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IFRS and Valuation workshop ppt. organised by Money Matters Club
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IFRS – Importance for Analysts and Investors
IBS, Hyderabad
Agenda
Overview of IFRS
Key points for investors
Live examples to highlight importance of understanding IFRS
Accounting differences – Impact on multiples
Mitigating accounting differences
Moving to IFRS – Impact on share prices
22
AGENDA
Overview of IFRS
• Stands for International Financial Reporting Standards
• The IASB is the independent standard-setting body
• IASB Objective - To develop a single set of high quality, understandable, enforceable and globally accepted international financial reporting standards (IFRSs)
• Currently there are 9 IFRS, 29 IAS and 29 interpretations
3
Developing standards4
IFRS across globe5
Towards one set of global accounting standards
Why important to understand IFRS6
Top 10 Global Capital MarketsUS US GAAP – moving towards IFRS
Japan Convergence to IFRS
UK IFRS
France IFRS
Canada Convergence to IFRS
Germany IFRS
Hong Kong HKFRS (equivalent to IFRS)
Spain IFRS
Switzerland IFRS or US GAAP
Australia AIFRS (equivalent to IFRS)
Agenda
Overview of IFRS
Key points for investors
Live examples to highlight importance of understanding IFRS
Accounting differences – Impact on multiples
Mitigating accounting differences
Moving to IFRS – Impact on share prices
77
AGENDA
Some key points for investors (1/2)
8
Accounting policy choices – Impairs comparability
IFRS is principle based standard and offers accounting policy choices
to companies.
Accounting policy choices are offered in financial instruments,
property plant and equipment, investment property, joint ventures
etc
Income statement - Cognizance of certain gains/losses
Gain on bargain purchase is recorded in income statement under IFRS.
This is a one time gain and not operating in nature.
Unrealized gains/losses due to fair value changes is recorded in
income statement for certain financial instruments.
Some key points for investors (2/2)
9
Management judgement/estimates – Infuses subjectivity
IFRS does not allow goodwill amortization. The same has to be tested
for impairment. This brings in subjectivity from management.
Fair value estimation
OCI– To be reviewed for income statement impact
Analysts/investors should look both the income statement and other
comprehensive income (OCI) when forecasting future cash flows.
Some portion of income/loss recognized in OCI is recycled back to
income statement in future years.
Agenda
Overview of IFRS
Key points for investors
Live examples to highlight importance of understanding IFRS
Accounting differences – Impact on multiples
Mitigating accounting differences
Moving to IFRS – Impact on share prices
1010
AGENDA
Example 111
Accounting requirement to fair value the remaining investment in case of loss
of control. (Moving from consolidation to equity method of accounting)
Please refer the case of Bezeq
Bezeq Press Release
Example 212
Accounting requirement to measure the own debt at fair value
For accounting purposes, Banks values its issued debt (e.g. bond issues) at the
current market price. Changes in this value are recorded in profit or loss.
FV of own debt
Example 3 EY research findings (Real Estate)
13
More than 90% of the surveyed companies have adopted the fair value option available in IAS 40
for the measurement of their investment properties
57% of the companies have disclosed the assumptions applied in valuation of investment
property
40% of the companies did not disclose information on impairment testing
Of those companies that have joint ventures (82%), 42% apply the equity method and 58% apply
the proportionate consolidation method. This suggests that, with the forthcoming changes under
the new standard Joint Arrangements (IFRS 11), we may expect some changes in accounting, e.g.,
changes from proportionate consolidation to equity accounting.
Report of one of leading Investment Bank pointed out the management subjectivity in impairment testing
Agenda
Overview of IFRS
Key points for investors
Live examples to highlight importance of understanding IFRS
Accounting differences – Impact on multiples
Mitigating accounting differences
Moving to IFRS – Impact on share prices
1414
AGENDA
Accounting differences –Impact on multiples
15
Consider two identical companies with 20 of goodwill on the balance sheet and 10 in pre-goodwill profit. Company A does not amortise goodwill while Company B amortises over 10 years (amortisation of 2 per year). (Assume share price of 200)
Will this impact the multiples?????
Since both companies have identical cash earnings they have the same value and should trade at the same share price (same number of shares assumed). This implies an earnings multiple of 25x for Company B. But it clearly would be wrong to conclude that Company A is cheaper than Company B. In fact, there is no information content whatsoever in the difference between the two multiples.
Agenda
Overview of IFRS
Key points for investors
Live examples to highlight importance of understanding IFRS
Accounting differences – Impact on multiples
Mitigating accounting differences
Moving to IFRS – Impact on share prices
1616
AGENDA
Mitigating accounting differences (1/2)
17
Restate accounting data to a common format
Depreciation – Can be largely unrelated to the economic consumption of the asset. Factor maintenance
capex to mitigate these differences for cross-border equity analysis
Goodwill Impairment – Exposed to subjectivity by management. Consider an earning number before
impairment
Leases – Operating leases currently are shown off balance sheet. Capitalization of operating lease
required for analysis purpose
Income from associated – Should be considered as Non Core income for arriving at core EBITDA
Exceptional items – Should be excluded from EBIT/EBITDA for analysis purposes
Mitigating accounting differences (2/2)
18
Focus on key statistics less affected by Accounting differences
Focus on cash flows when comparing companies instead of earning metrics
Comparing revenues (Still limitations will be there, not a preferred approach)
Using EBITDA – Has become the most common measure of performance (Ignores Capex and taxation)
Using OpFCF – Modified version of EBITDA (EBITDA – Maintenance Capex)
‘Maintenance capex’ is the amount an analyst estimates must be spent on fixed assets to maintain the profitability and competitive position of the company in real terms.
Agenda
Overview of IFRS
Key points for investors
Live examples to highlight importance of understanding IFRS
Accounting differences – Impact on multiples
Mitigating accounting differences
Moving to IFRS – Impact on share prices
1919
AGENDA
Moving to IFRS – Impact on share prices20
Convergence to IFRS will result in changes in the reported numbers be they revenues, costs, assets and/or liabilities.
New disclosures, changes in measurement and clearer performance and risk measures all potentially impact valuations.
IFRS can also impact cash flows that can impact the DCF valuation, e.g. change in accounting policy for revenue recognition.
IFRS can impact cost of capital if new disclosures changes investor perception for a company and the same getting reflected in investor’s required rate of return.
Moving to IFRS – Impact on share prices21
“Changing accounting standards to better reflect economic reality, is like buying a new pair of glassesto see the world around you. Just as new glasses can change your view of the world, a change inaccounting standards impacts perception of economic transactions. Although you know that theworld has not actually changed, it might be that you are better able to read signs with a new pair ofaccounting glasses”
Source: UBS