Financial Reporting

Front 1

Defined contribution plan

Back 1

the firm makes no guarantee of future returns

Pension expense is to the employer's contribution

Front 2

Defined benefit plan

Back 2

the firm promises to make periodic payments to the employee after retirment

Front 3

Funded status of the plan

Back 3

Plan assets - projected benefit obligation (PBO)

Front 4

PBO or PVDBO

Back 4

PV of of all future pension benefits earned to date, based on expected future salary increases

PBO at the beginning of the year

+ Service cost

+ interest cost

+ past service cost

+/- Actuarial losses or gains

- benefits paid

= PBO at the end of the year

Front 5

Current service cost

Back 5

present value of benefits earned by the employees during the current period. It includes an estimate of compensation growth if pension benefits are based on future compensation

Front 6

Interest cost

Back 6

increase in the obligation due to the passage of time

PBObeginning of the period x discount rate = interest cost

Under IFRS, interest = funded status x discount rate. If funded status is a liability interest expense is reported, if it is an asset, interest income is reported

Front 7

past/prior service costs

Back 7

retroactive changes when a plan is initiated or amended

under IFRS they are expensed immediately

under US GAAP they are amortized over the average service life of employees

Front 8

changes in actuarial assumptions

Back 8

gains and losses that change from assumptions of mortality, turnover, retirement age, and the discount rate

Front 9

Plan assets

Back 9

Fair value at the beginning of the year

+ contributions

+ Actual return

- Benefits paid

= Fair value at the end of the year

Front 10

Expected return on plan assets

Back 10

used to compute reported pension expense

the actual return on assets - expected return on assets goes into the actuarial gains/losses account

Front 11

Treatment of actuarial gains/losses in GAAP vs IFRS

Back 11

They are recognized in both under OCI

In GAAP they are amortized using the corridor approach, in IFRS they are reported as occured

Front 12

Corridor approach (US GAAP)

Back 12

for any period, once actuarial gains or losses exceed 10% of the beginning PBO or plan assets, amortization is required for the amount in excess of 10%

Front 13

Impact of increasing the discount rate on PBO

Back 13

PBO will be lower

Most likely pension expense will be lower because of lower current service cost

Usually will reduce interest cost unless the plan is mature

Front 14

total periodic pension cost

Back 14

contributions - change in funded status

or

current service cost + interest cost - actual returns on plan assets + actuarial losses - actuarial gains + prior service cost

Front 15

FX reval rate used for Assets & Liabilities

Back 15

Current Rate method uses the current rate

same as Temporary method for Monetary A&L, different for non monetary A&L

Front 16

FX reval rate used for Common Stock

Back 16

historical rate

for both Current Rate & Temporal Method

Front 17

FX reval rate used for Equity

Back 17

current rate is used for the Current Rate method

under the Temporal method it is measured at a "mixed rate"

the change in retained earnings (which includes net income, is mixed rates)

Front 18

FX Reval rate used for Revenues & SG&A

Back 18

Average rate

used for Current Rate and Temporal Methods

Front 19

FX Reval rate used for Net Income

Back 19

Average rate used for the Current Rate Method

Under the Temporal method revenues & SG&A are shown as average rate

but

COGS, depreciation, amortization are measured at historical rate

Front 20

FX Reval rate used for COGS, depreciation, amoritization

Back 20

The Current Rate method uses an average rate

The Temporal method uses a historical rate

Front 21

Where is the exchange rate gain or loss reported under the Current Rate & Temporal Methods?

Back 21

Income statement under Temporal method

Equity under Current rate method

Front 22

Operating Assets/ Operating Liabilities

Back 22

Total assets - cash, equivalents to cash & marketable securities

Total liabilities - both short term & long term debt

Front 23

Formula for Balance sheet based aggregate accruals

Back 23

accruals = NOAend - NOAbeg

NOA = Operating Assets - Operating Liabilities

Front 24

Accruals ratio (balance sheet approach)

Back 24

(NOAend - NOAbeg)

-----------------------------

(NOAend + NOAbeg) /2

The accruals measure can be distorted if a firm is growing quickly. Here we are scaling by dividing by the average NOA for the period.

the lower the ratio, the higher the earnings quality

Front 25

Accruals formula (cash flow approach)

Back 25

accruals = NI - CFO - CFI

Front 26

Accruals ratio (cash flow approach)

Back 26

(NI - CFO - CFI)

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(NOAend + NOAbeg) /2

the lower the ratio, the higher the earnings quality

Front 27

Core operating margin

Back 27

sales - COGS - SG&A

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sales

used for detecting misclassified operating expenses as nonrecurring or non operating

Front 28

Tax Burden

Back 28

NI

--------

EBT

Front 29

Interest Burden

Back 29

EBT

-----------

EBIT

Front 30

EBIT Margin

Back 30

EBIT

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revenue

Front 31

Total Asset Turnover

Back 31

revenue

----------------------

average assets

Front 32

Financial leverage

Back 32

average assets

------------------------

average equity

Front 33

ROE ( using Dupont formula)

Back 33

Tax Burden x Interest Burden x EBIT margin x Total asset turnover x Financial leverage