F2 Revisions Raising Finance Long Term Financing Equity Debt Rights issue of shares New issue of shares Initial public offering (IPO) or stock market launch Placement (non-public offering) Term loans Conventional bonds Convertible bonds Considerations: Availability, Credit rating, Amount, Term, Fixed or Floating rate, Security or Covenants
Cost of Equity & Cost of Debt Cost of Equity via Dividend Valuation Model After-Tax Cost of Debt where: ke = cost of equity d0 = dividends paid this year g = growth rate P0 = current price where: kdnet = cost of debt i = annual interest payment t = tax rate P0 = current market price of the debt capital ex-interest WACC where: k0 = WACC (weighted average cost of capital) ke = cost of equity kd = cost of debt VE = market value of equity VD = market value of debt
Consolidation Subsidiary Associate Joint Arrangement Investment Stake 50%-100% 20%-50% Joint Other than the rest Control Yes Significant influence Joint No Treatment Full consolidation Equity accounting Proportionate consolidation or equity accounting As single entity accounts Covered by IFRS 10 IAS 28 IAS 28 IAS 39 IFRS 10 Rules: Consolidation Parent entity must present consolidated financial statements Establishes control as the basis for consolidation Sets out how to apply principles of control to determine if investor controls investee Exceptions: No consolidation if parent is wholly owned subsidiary itself No consolidation if partially owned and other shareholders do not object to the arrangement No consolidation if partially owned, company securities are not publicly traded and ultimate parent produces IFRS-compliant consolidated accounts
IAS 28 Equity Accounting Rules: 20% voting rights = significant influence <20% voting rights = no significant influence Significant influence are: board representation participate in policy-making process material transaction between entities interchange of managers provision of essential technical information Recognition: SOPLCI - Share of profit after tax & Share of other comprehensive income SOFP - Non-current assets - Investment in associate/joint venture IFRS 11 Joint Arrangements Joint Operations Joint operators should recognise: its assets including its share of jointly-held assets its liabilities including its share of jointly-incurred liabilities its revenue from the sale of its share of the output of the joint operation its share of the revenue from the sale of the output of the joint operation its expenses, including its share of any expenses incurred jointly Joint Venture Joint venturer should recognise its interest in a joint venture as an investment and account for that investment using equity method (IAS 28). i.e. Investment in associate Cost of investment Add: share of post-acquisition of retained earnings Add: share of post-acquisition of other reserves Less: impairment losses on associate to date xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx
Related Party Transactions B Investors E G Associate 30% 50% 50% 70% 50% 50% Subsidiary Joint Venture Joint Venture A C D F Investees Related parties: Scenario 1: B + A = significant influence Scenario 2: B + C = control Scenario 3: D + F = both joint ventures of a third party (E) Scenario 4: A + D = one is an associate and one is a JV of a third party (B) Scenario 5: key management personnel of entity or its parent Scenario 6: close family member of any individual in Scenario 1, 2, 5 Effective Holdings A D G 80% A controls B 60% 80% D controls E G controls H B E H 10% 80% B controls C 60% 75% E controls F H controls J C F J Therefore A controls C A effectively holds (80% x 80%) 64% of C Therefore D controls F D effectively holds (60% x 60%) 36% of F Direct NCI in H = 20% Direct NCI in J = 15% Indirect NCI in J = 15% Total NCI in J = 30%
IAS 32 Financial Instruments: Presentation IAS 32 Financial Instruments: Presentation
IAS 18 Revenue Measurement Should be measured at the fair value of the consideration received or receivable. If deferred, the fair value of the consideration receivable is less than the nominal amount of cash and cash equivalents to be received, and discounting is appropriate. Recognition Transfer of risks and rewards of ownership Amount can be reliably measured Probable that debt will be repaid Transaction costs can be reliably measured IAS 17 Leases In return for rent Right to use an asset for an agreed period of time Finance Lease Operating Lease Risk Reward Statement of Financial Position Capitalised; Set up as liability Accrual; Prepayment Statement of Profit or Loss and Other Comprehensive Income Depreciation; Finance charges Rental expenses
IAS 37 Provisions, Contingent Liabilities and Contingent Assets Liability Present obligation arising from past events Expected outflow or economic benefits Actual amount of obligation Provision Present obligation, legal or constructive, arising from past events Probable outflow of resources Reliable estimate of the amount of obligation IFRS 2 Share Based Payment A share based payment transaction is one where an entity obtains goods or services with payment taking the form of shares or share options issued by the entity. Often performance conditions have to be met over a vesting period. 2 Ways to Settle: Equity Settled Cash Settled Share option scheme Dr Expense Cr Equity Fair value of option at grant date Share appreciation rights (SARs) Dr Expense Cr Liability Remeasure fair value each year end
IAS 21 Effects of Changes in Foreign Exchange Rates Functional Currency Currency of the primary economic environment in which an entity operates The currency used for measurement in the financial statements Other currencies are treated as a foreign currency Presentation Currency The currency in which the financial statements are presented Can be any currency Special rules to translate functional to presentation currency Same rule applies to translating foreign operations IAS 21 No further action No Transaction needs translation? Yes Transaction translated @ average rate Translating Foreign Currency Transactions No Reporting Date Settled? Yes No further action Non-monetary Monetary or non-monetary? Monetary Transaction translated @ closing rate No further action Historic rate Historic cost or fair value? Fair value Transaction translated @ fair value when fair value was determined
IAS 33 Earnings Per Share Earnings EPS = - Weighted ave. shares Numerator Basic EPS Profit or loss attributed to ordinary equity holders of the parent entity Diluted EPS Amount used in Basic EPS, but adjusted by the after-tax effect of: dividends, interest, any other change in income and expenses related to dilutive potential of ordinary shares Denominator Weighted average ordinary shares outstanding during period = outstanding at beginning period +[# issued x (days outstanding/total days)] - [# bought back x (days outstanding/total days)] Amount used in Basic EPS + weighted average ordinary shares that would be issued on conversion of all dilutive potential ordinary shares Ratios Profitability ratios: Gross profit margin Operating margin Asset turnover ROCE Liquidity ratios: Current ratio Quick ratio Inventory days Receivable days Payable days Gearing ratios: Gearing Interest cover Investor ratios: EPS P/E ratio Dividend cover Dividend yield