★
Six levels of financial report quality
Comply with accounting standards, be useful for economic decision-making and have high earnings quality (GAAP, decision-useful sustainable, and adequate returns)
) complies with accounting standards and is useful for economic decision-making, but has low earnings quality (GAAP, decision-useful, low earning quality)
Comply with accounting standards, but the reported information does not accurately reflect reality, that is, there are biases (within GAAP, but biased accounting choices), and therefore plays a smaller role in economic decision-making. For example, in the recognition of income and expenses, you can choose a more conservative method or a more radical method.
Comply with accounting standards, but there is profit manipulation (within GAAP, but earning management). Companies may engage in profit manipulation in order to reduce profit volatility within the scope permitted by accounting standards.
non-compliant accounting
False reporting includes fabricating transactions that do not exist or omitting matters that actually exist.
Classification affects financial report analysis results
(1) Dividing inventory into other assets can increase the inventory turnover rate and reduce the current ratio;
(2) Dividing non-operating income into operating income can increase operating profit margins and affect the judgment of profitability sustainability;
(3) Dividing operating expenses into non-operating expenses will increase operating profit margins and affect the judgment of profitability sustainability;
(4) Including matters that should be included in other comprehensive income into current profits and losses will also affect the analysis of the company's profitability;
(5) Classifying cash inflows generated from investing or financing activities as cash inflows generated from operating activities will affect the estimation of sustainable cash flow, and thus the valuation;
(6) Dividing accounts receivable into long-term receivables will increase the accounts receivable turnover rate.
Report
income statement
Low quality: high revenue, underestimation of expenses, improper classification
(1) Use aggressive revenue recognition methods such as dealer channelstuffing and bill and hold sales;
(2) Divide operating expenses into non-operating expenses and divide non-operating income into operating income
(3)Fake income
(4) Capitalize expenses;
(5) Losses are included in other comprehensive income, while gains are included in the income statement.
Symptoms of a problem
(1) The income growth level is higher than that of the same industry;
(2) The discounts given to customers continue to increase;
(3) The growth of accounts receivable is higher than the growth of revenue
(4) Operating cash flow is lower than operating income;
(5) Revenue in the fourth quarter is much higher than other quarters
(6) Operating profit suddenly increases;
(7) The assumption of depreciation life is too radical (increase the depreciation life and reduce the depreciation rate)
(8) Operating income and expenses are unstable;
(9) Management compensation is linked to financial data.
balance sheet
Low quality: overestimating assets, underestimating liabilities, improper classification
(1) Select models and input variables when estimating fair value
(2) Divide current assets into non-current assets;
(3) Underestimating identifiable assets and overestimating non-identifiable assets (goodwill)
(4) Overestimation or underestimation of allowance accounts (bad debt provisions, etc.)
Symptoms of a problem
(1) Model input variables in fair value estimation are incorrect or inconsistent
(2) Current assets are classified as non-current assets;
(3) Provision accounts (bad debt provisions, etc.) are significantly different from those in the same industry, or fluctuate greatly;
(4) There is a large proportion of goodwill among assets
(5) Establish a special purpose entity (SPE);
(6) Significant changes in deferred income tax assets and liabilities
(7) Having large off-balance sheet liabilities
cash flow statement
Low quality: Overestimating operating cash flow
(1) Affect operating cash flow through management methods;
(2) Increase operating cash flow through cash flow classification.
Symptoms of a problem
(1) Accounts receivable and inventory decreased, and accounts payable increased;
(2) Capitalize expenditures and classify cash outflows as investment cash outflows
(3) Adopt sales and lease back
(4) Increase in bank overdrafts
Consolidated Statement
The business merger purchase method conceals the cash flow problems of the parent company
Share-based payment, suspected of financial fraud pushing up stock price
M&A, concealment of acquirer’s financial misinformation, reduced comparability and quality
Mergers, incentives to overstate goodwill and understate the value of identifiable assets
accounting standards, adjustments
Excluding impairment provisions and restructuring costs or amortization
Adjustment of R&D expenses that do not meet capitalization conditions
Adjustment for charges that cannot be recognized due to incomplete delivery
Adjustment of floating gains and losses included in other comprehensive income
Report quality assessment
step
(1) Understand the company and industry, and understand the rationality of the accounting standards adopted by the company;
(2) Understand the company’s management and assess whether the company’s management has any motivation to distort financial reports, including compensation system design, insider share reduction, and disclosure of related party transactions;
(3) Clarify areas in financial reports that involve subjective judgments by management and areas where unconventional accounting methods are used;
(4) Compare the company's financial statements for the current year and previous years, compare the company's accounting systems with those of its competitors, and use ratio analysis to compare the company's performance with its competitors;
(5) Discover signs that there may be problems with the quality of financial reports;
(6) For companies with multiple product lines or multiple regional divisions, analyze whether the company is trying to make revenue and profits appear to be shifting to high-growth hot areas, especially when the consolidated statement shows negative growth and a specific When the department is experiencing rapid development;
(7) Use quantitative analysis tools to evaluate the possibility of misstatements.
Beneish model Beneish model
Role: Assess the possibility of financial fraud
M-score
Greater than -1.78, the possibility of profit manipulation is high
The more negative the better
factor
DSR, days sales receivable index
The bigger it is, the more problems it has
GMI, gross margin index
Gross profit last year/gross profit this year
>1, gross profit deteriorates, continuous deterioration may lead to profit manipulation
AQI, asset quality index, asset quality index
The ratio of non-current assets to total assets between the current year and the previous year
Excess capitalized expenditures
SGI, sales growth index
Compared with last year, sales revenue was
Possible profit manipulation for high growth
The greater the proportion of Accruals non-cash profits to total assets, the more likely it is to be manipulated
Significantly
DEPI, depreciation index, depreciation index
The ratio of the depreciation rate last year to this year
>1, depreciation slows down and may be controlled
SGAI, Selling, General & Administrative Expenses Index
This year compared to last year, SG&A sales revenue
LEVI, the ratio of debt capital to total assets, compared with this year
Earnings quality
high quality features
Profit covers capital cost
Profit comes from sustainable business recurring
The greater the cash component of earnings, the more sustainable it is
mean reversion
The greater the non-cash portion of the profit maker, the faster the mean reversion
Other signs of low earnings quality
Compulsory measures taken by regulatory agencies
Readjust previous period reports
Revenue recognition: To increase profitability, accelerate revenue recognition
Expense recognition: Capitalizing expenditures will reduce current expenses and increase current profits.
Bankruptcy prediction Altman model
Z-score
Below 1.81, the probability of bankruptcy is high
More than 3, the probability of bankruptcy is low
cash flow quality
Need to be combined with the enterprise life cycle
Mature company with high-quality cash flow
positive empirical cash flow
sustainable operating cash flow
Cash flow is sufficient to cover capital expenditures, dividends, and debt repayments
Low cash flow volatility
Precautions
Selling accounts receivable and deferring payment of accounts payable can increase operating cash flow
Cash flow classification
Balance sheet quality
integrity
Pay attention to off-balance sheet matters
unbiased measurement unbiased measurement
clear presentation clear presentation
Sources of risk-related information
Financial Statements
Notes to financial statements
Management Discussion and Analysis
auditor's opinion
other
Media reports, etc.
Comprehensive analysis of financial reports ★
Analysis process
Clarify goals and context
Data collection
Data processing
Analyze and interpret data
form conclusions and recommendations
Continuous follow-up
Analytical method
Source of profit
Dupont decomposition
5 decomposition
3 decomposition
Regular and non-recurring items
Investment income of associates
Balance sheet composition
Asset composition
Capital composition
Sector Analysis and Capital Allocation
The ratio of capital expenditure to capital ratio
Earnings quality
The smaller the accrual portion, the better
Cash Flow Analysis: Operational
cash flow to operating income
CFO before interest and tax/EBIT
measure cash receipts
cash return to total assets
CFO before interest and tax/average assets
cash flow to reinvestment
CFO before interest and tax/capital expenditure
cash flow to total debt
CFO before interest and tax/total debt
cash flow interest coverage
CFO before interest and tax/cash interest
cash-flow-based accruals ratio
[NI − (CFO CFI)]/(Average NOA)
NOA: net operating assets
Easily manipulated profit ratio
The lower the better
Market capitalization breakdown
The individual value of the investor = the market value of the investor - the market value of the investee held proportionally
Investor's separate profit = Investor's profit - Proportionally held investee's profit