Assignment

On
Financial Statement Analysis and Valuation

Submitted to:
Md.Sajib Hossain, CFA
Assistant Professor
Department of Finance
University of Dhaka

Submitted by:
Rashidul Hasan Rana
ID: 23-318 Section: B
Department of Finance
University of Dhaka
Long Lived Assets
Long-lived assets impact firms long term financial statements. Long-lived assets include tangible
assets, intangible assets, and financial assets.

Firms make many estimates and choices in accounting and use accounting discretion for long-
lived assets that affect the firms’ profits, ratios, and cash flow classifications. The objective of
the chapter is to understand the effects of and issues concerning capitalization versus immediate
expensing of various costs, including construction interest, research and development, and
software costs.

Capitalize vs. Expense

Capitalized Interest: Interest can be capitalized only if it is paid directly against a asset
purchased. Otherwise it is always stated as expenses. Moreover, interest can be capitalized in
IFRS method. There is no chance to capitalize interest in US GAAP.

Tangible and Intangible assets Charging Method

Depreciation: Depreciation is charged against tangible assets. There are many methods of
depreciation such as: Straight Line Method, Double declining method, MACRS etc.

Impairment and revaluation: Impairment is charged for intangible assets. Impairment loss
must be stated in Financial Statements but impairment gain can’t be stated in financial
statements. However a limited impairment gain can be stated (which was reported as loss
previously) in IFRS method. But US GAP doesn’t allow this.

Finance versus Operating Leases

Under IFRS, if substantially all the risks and rewards incidental to ownership are transferred to
the lessee, the lease is classified as a finance lease and the lessee reports a leased asset and a
lease obligation on the balance sheet. Otherwise, the lease is reported as an operating lease.

Reporting and disclosure considerations for lessees

For operating leases, lease payments are reported as rent expenses when they become due and no
assets or liability is shown on the balance sheet for future amounts to be paid. Future minimum
lease payments (MPL’s) are disclosed.

For capital leases, present value of future lease payments is shown as an asset and liability on the
balance sheet and payments are shown as interest expense and principal repayment. The leased
asset is depreciated.
NON-CURRENT (LONG- TERM) LIABILITIES
Bond Consideration Materials: To evaluate bond the following things must be considered
such as Face Value/ Maturity Value/Par Value, Coupon Rate, Coupon Payment, Effective rate
of interest/ Market rate of interest, Interest Expense .

At the date of issuance, the market rate of interest may be equal to (par), less than ( premium), or
greater ( Discount) than the coupon rate.

Financial Statement Analysis

Financial Statement Analysis reflects company’s past financial performance and also includes
the future projection which helps evaluation of credit risk and equity investments. Before
analyzing of financial statements, Analyst have to get acquainted with current standards.

When an analyst evaluates company’s historical performance, he must emphasis on company’s

strategy so that he could understand whether it is worthy to implement such a strategy like:
company can focus high EPS by cutting cost.

The forecast of future net income and cash flow begins with top down sale projection in where
analyst use GDP growth and growth of industry sale .If the market share remain same, growth
will be same .In simple forecasting model, some items such as: operating margin, EBT margin or
net margin are used in addition multi period forecast used for complex forecasting model.
Discounted cash flow are needed in projection of future performance.

Credit rating analysis depend on three Cs”, four Cs, Five Cs. Three Cs includes Character,
Collateral, and Capacity to repay. Some roles are used to assessing credit quality like: Scale of
diversity, Operational efficiency, Marginal stability and leverage. Analyst have to focus on
portfolio when he will consider a large universe potential equity investment.

Back testing refers to using a specific set of criteria to determine about portfolio. Ratios are
constructed from financial statement data and market data are used to screen for potential equity
investment.

When analyst choose different accounting methods ,he must include adjustment so that it could
be comparable another company or group of companies .Both U.S GAAP and IFRS suggest to
adjust the financial statements of firms from different countries before comparing their financial
result.
Financial Reporting Quality
Financial reporting quality varies from across company’s.The quality refers to the characteristics
reporting standards of financial statements. GAAP provide choice of methods, estimates and
specific treatment of many times.

High quality financial reporting must be decision useful as well as two qualities of decision
useful financial reporting are relevance (useful and material) and faithful representation
(completeness, unbiased and free from error .

Results quality commonly referred to as earning quality pertains to the earning cash generated by
the company’s actual economic activities and resulting financial condition. High quality end of
spectrum financial reports that are complaint with

GAAP decision useful and report earnings are sustainable and represent an adequate return on
invested capital, at opposite end of spectrum are financial reports which are necessarily fictitious
(fraudulent).

As financial reporting quality is the degree of which accounting choices are conservation or
aggressive which is typically indicates to choices that aim to important the company’s reported
performance and financial position by inflating the amount of revenues, earnings and operating
cash flow reported in the period by decreasing expenses for the period of the debt reported on the
balance sheet.

Analyst must think about conservatism in financial reporting as good and aggressive reporting as
bad .It is also be considered as a deviation from neutral reporting or faithful representation that
reduces the usefulness of financial statements to analysts and investor.

Management may be motivated to issue less than high quality reports in order to mask poor
performance to boost the stock price for personal compensation or bonus by declining violation
of debt covenants. Pro forma earrings adjust earnings as reported on the income statements
which include negative items that are hallmarks aggressive presentation choices .Companies
required to make additional disclosures when presenting any no GAAP or IFRS metric. Cash
from operations is a metric of interest to investors that can be enhanced by operating choices
such as stretching accounts payable and potentially by classification choices.