Shit happens but Life moves on...

The greatest all-rounder in 150 years cricket history, Imran Khan, was dropped from the team after he played the first match. He is the only fast bowler in the cricket history to have changed his bowling action and have succeeded. With his career's last match he, as the caption of the team, won the world cup in 1992. So much from the Cricketing Legend. I once heard him saying that you do not deserve to win unless you have the potential to face failure. These words have changed my life. Confidence does shatter after getting failed but only those succeed who manage to build themselves up for another try. It took us all 7 to 8 long months to prepare for the CFA Level II exams, we all put in our best to prepare ourselves for nailing it but what if we fail??? Less than 24 hours left for the result to be announced. Recalling the exam reminds me of the uncertainty I was having while rolling the circles specially in Ethics, & Economics. FRA & Ethics grant me a bit of confidence but one never knows what will happen. Lets hope for the best and be ready for the worst. Like its said... Shit happens but life moves on...

News Pick - Toronto CFA Society and Hillsdale's $10,000 Award for Canadian Investment Research Goes to Rotman for Pension Research

So far I have been posting news about the curriculum of CFA how it relates to the real world happenings. Looking at several things over the internet, I came across this news. CFA Societies are very active around the world. The societies keep on organizing different events which give a lot of confidence and opportunities to the members. I came across this story related to the Toronto CFA Society thought to share it with you guys.

Read the story: http://www.newswire.ca/en/story/930441/toronto-cfa-society-and-hillsdale-s-10-000-award-for-canadian-investment-research-goes-to-rotman-for-pension-research

Poll Results - Is CFA Level II the most difficult in three levels?

I posted this question a few days back over my blog. A total of 54 people participated in the polling. The results can be seen in the graph below.

News Pick - Roche extends hostile offer for Illumina

When I was reading Mergers & Acquisition in Corporate Finance, I came to know about Roche attempting to acquire Illumina. Initially I was not able to understand the whole picture as I was unaware of the concepts related to M&A. Once I was done with the reading and then I dipped myself into this, I was able to see what exactly was going on. The following article is a development in which Roche has extended its tender offer.

Read the story: http://www.proactiveinvestors.com/companies/news/25473/roche-extends-hostile-offer-for-illumina-25473.html

News Pick - Apollo Said to Be Near Deal to Buy El Paso Oil Exploration Unit

Leveraged Buyout, Spin Off, Split Off, Takeover etc. are not only key terms but critical concepts. They have been discussed in several LOS of the CFA Level II Curriculum. A basic introduction of Leveraged Buyout (LBO) is part of the Level I curriculum but spin off, split off, takeover, friendly and hostile etc. are explained in the Level II curriculum. How these terms can be connected with the real world happenings can be experienced through this Bloomberg Story written by Cristina Alesci

Read: http://www.businessweek.com/news/2012-02-24/apollo-said-to-be-near-deal-to-buy-el-paso-oil-exploration-unit.html

News Pick - AMR Corp. retirees ask judge to deny termination of pension plans

Actuarial assumptions hold immense importance while planning for pension obligations. There is a complete reading in CFA Level II Curriculum regarding pension obligations. Is it due to false actuarial assumptions the AMR corporation deciding to deny termination of pension plans or due to other conservative or aggressive accounting measures taken by the management? Read the article and try figuring it out.

http://www.tulsaworld.com/business/article.aspx?subjectid=45&articleid=20120215_45_E1_Retire964111

U.S. Strips Formation Falls for Sixth Month Amid Twist Program

Fixed income is an important area of CFA Curriculum. Zero coupon bonds and treasury strips are covered in detailed in both Level I and Level II. What's going on with the bond market in U.S. especially with strips can be visualized through this article.

Read the article: http://www.businessweek.com/news/2012-02-07/u-s-strips-formation-falls-for-sixth-month-amid-twist-program.html

Housing Price Conundrum (Part 3)

Housing Price Conundrum (Part 2)

Held for Trading Investments

These are debt or equity securities acquired with the intent to sell them in the near term.
Accounting Treatment:
· Held-for-Trading securities are reported initially at Fair value on the balance sheet.
· Transaction costs are not included in fair value; neither initially nor subsequently.
· At each reporting date, these investments are remeasured and reported at fair value.
· Any unrealized gains or losses arising from changes in fair value are reported in Income Statement.
· Interest received on debt securities and dividends received on equity securities are reported in Income Statement.


Summary of Accounting Treatment of Held-for-Trading
(e.g. Bond):
1. Balance sheet value = Fair value of Bond
2. Interest Revenue = Value of Bond(t-1) × market interest rate at issuance
    · Interest Revenue is recognized in the Income Statement.
3. Unrealized Gain/loss = Fair value – carrying amount (adjusted for the difference between coupon and interest revenue)
    · Unrealized Gain/loss is recognized in the Income Statement.
4. Realized Gain/loss = Sale price – Fair value
    · Realized Gain/loss is recognized in the Income Statement.

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.

Video Tutorial - Velocity of Money Rather than Quantity Driving Prices

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

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

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.

Video Tutorial - Hedge Funds, Venture Capital, and Private Equity

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

Credit Rating Summary - General Motors

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…