3-1

Analyzing Financing Activities

3
CHAPTER

3-2

Analyzing Financing
Activities

Liabilities

Classification
1) Current & Non current
2) Operating & Financing

Analyze of
Equity

Leases ?

Contingencies ?
Analyze of
Liabilities

Equity

Off Balance ?
Sheet

Capital
Stocks

Retain
Earning

3-3

Analyzing Financing
Activities

Liabilities

Classification
1) Current & Non current
2) Operating & Financing

3-4

Liabilities
Classification
Current (short-term)
Liabilities
Obligations payable
within one year

Noncurrent (Long-Term)
Liabilities
Obligations not
payable within one
year

3-5

Liabilities
Alternative Classification
Operating
Operating
Liabilities
Liabilities

Financing
Financing
Liabilities
Liabilities

Obligations
Obligationsthat
thatarise
arisefrom
fromoperating
operating
activities--examples
activities--examplesare
areaccounts
accounts
payable
payable(trade
(tradecreditor),
creditor),taxes
taxes
payable,
payable,and
andother
otheraccruals
accrualsof
of
operating
operatingexpenses
expensesexample
examplewage
wage
payable
payable
Obligations
Obligationsthat
thatarise
arisefrom
fromfinancing
financing
activities--examples
activities--examplesare
areshortshort-and
and
long-term
long-termdebt,
debt,bonds,
bonds,notes,
notes,leases,
leases,
and
andthe
thecurrent
currentportion
portionof
oflong-term
long-term
debt
debt

3-6

Analyzing Financing
Activities

Liabilities

Classification
1) Current & Non current
2) Operating & Financing

Analyze of
Liabilities

3-7

Liabilities
Important Features in Analyzing Liabilities
Terms of indebtedness (such as maturity, interest
rate, payment pattern, and amount).
Restrictions on deploying resources and pursuing
business activities.
Ability and flexibility in pursuing further financing.
Prohibitions on disbursements such as dividends.
Obligations for working capital, debt to equity, and other
financial figures.

3-8

Analyzing Financing
Activities

Liabilities

Classification
1) Current & Non current
2) Operating & Financing

Analyze of
Liabilities

Leases

3-9

Leases
Leasing Facts
Lease contractual agreement between a
lessor (owner) and a lessee (user or renter) that
gives the lessee the right to use an asset
owned by the lessor for the lease term.
MLP minimum lease payments
(MLP) of the lessee to the lessor
according to the lease contract

3-10

Leases
Lease Accounting and Reporting
(1) Capital Lease Accounting For leases that transfer substantially all benefits
and risks of ownershipaccounted for as an asset acquisition and a liability
incurrence by the lessee, and as a sale and financing transaction by the lessor
A lessee classifies as a capital lease if,
at its inception, the lease meets any of four criteria:
(i) lease transfers ownership of property to lessee by end of the lease
term
(ii) lease contains an option to purchase the property at a bargain price
(iii) lease term is 75% or more of estimated economic life of the
property
(iv) present value of rentals and other minimum lease payments at
beginning of lease term is 90% or more of the fair value of leased
property
(2) Operating Lease Accounting For leases other than capital leasesthe
lessee (lessor) accounts for the minimum lease payment as a rental expense (income)
Accounting Entry ?

3-11

Analyzing Financing
Activities

Liabilities

Classification
1) Current & Non current
2) Operating & Financing

Leases

Contingencies
Analyze of
Liabilities

3-12

Contingencies and Commitments

Basics of Contingencies
Contingencies -- potential losses and gains than depends on one or more future
events.
Contingent liabilities -- contingencies with potential claims on resources
-- to record a contingent liability (and loss) two
conditions must be met:
(i) probable i.e. an asset will be impaired or a
liability incurred, and
(ii) the amount of loss is reasonably estimable;
Contingent assets

Contingencies
should be . . .

-- contingencies with potential additions to resources

-- a contingent asset (and gain) is not recorded until
the contingency is resolved
-- a contingent asset (and gain) can be disclosed if
probability of realization is very high

3-13

Analyzing Financing
Activities

Liabilities

Classification
1) Current & Non current
2) Operating & Financing

Off Balance
Sheet

Leases

Contingencies
Analyze of
Liabilities

3-14

Off-Balance-Sheet Financing
Illustration of SPE Transaction to Sell
Accounts Receivable
A special purpose entity is formed by the sponsoring
company and is capitalized with equity investment,
some of which must be from independent third
parties.
The SPE leverages this equity investment with
borrowings from the credit markets and purchases
earning assets from or for the sponsoring company.
The cash flow from the earning assets is used to
repay the debt and provide a return to the equity
investors.

3-15

Off-Balance-Sheet Financing
Illustration of SPE Transaction to Sell
Accounts Receivable - Chp 4

3-16

Analyzing Financing
Activities

Liabilities

Classification
1) Current & Non current
2) Operating & Financing

Analyze of
Liabilities

Off Balance
Sheet

Leases

Contingencies&
Commitment

Equity

3-17

Shareholders Equity
Basics of Equity Financing

Equity refers to owner (shareholder) financing;

Characteristics include:
Equity holders usually subordinate to creditors
Reflects claims of owners (shareholders) on net assets
Exposed to maximum risk and return

3-18

Shareholders Equity
Two basic components

Capital Stock
Retained Earnings
Reserves

3-19

Analyzing Financing
Activities

Liabilities

Classification
1) Current & Non current
2) Operating & Financing

Analyze of
Liabilities

Off Balance
Sheet

Leases

Contingencies&
Commitment

Equity

Analyze of
Equity

3-20

Analyzing Financing
Activities

Liabilities

Classification
1) Current & Non current
2) Operating & Financing

Analyze of
Liabilities

Equity

Off Balance
Sheet

Analyze of
Equity

Leases

Contingencies&
Commitment

Capital
Stocks

3-21

Shareholders Equity
Classification of Capital Stock
Preferred Stock
stock with features not possessed by
common stock; typical preferred stock features include:
Dividend distribution preferences
Liquidation priorities
Convertibility (redemption) into common stock
Non-voting rights ? Berjaya Group Bhd
Common Stock stock with ownership interest and
bearing ultimate risks and rewards (residual interests) of
company performance

3-22

Shareholders Equity
Components of Capital Stock
Contributed (or Paid-In) Capital total financing received from
shareholders for capital shares; usually divided into two parts:
Common (or Preferred) Stock financing equal to par or
stated value;if stock is no-par, then equal to total financing
Contributed (or Paid-In) Capital in Excess of Par or Stated
Value financing in excess of any par or stated value

3-23

Shareholders Equity
Reporting Capital Stock
Sources of increases in capital stock outstanding:
Issuances of stock
Conversion of debentures and preferred stock
Issuances of stock in acquisitions and mergers
Issuances pursuant to stock dividends and splits
Issuances pursuant to stock options and warrants exercised
Sources of decreases in capital stock outstanding:
Stock buybacks (Berjaya Group)
Reverse stock splits
Treasury Stock (or buybacks ) - shares of a companys stock
reacquired after having been previously issued and fully paid for.
Reduces both assets and shareholders equity
contra-equity account (negative equity).

3-24

Date

Buy Back

Total amt.

Total

Paid

Treasury

Shrs
Announce

16-Feb-09
16-Feb-09

16-Feb-09

16-Feb-09
16-Feb-09

16-Feb-09

Company

APEX
BJLAND

ECM

HAIO
HIRO

IPOWER

Acquir
ed

Date

Min

Max

1-Jan-00
52,000

0.5

0.56

26,337.28

1,636,918

5,000

3.1

3.1

15,613.65

6,771,635

200,000

0.38

0.39

78,187.01

12,085,800

3,500

3.3

3.32

11,655.00

1,112,944

2,000

0.54

0.54

1,110.33

17,575,200

42,000

0.135

0.14

5,720.11

33,880,000

1-Jan-00

1-Jan-00

1-Jan-00
1-Jan-00

1-Jan-00

3-25

Analyzing Financing
Activities

Liabilities

Classification
1) Current & Non current
2) Operating & Financing

Analyze of
Liabilities

Equity

Off Balance
Sheet

Analyze of
Equity

Leases

Contingencies&
Commitment

Capital
Stocks

Retain
Earning

3-26

Shareholders Equity
Basics of Retained Earnings
Retained Earnings earned capital of a company; reflects
accumulation of undistributed earnings or losses since inception;
retained earnings is the main source of dividend distributions
Cash and Stock Dividends
Cash dividend distribution of cash (or assets) to shareholders
Stock dividend distribution of capital stock to shareholders
Accounting T Account

3-27

Shareholders Equity
Spin-Offs and Split-Offs
Spin-off, the distribution of subsidiary stock to
shareholders as a dividend; assets (investment in
subsidiary) are reduced as is retained earnings.
Split-off, the exchange of subsidiary stock owned by
the company for shares in the company owned by the
shareholders; assets (investment in subsidiary) are
reduced and the stock received from the shareholders is
treated as treasury stock.

3-28

Questions(11

th

pages 205-20)

3-1
3-15
3-24
3-27
How convertible debt/warrants impacts on valuation of
existing shareholders?
Define big baths? How big bath impacts on company
earning?
Exercise 3-2
Discuss in general about Company Restructuring and
bankruptcy process?