Company Valuation Under IFRS: Interpreting and Forecasting Accounts Using International Financial Reporting Standards

431 Pages·2008·1.75 MB·English

by  Nick Antill

Company valuation
IFRS
under
Interpreting and forecasting accounts using
International Financial Reporting Standards
Nick Antill Hh
Kenneth Lee
2nd Edition
Hh Hh
Company valuation under
IFRS
Interpreting and forecasting accounts using International
Financial Reporting Standards
by Nick Antill and Kenneth Lee
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FirstpublishedinGreatBritainin2005,thisrevisededitionpublishedin2008
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ISBN978-1-905641-77-2
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don’taremorelikelytopayit.’–Paulos
‘Professional investment may be likened to those newspaper competitions in
which the competitors have to pick out the six prettiest faces from a hundred
photographs,theprizebeingawardedtothecompetitorwhosechoicemostnearly
correspondstotheaveragepreferenceofthecompetitorsasawhole;sothateach
competitor has to pick, not the faces which he himself finds prettiest, but those
whichhethinkslikeliesttocatchthefancyofothercompetitors,allofwhomare
lookingattheproblemfromthesamepointofview.’–Keynes

Contents
Indexofexhibits vii
Abouttheauthors xi
Prefacetofirstedition xiii
Acknowledgments xix
AnIFRSbriefing xxi
Prefacetosecondedition xxiii
Chapter One – It’s not just cash; accounts matter 1
1.Introduction–Valuationrefresher 1
2.Distributions,returnsandgrowth 3
3.Cash,accrualsandprofits 13
4.TheEconomicProfitmodel 15
5.Therealworldofspecificforecasts 17
6.Introducingdebt 18
Chapter Two – WACC – Forty years on 21
1.RiskandReturn 21
2.Diversificationandportfolioeffects 24
3.Theproblemofgrowth 34
4.Leverageandthecostofequity 37
5.Buildingintaxshelters 40
6.TimevaryingWACC 54
7.Thewalkingwounded–realoptions 55
andcapitalarbitrage
8.Internationalmarketsandforeignexchangerates 68
9.Conclusionsondiscountrates 68
Chapter Three – What do we mean by ‘return’? 71
1.IRRversusNPV 72
2.CalculatingCFROI 76
3.Anotherapproach:CROCI 85
4.UsesandabusesofROCE 85
Chapter Four – Key issues in accounting and
their treatment under IFRS 87
1.Revenuerecognitionandmeasurement 89
2.Stockoptions 100
3.Taxation 107
4.Accountingforpensionobligations 117
5.Provisions 129
v
CompanyvaluationunderIFRS
6.Leasing 135
7.Derivatives 145
8.Fixedassets 154
9.Foreignexchange 161
Chapter Five – Valuing a company 169
1.Buildingaforecast 170
2.Ratiosandscenarios 197
3.Buildingavaluation 201
4.Frequentproblems 212
5.Threeperiodmodels 238
6.Conclusionsregardingbasicindustrials 243
Chapter Six – The awkward squad 245
1.Utilities 245
2.Resourceextractioncompanies 262
3.Banks 273
4.Insurancecompanies 299
5.Propertycompanies 335
Chapter Seven –An introduction to consolidation 343
1.Introduction 343
2.TreatmentofInvestments 343
3.Methodsofconsolidation 344
4.Furtherissuesinconsolidation 349
5.Accountingforassociatesandjointventures 350
6.Purchaseaccountingandunitingofinterests 355
7.Foreignsubsidiaries 356
8.Accountingfordisposals 357
9.Modellingmergersandacquisitions 363
Chapter Eight – Conclusions and continuations 379
1.Conclusions 379
2.Continuations 382
Furtherreading 385
Appendices 389
IASorIFRSin,orcominginto,force 389
IFRSinEmergingMarkets 391
ChineseAccountingStandards–majordifferences
withIFRS 393
Analysisformulae 394
Index 399
vi
Index of exhibits
Chapter One
1.1 Constantgrowthcompanyaccounts 4
1.2 Nominaldividendprojection 5
1.3 Discounteddividendprojection 6
1.4 SimpleCodividenddiscountmodel 7
1.5 Valueversusgrowth 8
1.6 Possiblecashflows(1) 9
1.7 Possiblecashflows(2) 10
1.8 Companyvaluationsensitivities 12
1.9 Growthquestion 13
1.10 Price/booksensitivities 16
1.11 NOPATandfreecashflow 19
ChapterTwo
2.1 Risksandreturns 22
2.2 Probabilitydistributionsofreturns 22
2.3 Binomialsharepriceprogression 23
2.4 Twostockportfolio 25
2.5 Diversificationandrisk 26
2.6 Capitalmarketline 27
2.7 Securitymarketline 30
2.8 Betaasmeasureofcovariance 31
2.9 EstimatingBetas 32
2.10 20thCenturymarketriskpremia 33
2.11 Capitalvaluedecomposition 35
2.12 LeverageandWACC 36
2.13 Impactofgrowthonvalues 36
2.14 CalculationofequityBeta 38
2.15 Leveragedassets 39
2.16 Conventionaltaxsheltercalculation 41
2.17 APVforvaryinggrowth(1) 42
2.18 APVforvaryinggrowth(2) 43
2.19 APV/WACC–riskfreedebt 45
2.20 IterationofWACC 46
2.21 APV/WACC–impliedBetaofdebt 49
2.22 APV/WACC–zeroBetaofdebt 51
2.23 Valuebuild-up 53
2.24 Equityascalloption 56
2.25 Debtaswrittenput 57
2.26 Put-callparity 58
vii
CompanyvaluationunderIFRS
2.27 Thecomponentsofanoptionprice 60
2.28 VivendiUniversal 61
2.29 Vivendi–marketvalues 65
2.30 Payoffstoequityanddebt 66
ChapterThree
3.1 Projectcashflows 72
3.2 ProjectcashflowsandNPV 73
3.3 ROCE=IRR 73
3.4 ConventionalROCEcalculation 74
3.5 MaturecompanyROCE 75
3.6 BasicsofCFROIcalculation 77
3.7 CFROI=corporateIRR 78
3.8 Cashflowfromexistingassets 79
3.9 CFROImodelofSafeway 81
Chapter Four
4.1 Technicalaccountingareascovered 89
4.2 Sourcesofincome 91
4.3 Non-operatingrevenues 91
4.4 IAS18Revenuerecognitioncriteria 93
4.5 GlobalCrossing 95
4.6 Propertycompanyrevenuerecognition 98
4.7 DeutscheTelekomrevenuerecognition 99
4.8 Stockoptionforfeit 104
4.9 USGAAPpractice–CISCO 105
4.10 Deferredtaxexample 108
4.11 Temporarydifferences 110
4.12 Incomestatementanalysisoftaxcharge 114
4.13 Reconciliationoftaxexpenses 115
4.14 Deferredtaxationnote 116
4.15 Thepensioncorridor 122
4.16 BMWpensionprovisions 126
4.17 Provisionsrecognitiondecisiontree 131
4.18 Lufthansaprovisionsnote 132
4.19 IAS17leasingcriteria 136
4.20 Financeleaseillustration 137
4.21 Operatingleaseillustration 138
4.22 Hiltonnoteonleases(1) 140
4.23 Hiltonnoteonleases(2) 141
4.24 Impactofcapitalisinglease 143
4.25 Commerzbankfairvaluehedges 152
4.26 Commerzbankcashtoprofitreconciliation 153
4.27 Vodafonetangibleandintangiblefixedassets 154
viii
Indexofexhibits
4.28 Capitalisingdevelopmentcosts 158
4.29 Daniscointangibleassets 158
4.30 ReckittBenckisertotalrecognisedgainsandlosses 164
Chapter Five
5.1 Metroaccountsforecasts 171
5.2 Metrovaluation 202
5.3 Metrovaluationwithbuy-back 214
5.4 SandvikROCE 221
5.5 Sandviksalesgrowth 222
5.6 SandvikEBITmargin 223
5.7 Sandvikinventorydays 224
5.8 Sandvikcapex/depreciation 225
5.9 DanoneROCEcalculations 227
5.10 Growthcompanymodel 232
5.11 Faderoutine 240
5.12 ThreevaluesforMetro 242
Chapter Six
6.1 Currentcostaccountsmodel 249
6.2 Exxonexplorationandproductionmodel 266
6.3 IASBproposalsregardingupstreamoilactivities 273
6.4 Bankbalancesheet 275
6.5 Classificationofbankloans 276
6.6 Bankincomestatement 277
6.7 UKGAAPandUSGAAPbanknetincome 279
6.8 BarclaysUSandUKGAAPnetincome 279
6.9 Barclaysbankeconomiccapital 286
6.10 Commerzbankaccountingandvaluationmodel 290
6.11 Accountingtermsforinsurance 300
6.12 Accountsfortypicalinsurancecompany 301
6.13 Calculationofnetearnedpremiums 302
6.14 Insuranceclaimsdevelopmenttable 307
6.15 Modelofgeneralinsurancebusiness 312
6.16 Achievedprofitversusstatutoryprofit 326
6.17 APversusMSSprofitchart 327
6.18 APversusMSSNAV 327
6.19 Legal&Generalmodel 330
6.20 L&Gvaluationsensitivities 334
6.21 Propertycompanyfaderoutine 339
ix