FA3

• Earnings per Share (EPS)


  Net Income - Preference Dividends / Weighted-Average Ordinary Shares Outstanding
• Basis EPS


  EPS for only ordinary shares
• Diluted EPS


  EPS if all potentially converted ordinary shares are included, while excluding antidilutive securities
• Dilutive securities


  Financial instruments that enable their holders to obtain ordinary shares and reduce ('dilute') earnings per share (EPS) by increasing number of shares outstanding
• Most notable examples of dilutive securities


  • Convertible bonds
  • Convertible preference shares
  • Warrants and Employee Share Options
• Convertible bonds


  Accounted for as a compound financial instrument (they have both a debt and equity component)
• Valuation of equity in convertible bonds


  1. Determine total fair value of debt

  2. Determine debt component by computing net present value of all future cash flows

  3. Subtract debt component from total fair value to get the equity component
• Situations for convertible bonds


  • Repurchase at maturity
  • Conversion at maturity
  • Conversion before maturity
  • Repurchase before maturity
• Convertible Preference Shares


  Enables holders to convert the shares into a fixed number of ordinary shares, reported solely as equity
• Entries for convertible preference shares

  1. Issuance

  2. Conversion

  3. Repurchase
• Share Warrants


  Certificates that give the holder the right to obtain shares at a fixed price within a pre-specified period
• Employee Share Option Plans

  Require companies to recognise compensation cost using the fair-value method, with expense recognised over the service period
• Restricted Shares


  • Shares that cannot be sold or transferred until vesting occurs, expensed over the service period
• Share-Appreciation Rights (SARs)


  Give employees the right to receive compensation equal to the increase in value (i.e., share appreciation) of its shares
• The value of financial assets comes from a contractual claim to cash flows, while the value of physical assets comes from their use in business
• Important types of financial assets

  • Debt investments (e.g., loans, bonds)
  • Equity investments (e.g., ordinary/preference shares)
• Share appreciation

  The excess of the market price of the share at the date of exercise over a pre-established price
• The company may pay the share appreciation in cash, shares, or a combination of both
• Accounting for SARs


  Depends on whether the company provides the rights as equity or as liability awards (i.e., the holder receives shares vs. cash)
• Financial assets


  The value of financial assets comes from a contractual claim to cash flows
• Important types of financial assets

  • Debt investments (e.g., loans, bonds)
  • Equity investments (e.g., ordinary/preference shares)
• Main motivations for investing

  • To earn a return
  • Strategic investment
• To record at amortized cost


  • Business model test: Will the company hold to collect?
  • Cash flow characteristics test (SPPI test): Do the contractual terms of the asset give rise on specified dates to cash flows that are payments of principal and interest?
• Amortized cost


  Asset reported at original value (historical) and adjusted for depreciation or amortization (backward-looking)
• Fair value

  Amount for which an asset could be exchanged in an arm's length transaction (more forward looking)
• Debt investments categories under IFRS 9

  • Held-for-collection
  • Held-for-collection and selling
  • Trading securities
• Accounting for held-for-collection debt investments

  1. Initial recording of investment

  2. Recording of first cash payment

  3. Interest revenue recognition

  4. Selling of bond

  
• Accounting for held-for-collection and selling debt investments

  1. Recording of purchase

  2. Recording interest revenue

  3. Fair value adjustment at end of year

  4. Selling HFCS

  
• Accounting for trading debt investments

  1. Recording of purchase

  2. Recording interest revenue

  3. Fair value adjustment at end of year

  
• Fair value option


  Companies can choose to value debt investments at fair value even if they could be valued at amortized cost
• Impairment of value


  IFRS 9 requires credit losses on financial assets to be measured and recognised using the 'expected credit loss (ECL)' approach
• Equity investment


  Represents ownership interest or rights to acquire/dispose of ownership interests
• Classifications of equity investments based on influence

  • 0% - 20% (little or none)
  • 20% - 50% (significant)
  • 50% - 100% (control)

  
• Holdings of less than 20%


  Can be further subdivided into trading and non-trading options, the only difference being the recognition of unrealized holding gains or losses
• Accounting for equity investments less than 20%


  1. Recording the purchase

  2. Recording cash dividends received

  3. Fair value adjustment at end of year

  4. Selling the investment

  
• Equity method


  Used to account for equity investments between 20% and 50%, where the investor has significant influence but not control

  
• Consolidation

  Required when a parent company has a controlling interest (over 50%) in a subsidiary
• Consolidation process

  1. Step 1: offset equity investment against subsidiary's equity and calculate (potential) goodwill

  2. Step 2: aggregate all assets and liabilities

  3. Step 3: determine the consolidated equity
• If subsidiaries' book value of net assets does not equal fair value, adjustments are needed for goodwill and non-controlling interest
• Further steps in the consolidation process include eliminating inter-company transactions