Apple Inc.'s Share based compensation - Extract from Form 10K

Above is the snapshot from Apple inc.'s Form 10K submitted on 24 September, 2011. The above paragraph explains the share-based compensation used by the company and the way of reporting them, the valuation models used and the accounting treatments related to how the expense is recognized and recorded over service periods.

Below are some extracts from the Reading 23, Employee Compensation which totally relate to the extract above.

"Restricted Stock Grant: 
• Compensation expense is reported based on the fair value of the stock on the Grant Date (i.e. market value at grant date).
• Compensation expense is allocated over the service period of the employee

Stock Options:
Definitions: 
• Grant date: It is the day that options are granted to employees.
• Service Period:  It is usually the period between the grant date and the vesting date.
• Vesting Date: It is the date that employees can first exercise stock options. The vesting can be immediate or over a future period.
• Exercise Date: The date when employees actually exercise the options and convert them to stock

Accounting Treatment of Stock Options (IFRS & US GAAP): 
• Compensation expense related to option grant is reported at fair value of the option on the grant date based on the number of options that are expected to vest.
• If the share-based payments vest immediately, then compensation expense is recognized in the income statement on the grant date.
• If share-based compensations do not vest until a specified service period is completed, compensation expense is recognized in the income statement and allocated over the service period (the time between the grant date and the vesting date).
• If the share-based compensation are contingent upon achievement of performance or a market condition e.g. target share price, compensation expense is recognized over the estimated service period in the income statement.

Determining Fair Value: 
Fair value of stock options must be estimated using an appropriate valuation model unlike stock grants whose  fair value is based on the market value at the grant date.

When market price is not available, the firm can use option pricing model i.e. Black scholes or binomial model. No specific method is preferred under IFRS and U.S. GAAP.


Option pricing model is based on the following six inputs: 
1. Exercise price (It is known at the time of grant).
2. Stock price at the grant date.
3. Expected term (It is a highly subjective measure).
4. Expected volatility (It is a highly subjective measure).
5. Expected dividends.
6. Risk-free rate

Effects of changes in inputs on the Estimated fair value of options: 
Inputs that lead to increase in Estimated Fair Value and higher compensation expense:
• Higher volatility
• Longer estimated life
• Higher risk-free rate
• Lower assumed dividend yield

Inputs that lead to decrease in Estimated Fair Value and lower compensation expense:
• Lower volatility
• shorter estimated life
• Lower risk-free rate
• Higher assumed dividend yield"

The reason why this charter is given such respect is evident through the skills & knowledge which it develops. Above is one such example that how preparing for the exam equips one with the knowledge which is being used and applied by large companies. Reading Form 10K after going through FRA segment was a totally new  experience for me. I had never understood the essence so clearly before.

Video Tutorial - CDOs (Level II)

Real World Application - Active Managers spark row (News Pick)

An article written by Steve Johnson in Financial Times throws light on Active Management & Passive Management. Both investment studies have been fairly discussed in the CFA curriculum. Although how to actively manage portfolio or any specific strategy has not been discussed but the major differences, why re-balancing is done and the types of analysis which analysts use to value stocks, bonds and other investments to be included in their portfolio are discussed in the CFA Curriculum. The article can be understood better if allegiance with the terminologies associated with active & passive management is present.

Read the article here: "http://www.ft.com/cms/s/0/adf228ee-1c2b-11e1-af09-00144feabdc0.html#axzz1hdAsn2G8"

Video Tutorial - Option Delta (Level II)

Understanding & Interpreting Option delta was a difficult for me while studying Derivatives. I had to read the curriculum multiple times to fully understand option delta. Below is an excellent tutorial on Option delta which I personally have found very productive as it helps in visualizing the things and making it quite easier to understand the topic. 

Application of Level I - Retailers may return some cash to investors in 2012

Share repurchase are extensively discusses in Corporate Finance in the CFA Level I curriculum. The effects of share repurchase, buy backs, the methods of doing so, paying dividend in cash or buying share from that amount, the effect on ratios, stock splits, stock reverse splits, negotiations, dutch auctions etc. are narrated well in the readings. Following article from CNBC requires basic understanding of share repurchase to be apprehended well. 

With excess cash on hand from years of cautious spending and slower store growth, retailers in 2012 will focus on returning capital to investors via share buybacks and dividends, according to a Credit Suisse report.

• 
  By Sue Ogrocki, AP
  A Home Depot store in Edmond, Okla.

Enlarge

By Sue Ogrocki, AP

A Home Depot store in Edmond, Okla.

The firm's analysts estimate that share buybacks will reach $36.2 billion next year. That's a slight decline from $37.4 billion in 2011, but well above $20.7 billion in share repurchases seen in 2008.

While capital spending is expected to increase, it will be nowhere near peak levels of 2006-2007.

• Beyond share buybacks and dividends, retailers are also expected to focus on international growth, e-commerce, marketing programs (including loyalty programs), and remodels.

Offering automotive parts retailer AutoZone as an example, the report underscores that buybacks work best when combined with strong company fundamentals — supporting stock through lower earnings years and amplify earnings improvement in the better years.

For 2012, the report calls Home Depot and Lowe's the most interesting names in the retail space.

"While these names do not have the highest yields in the segment, buybacks can support earnings today, while the housing market remains challenging," says the report. "In the long term, if one believes in a housing recovery and that these companies can deliver upside to margins, the higher earnings combined with the years of buybacks should lead to much stronger [earnings per share] growth and strong stock performance."

Credit Suisse analysts also expect to see significant returns of capital for shareholders from department stores.

Macy's could buy back about $1 billion of stock in 2012 and double its annual dividend to $0.80 from $0.40, says the report.

Kohl's is also seen increasing its dividend, which was initiated for the first time ever in 2011, and buying back about $800 million in stock next year.

In addition, Dillard's and Saks "both will have capacity to return meaningful amounts of capital in the form of share repurchases and dividends in the coming year," says the report.

Strong outlooks and the financial flexibility put CVS and Kroger in a good position to continue returning cash to stockholders for the foreseeable future. "We estimate they should buy back 7% to 8% of their current market capitalization in 2012," says the report.

Just this week, CVS announced a 30% increase in its quarterly dividend.

Equipment suppliers are viewed as most likely to actively repurchase shares in the near-term, with International Game Technology taking the lead. According to the report, every $50 million of stock repurchased could add $0.01 to EPS for the company.

"Earlier this year, the company announced a new $500 million share repurchase program, and with $1.3 billion in free cash flow through fiscal 2013, management appears eager to return cash to shareholders, particularly as fundamentals are improving," says the report.

However, retailers with high cash flow yields but weak fundamentals may not benefit from buybacks. Among them, Best Buy, GameStop, Sears, Staples, and Bon-Ton Stores.

"While buy backs may support EPS in the near term, the stocks may not be rewarded if the companies cannot demonstrate net income growth," says the report.

Source: "http://www.usatoday.com/money/industries/retail/story/2011-12-24/retailers-return-cash-to-investors/52164386/1"

Video Tutorial - Mortgage Backed Securities (III)

Preparing for Level I Exam - Important Tips

• Adjust your studying of a topic to the weight it is given in the exam. For example, if ethics is 15% of the exam, try to spend 15% of your time studying ethics
• Don't ignore ethics. Many people don't cover ethics well enough. If you study properly, this 15% should be a gimme.
• Be sure to eat properly and exercise. When you're working 50-70 hours each week and then studying an additional 10-20, it's easy to ignore working out and start eating junk food.
• Do not underestimate the difficulty of the exam. Even though it's considered the easiest of the three CFA exams, it still covers a wide variety of difficult topics.
• How much you will have to study is going to depend on a variety of factors, including your academic background, work experience, general intelligence, etc. CFAI recommends at least 250 hours, though.
• Don't use the study hours as your only measure of progress. Some people will pass level 1 by studying 100 hours, while some will need 400 hours to master the curriculum. The key is studying enough to be able to answer any question in under 1.5 minutes. Taking practice exams will give you a good proxy for your progress.
• Continuously review all of the material you have covered to date. A major concern with candidates is forgetting information that they covered a month or two ago. This is another area where the 3rd party notes come in handy.
• Track your studying. A simple excel sheet could help you in tracking the number of hours which you've studied.
• Take Full Practice exams. Practice is the key to success. Once you are done with your readings take mocks. CFA Institute provides 1 mock. Try to appear in as much mocks as you can. Third  party mocks can be purchased online.
• Start with the topic that interests you the most . If you think that studying derivatives sounds interesting, start with studying derivatives. If you do this, you're more likely to enjoy the reading, rather than having the feeling of being forced to read - much like when you were forced to read the "classic novels" in high school.
• Sign up early. I suggest signing up at least before the first deadline, if for no other reason than to save some money. This will also ensure that you'll have enough time to properly prepare.
  

Video Tutorial - Mortgage Backed Securities (II)

Tips for remembering and retaining a great deal of information

CFA Level I is more about retaining the information. It requires specific attitude towards education and learning which develops in the first Level and act as a prerequisite to Level II & Level III. Following are some tips which I read somewhere and saved for some later use. This is the best platform for me to share them with you.

Tips for remembering and retaining a great deal of information:

• Use mnemonic devices,
• Like in Ethics Standard No. 1 Professionalism the next four sub parts could be remembered by making a mnemonic device KIMM.
• Review information frequently. Don't review information you've already learned pat. Your review time is best spent, drudging through the hard stuff.
• Understand what you're reading rather than trying to memorize information without comprehending it. If you read a chapter and a quick review of the key points will solidify the information, take the time to review the key points, else your recall will be poor. If you can not digest a concept, get help. Ask someone who is also taking the exam.
• Visualize the formula in your head. Do not move on in your readings until you can visualize the formula your head and write it paper.

The Spacing Effect states that one is more likely to remember a set of items when rehearsal is spaced over an extended period of time. This means that you should review the formulas often. Photocopy the formulas in the back of your books and keep them in your bag or maintain some formula sheet to review it often before the practice tests or the exam.

Applying Level I - GE Capital Renews and Expands Credit Facility for Hensall Co-Op

Corporate Finance is an important study session in the CFA Level I curriculum. It gives a comprehensive understanding of working capital management, proforma financial statements, share repurchases, WACC etc. The following article from CNW relates to what the candidates have been studying in Corporate Finance.

TORONTO, Dec. 22, 2011 /CNW Telbec/ - GE Capital, Corporate Finance today announced that it has provided an $80 million revolving credit facility to Hensall District Co-Operative, the largest independent agricultural co-op in Ontario representing about 4,400 member farmers. The facility will be used to refinance Hensall's existing debt and support growth, and includes a $15 million accordion to meet peak seasonal needs.

Founded in 1937, HDC operates 14 locations supporting procurement, processing, marketing and distribution of edible beans, soybeans, grains and fertilizers. HDC also supports its members and customers in over 40 countries by operating feed, petroleum, propane and global logistics businesses. In fiscal 2011, HDC had total sales of $466 millionand net profit before distributions to members and income taxes of $9 million.

"As we've expanded our scope of activities in recent years to better serve our members, growing by 40% last year alone, we appreciate having a financial provider with the resources of GE Capital," said Earl Wagner, chief executive officer of Hensall. "We see GE as a partner in our development, not simply a bank, as they have shown the ability to look beyond the ups and downs of a commodity-driven industry and find ways to help us grow."

"We're very pleased to be able to expand our relationship with HDC as they build their operations," said Ellis Gaston, managing director, GE Capital Corporate Finance, Canada. "Our domain expertise in this industry and our ability to provide the entire facility are important advantages for HDC."

About GE Capital, Canada
With more than 20 offices throughout Canada, GE Capital (gecapital.ca) offers a wide variety of financial products and services to address commercial financing and fleet management needs in all phases of a business' lifecycle. From equipment finance to working capital and growth financing to large asset-based and restructuring loans, we apply our wealth of industry expertise and develop custom solutions for your company. Some of the industry sectors we specialize in include transportation, construction, healthcare, agriculture, forestry, manufacturing, oil & gas, wholesale and retail, restaurant and hotel franchise.

GE Capital offers consumers and businesses around the globe an array of financial products and services. For more information, visit gecapital.com or follow company news via Twitter (@GECapital).

GE (NYSE: GE) works on things that matter. The best people and the best technologies taking on the toughest challenges. Finding solutions in energy, health and home, transportation and finance. Building, powering, moving and curing the world. Not just imagining. Doing. GE works. For more information, visit the company's website at ge.com.

Source: "http://www.newswire.ca/en/story/899393/ge-capital-renews-and-expands-credit-facility-for-hensall-co-op"