Tuesday 31 January 2012

Held to Maturity Investments


These are the investments in financial assets with:
· Fixed or determinable payments.
· Fixed maturities (debt securities).
Under both IFRS and U.S. GAAP, the investor must have a positive intent and ability to hold the security to maturity.
Under both IFRS and U.S. GAAP, an entity is not permitted to classify any financial assets as held-to maturity if it has during the current or two preceding financial reporting years, sold or reclassified more than an insignificant amount of held-to-maturity investments before maturity (unless the sale or reclassification meets certain criteria).


Accounting Treatment under IFRS:
· Held-to-maturity securities are initially recognized at Fair value + Transaction costs
· At each reporting date (subsequent to initial recognition), Held-to-maturity securities must be reported at amortized cost using the effective interest rate method.
Amortized cost = Original Cost of the debt security + discount - premium
· Any discount (par value> fair value) or premium (par value < fair value) existing at the time of purchase is amortized over the life of the security.
· Any interest payments received are adjusted for amortization and are reported as interest income.
· If the security is sold before maturity, any realized gains or losses arising from the sale are recognized in Income Statement of the period.


Accounting Treatment under U.S. GAAP:
· Held-to-maturity securities are initially recognized at Historical Cost + Transaction costs
· At each reporting date (subsequent to initial recognition), Held-to-maturity securities must be reported at amortized cost using the effective interest rate method.
· Any discount (par value> fair value) or premium (par value < fair value) existing at the time of purchase is amortized over the life of the security.
· Any interest payments received are adjusted for amortization and are reported as interest income.
· If the security is sold before maturity, any realized gains or losses arising from the sale are recognized in profit or loss of the period.




Housing Price Conundrum (Part 1)


Monday 30 January 2012

Apple Inc. Balance Sheet Extracts and Some Ratios

PERIOD ENDING Sep-11 Sep-10 Sep-09 Sep-08
All numbers in thousands
Inventories 776,000 1,051,000 455,000 509,000
Receivables 11,717,000 9,924,000 5,057,000 4,704,000
Total Current Assets 44,988,000 41,678,000 31,555,000 34,690,000
Total Assets 116,371,000 75,183,000 47,501,000 39,572,000
Total Current Liabilities 27,970,000 20,722,000 11,506,000 14,092,000
Total Non-Current Liabilities 11,786,000 6,670,000 4,355,000 4,450,000
Total Liabilities 39,756,000 27,392,000 15,861,000 18,542,000
Total Equity 76,615,000 47,791,000 31,640,000 21,030,000
Total Revenues 108,249,000 65,225,000 42,905,000 32,479,000
Cost of Sales 62,617,000 38,514,000 24,949,000 20,861,000
Total Net Income 25,922,000 14,013,000 8,235,000 4,834,000
Revenue on Assets 0.93 0.87 0.90 0.82
Asset Turnover 1.08 1.15 1.11 1.22
Return on Assets 0.22 0.19 0.17 0.12
Return on Equity 0.34 0.29 0.26 0.23
Receivables Turnover 9.24 6.57 8.48 6.90
Inventory Turnover 80.69 36.65 54.83 40.98
Current Ratio 1.61 2.01 2.74 2.46
Quick Ratio 1.58 1.96 2.70 2.43
Financial Leverage 1.52 1.57 1.50 1.88

Dividends generating signal about what the management is thinking.

Today I was going through Reading 31 which is related to dividend and share repurchase. The theories presented in the topic are interesting especially the one related to the behaviour of clients. The growth investors consider the declaration of dividends as a negative signal and the investors who want steady dividend and have invested in a company which continues to increase dividend amount or maintains a stable payout ratio consider the cutting of the dividend as a negative signal.

Empirically the studies have shown that declaration of dividend is considered to be a positive signal as it reflects a feeling that the future earnings, based upon which the company is valued, are higher and that's why the company has declared a dividend and vice versa but this is not true for all sort of investors. When in 2003 Microsoft was deciding to declare dividend several investors were curious as investors, seeking growth, had invested with the aim that the company would grow but it could give a perception that the company had no future projects to hold cash.

As an analyst it is necessary to know about the capital structure of the company. The reinvestment opportunities, growth opportunities available to the company, the client preference and the legal and financial environment. Based upon these aspects the dividend policy of the company must be evaluated.

Video Tutorial - Velocity of Money Rather than Quantity Driving Prices


Sunday 29 January 2012

News Pick - NCUA Issues Interest-Rate Risk Rule: Onsite Coverage

Interest Rate Risk is an important type of risk which has been discussed extensively in CFA Level I curriculum. Though the calculations of interest rate risk related to non-parallel shift in the yield curve through key rate duration is discussed in Level II, but a brief but comprehensive overview is present in the Level I curriculum. Below is the link to an article which discusses Interest rate risk and its importance in the financial world.


Read the article: http://www.cutimes.com/2012/01/26/ncua-issues-interest-rate-risk-rule-onsite-coverag?ref=hp

Video Tutorial - Fair Value Accounting


Saturday 28 January 2012

Apple & U.S. Technology Index


APPLE INC Income Statement & Some Ratios

PERIOD ENDINGSep-11Sep-10Sep-09Sep-08
All numbers in thousands    
Income Statement
Operating Revenue (Revenue/Sales)108,249,00065,225,00042,905,00032,479,000
Total Revenues108,249,00065,225,00042,905,00032,479,000
Cost of Sales62,617,00038,514,00024,949,00020,861,000
Cost of Sales with Depreciation64,431,00039,541,00025,683,00021,334,000
Gross Margin45,632,00026,711,00017,956,00011,618,000
Gross Operating Profit45,632,00026,711,00017,956,00011,618,000
Research & Development Expense2,429,0001,782,0001,333,0001,109,000
Selling, Gen. & Administrative Expense7,599,0005,517,0004,149,0003,761,000
Operating Income33,790,00018,385,00011,740,0006,275,000
Operating Income b/f Depreciation (EBITDA)35,604,00019,412,00012,474,0006,748,000
Depreciation1,814,0001,027,000734,000473,000
Operating Income After Depreciation33,790,00018,385,00011,740,0006,275,000
Interest Income519,000311,000407,000*
Other Income, Net-104,000-156,000-81,000620,000
Total Income Avail for Interest Expense (EBIT)34,205,00018,540,00012,066,0006,895,000
Pre-tax Income (EBT)34,205,00018,540,00012,066,0006,895,000
Income Taxes8,283,0004,527,0003,831,0002,061,000
Income before Income Taxes34,205,00018,540,00012,066,0006,895,000
Net Income from Continuing Operations25,922,00014,013,0008,235,0004,834,000
Net Income from Total Operations25,922,00014,013,0008,235,0004,834,000
Total Net Income25,922,00014,013,0008,235,0004,834,000
Normalized Income25,922,00014,013,0008,235,0004,834,000
Net Income Available for Common25,922,00014,013,0008,235,0004,834,000
     
Gross Profit Margin42.2%41.0%41.9%35.8%
EBITDA Margin32.9%29.8%29.1%20.8%
Operating Profit Margin31.2%28.2%27.4%19.3%
Net Profit Margin23.9%21.5%19.2%14.9%
SG&A as % of Revenues7.0%8.5%9.7%11.6%
R&D as % of Revenues2.2%2.7%3.1%3.4%

News Pick - Italy sells top amount at bond sale, yields fall

Below is the link to the article written in Reuters. Fixed income is a detailed Study Session in Level I and Level II and it exposes to the major terminologies used in the bond market. Those who have gone through this study session in Level I or in Level II will enjoy reading this.


Read the article: http://www.reuters.com/article/2012/01/26/us-italy-bonds-auction-idUSTRE80P0K020120126

Friday 27 January 2012

Graphical Representations of some extracts of GM




Environmental Cost of General Motors














I was looking at the financial statement of GM and I found this note different. 

Held-to-Maturity Investments - CFA Level II FRA


These are the investments in financial assets with:
• Fixed or determinable payments.
• Fixed maturities (debt securities).
Under both IFRS and U.S. GAAP, the investor must have a positive intent and ability to hold the security  to maturity.
Under both IFRS and U.S. GAAP, an entity is not permitted to classify any financial assets as held-to maturity if it has during the current or two preceding financial reporting years, sold or reclassified more than an insignificant amount of held-to-maturity investments before maturity (unless the sale or reclassification meets certain criteria).


Accounting Treatment under IFRS: 
• Held-to-maturity securities are initially recognized at Fair value + Transaction costs
• At each reporting date (subsequent to initial recognition), Held-to-maturity securities must be reported at amortized cost using the effective interest rate method.
Amortized cost = Original Cost of the debt security + discount - premium
• Any discount (par value> fair value) or premium (par value < fair value) existing at the time of purchase is amortized over the life of the security.
• Any interest payments received are adjusted for amortization and are reported as interest income.
• If the security is sold before maturity, any realized gains or losses arising from the sale are recognized in Income Statement of the period.


Accounting Treatment under U.S. GAAP:
• Held-to-maturity securities are initially recognized at Historical Cost + Transaction costs
• At each reporting date (subsequent to initial recognition), Held-to-maturity securities must be reported at amortized cost using the effective interest rate method.
• Any discount (par value> fair value) or premium (par value < fair value) existing at the time of purchase is amortized over the life of the security.
• Any interest payments received are adjusted for amortization and are reported as interest income.
• If the security is sold before maturity, any realized gains or losses arising from the sale are recognized in profit or loss of the period.


Wednesday 25 January 2012

Categories of Financial Assets Under IFRS & US GAAP


Characteristics: 
• Investments in financial assets are considered Passive investments.
• Investor usually has < 20% ownership interest.
• Investor cannot exert significant influence or control over the operations of the investee.
Accounting Treatment: 
IFRS and U.S. GAAP have similar accounting treatment for investments in financial assets.
• Investments in financial assets are initially recognized at fair value.
• Dividends and interest income from investments in financial assets are reported in the Income Statement.
• Treatment of Subsequent changes in fair value and transaction costs depend on the classification of the financial asset investment.
Classification Under US GAAP










Classification Under IFRS


Aegis wins $3bn General Motors global media contract

GM has changed its business model and transformed into a 'successor'. The magnitude of their efforts could be seen through this Financial Times Article.

Credit Rating Summary - General Motors


Tuesday 24 January 2012

Corporate Investments (Basic) Categories


Investments in marketable debt and equity securities can be categorized as follows:
1) Investments in financial assets in which the investor has no significant influence or control over the operations of the investee (less than 20% ownership interest).
2) Investments in associates in which the investor can exert significant influence but not control over the investee (between 20% - 50% ownership interest).
3) Business combinations, i.e. investments in subsidiaries, in which the investor has both over the investee. Greater than 50% ownership interest).


NOTE: Ownership percentage is only a guideline. The category of investment is rather based on the investor’s ability to influence or control the investee.


It is possible that investor has significant influence over the investee with < 20% ownership interest. Or the investor has 20-50% ownership but does not have any influence on the investee.


Preferred Accounting Methods: 
• When a company owns a non-influential and noncontrolling interest in another company the investment must be carried at Cost.
• When a company owns an influential but noncontrolling interest in another company, commonly 20-50%, it must account for it under the Equity Method.
• When a company's interest in another exceeds 50% it is considered to have controlling interest and must consolidate the financial statements using the Acquisition Method.


Congratulations Level I Candidates


It was 39% when I had appeared and the joy of realizing ‘being in 39%’ was more as compared to passing the exam! This time it is 38%. I can understand how you would be feeling. Your efforts have made you step one level ahead and now you have the opportunity to learn ample knowledge and develop significant skills while preparing for Level II. 

Those who were not able to pull it off should not loose heart and come up with a new spirit. The question to address is not the level of efforts they had put in but their productivity. If you can’t accept this failure then you don’t reserve the right to appear in the CFA exam ever. This is an excellent opportunity for you to learn from your experience, identify the  loopholes, address them and come up with a new spirit.

Okay 38% this is your day, live to your max but do not forget, Level II is way more in depth as compared to Level I. Does that mean it is difficult? Certainly it is! Is it impossible to do? If it is, then alteast worth trying… Is it enjoyable? Well if you find it enjoyable then your chances to pass may rise…

Video Tutorial - Hedge Fund Structure & Fees

Monday 23 January 2012

Mercedes, BMW target wealthy individuals with lease model - Livemint Article

The previous posts were extracts from income statements of Daimler Group and BMW Group. Below is the link to the article published in Livemint highlighting how both giants target wealthy individuals. For both groups such lease are sales type where they not only enjoy profit over cars but also interest income on lease.

Read the article: http://www.livemint.com/2012/01/15213116/Mercedes-BMW-target-wealthy-i.html?atype=tp