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Ac3102 Risk Reporting and Analysis Bible

Autor:   •  October 5, 2017  •  Term Paper  •  14,464 Words (58 Pages)  •  394 Views

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Seminar 1

Risk


  • Uncertainty
  • E.g. chance that an investment’s actual return will differ from its expected return /

possibility of losing some or all of the original investment

  • Exposure: firm has to manage a risk only if it is exposed to the uncertainty

Risk Management (≠ Elimination)

  1. Avoidance: attempt to avoid the risk by carefully circumscribing its activities
  2. Acceptance: accepting the rick as an inevitable, unavoidable result of business decisions
  3. Sharing: transferring, at a cost, all or part of the risk to another party, e.g. partnership, outsourcing, joint-venture
  4. Reduction: attempt to reduce the risk by designing and implementing proactive policies, procedures and processes, considered the best method
  • Systematic (market) risk vs unsystematic (firm-specific / diversifiable) risk
  • Risk tolerance: maximum level of risk that an investor is willing to tolerate for each specific risk / objective
  • Risk capacity: amount of risk that an investor “must” take in order to reach financial goals
  • Note: High risk -> high returns, but NO risk -> low returns (rf)

Risk Analysis

  • 2 factors
  1. Probability (likelihood of occurrence)
  2. Impact / effect (magnitude of consequence, e.g. monetary losses)

[pic 3][pic 4]

Risk Reporting

  • Qualitative disclosures
  • Risk exposure


  • Risk management policy
  • Quantitative disclosures
  • VaR (value-at-risk)
  • Sensitivity analysis
  • Others

Business Combinations

  • Unsystematic risk (e.g. business cyclical risk) may be reduced through diversification
  • One of the main reasons for business combinations is to manage unsystematic risks
  • Types
  1. Merger: when 2 firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated; aka “merger of equals”
  • Horizontal, vertical, market-extension, product-extension, conglomeration
  1. Acquisition: when one company purchases and takes over another, and clearly established itself as the new owner
  • Target company ceases to exists legally while buyer’s shares continue to be traded
  • May involved the purchase of the target company’s assets & / or liabilities

and equity / shares (focus)

  • Reverse merger is a form of acquisition where a small private company with strong prospects is eager to raises financing buys a publicly-listed larger shell company, usually one with no business and limited assets, aka backdoor listing (e.g. Capital City acquiring Terratech Group)

Consolidated Financial Statements (CFS)

  • A business combination is “a transaction...in which an acquirer obtains control of one or

more businesses” (FRS 103 App A)

  • Accounted using acquisition method (FRs 103.4)
  • Each separate legal entity (e.g. parent and subsidiary) in a business combination will have to prepare their own set of financial statements
  • Parent also has to prepare and present consolidated financial statements


Control

Parent: controls one or more entities (FRS 110 App A)

  • FRS 110.7: An investor (P) controls an investee (S) if & only if the investor has
  1. Power over the investee (e.g. decide financial (bonds / shares) and operating (workweek) policies),
  2. Exposure to variable returns of the investee, and
  3. Ability to use power to affect the investee’s returns (e.g. change strategies to diversity product line)
  • Assume if A holds > 50% of voting shares in B, then A has control over B

Exemption from Presenting CFS

  • FRS 110.4(a): P need not present CFS if
  • P is a wholly-owned S, or partially-owned S and its other owners do not object,

[pic 5]

or

[pic 6]

  • P’s debt / equity instruments are not traded in a domestic / foreign exchange
  • P is not in process of being listed, and
  • P’s ultimate / intermediate parent produces CFS available for public use.
  • Note that the exemption can only apply to intermediate parents!
  • IFRS 10.4(a) further requires in 4th criteria that P’s ultimate / intermediate parent produces CFS that comply with IFRSs, i.e. if the A is a U.S. company and comply with GAAP instead, B cannot be exempted from presenting CFS


Seminar 2

Combination of Accounts

  • Single entity concept
  1. Add across same accounts of P & S
  2. Eliminate P’s “Investment in S” account
  • Adding together P’s & S’s assets & liabilities line-by-line and P’s “Investment in S”

account will double-count S’s net assets

  • Need to eliminate P’s “Investment in S” account against S’s pre-acquisition share capital & retained earnings
  • These items arose prior to P obtaining control over S (i.e. representing S’s net assets

at the point of acquisition by P)

Fair Value Adjustments (FVA)

  • Recognition principle: To recognize, separately from goodwill, S’s identifiable (recognized / unrecognized) acquired assets & assumed liabilities, & NCI (FRS 103.10)
  • Measurement principle: To measure S’s assets & liabilities at “acquisition-date fair value” (FRS 103.18)
  • *Only for S! Take P’s book value (BV) even if P has not revalued its own

assets/liabilities

...

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