ACCT6101 – Session #1: Introduction to Valuation
PART 1 – Background
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ACCT7106 – Session #7: Reformulating the Financial Statements
overarching objective:
to conduct fundamental value for the purpose of estimating the ‘intrinsic value’ of a firm’s common shares
requires an understanding of the firm’s ‘value drivers’
need to accumulate a ‘tool kit’ as the basis for developing the pro forma Financial Statements
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projected over the forecast horizon
core inputs into the valuation model x g
Balance Sheet (B/S)
Income Statement (I/S)
Statement of Cash Flows (SCF)
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STEP 1
Understanding the past
Information collection
Understanding the business
Accounting analysis
Financial ratio analysis
Cash flow analysis
STEP 2
Forecasting the future
Structured forecasting
Income Statement forecasts
Balance sheet forecasts
Cash flow forecasts
STEP 3
Valuation
Cost of capital
Valuation models – AE, FCF, D
Valuation ratios
Complications
Negative values
Value creation and destruction
Figure 1.1 Lundholm & Sloan, Framework for Equity Valuation
Sessions #3 #9
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Stage 1 – Understanding the Business
‘Strategy Analysis’
product market
competition
regulatory constraints
business strategies
technology
Stage 2 – Analysing Information
Accounting Analysis & Financial Analysis
quality of accounting information
reformulating the F/S to uncover business activities
ratio and cash flow analysis
Stages of the Analysis
Stage 3 – Prospective Analysis: Forecasting
pro-forma – Income Statement
– Balance Sheet
– Statement of Cash Flows
Stage 4 – Prospective Analysis: Valuation
Abnormal Earnings Model
Alternative Valuation Models
Statement of Cash Flows
Stage 5 – Prospective Analysis: Application
investment decision
investor – decision to buy, hold, sell
manager – decision to adopt strategy or not
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external environment
economic prospects
macroeconomic factors
socio-cultural forces
political / regulatory
Industry dynamics
Porter’s five forces
(suppliers, buyers, new entrants, substitutes, rivalry)
Analysis of Financial Statements
understanding current F/S
re-formulating the F/S
accounting quality
analysts’ reports
management forecasts
financial press
???
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Financial Statements – AASB 101:
Balance Sheet
Income Statement and/or Statement of Comprehensive Income
Statement of Changes in Equity
Statement of Cash Flows
Notes to the financial statements
building blocks definitions specific to accounting
accounting principles AASB / IFRS rules to guide accounting decisions/choices
recognition (item to F/S) versus disclosure (notes)
‘accountability’ & ‘stewardship’
‘accountability’ preservation by management of the resources entrusted to them
‘stewardship’ efficient use by management of resources entrusted to them (earning a return)
‘articulation’ Financial Statements constitute an ‘integrated system’
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beginning stock
Beginning Balance Sheet
Cash
+ Other assets
= Total Assets
– Liabilities
= Shareholders’ Equity (BVt-1)
Statement of Changes in S/E
Cash from operations
+ Net Income & OCI
= Net Change in S/E
Cash Flow Statement
Cash from operations
+ Cash from investing
+ Cash from financing
= Net change in cash
Income Statement
Revenue
– Expenses
= Net Income (NPAT)
Ending Balance Sheet
Cash
+ Other assets
= Total Assets
– Liabilities
= Shareholders’ Equity (BVt)
flows
ending stock
pro forma Income Statement
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caution – for ‘clean surplus’ and consistent estimates, the accounting system must reconcile
‘articulation’: must concurrently develop the pro forma B/S and SCF
2019 2020 2021E 2022E 2023E
Sales 38,176 37,408 ? ? ?
Other operating revenue 288 376
Cost of sales (29,253) (28,043) ? ? ?
Other income 428 108
Administrative expenses (8,031) (8,081) ? ? ?
Other expenses (146) —
Share – equity investments 5 (6)
Financing costs (42) (443) ? ? ?
Income tax expense (347) (341) ? ? ?
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Objectives:
separate operating activities from financing activities
Operations: buying and selling goods and services
Financing: the company’s use of debt and equity to finance its operations, as well as the company’s investment in financial assets
Why separate? industrial companies generate value from their operations, not from their financial activities
alter several accounting classifications
for the Income Statement, separate revenues and expenses based on their driver (sales volume or other), and whether they are recurring or non-recurring
PART 2 – Reformulation
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Balance Sheet Reformulation
Assets
=
Liabilities
+
Shareholders’ Equity
Operating Assets (OA)
Financial Assets (FA)
Operating Liabilities (OL)
Financial Obligations (FL)
accounting equation
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Shareholders’ Equity
S/E
net financial obligations
(FO – FA)
net operating assets
(OA – OL)
=
+
Assets (A) = Liabilities (L) + Shareholders’ Equity (S/E)
reformulating
[OA + FA] = [OL + FO] + S/E
(OA – OL) = (FO – FA) + S/E
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Step #1 – Operating Assets (OA) versus Financial Assets (FA)
Operating Assets (OA) – assets used in selling goods and services (the company’s business)
Financial Assets (FA) – assets used to invest excess cash (investments not tied to the business)
two broad criteria:
nature of the item itself
function of the item in the company’s operations
typical indicators of Financial Assets (FA) (none are decisive on their own):
the item is financial nature, such as investments in debt/equity securities
typically measured at fair value e.g., investments in debt or equity
typically earn interest or dividends for the company
the asset is not integrated into the company’s operations
separating operating cash (OA) and financial cash (FA) is a matter of judgement (e.g., 0.5% of sales revenue)
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Step #2 – Operating Liabilities (OL) versus Financial Obligations (FO)
Operating Liabilities (OL) – liabilities associated with selling goods and services (the company’s business)
Financial Obligations (FO) – sources of financing other than CSE (basically debt)
typical indicators of Financial Obligations (FO):
the company pays interest on them and has an obligation to repay
most are measured at amortised cost (or rarely fair value)
the liability is not integrated with the company’s operations
items for reclassification
dividends payable – treat as part of S/E
preference shares – treat as a financial obligation (FO) and dividend as a financial expense
derivative securities – given the challenges of specifically confirming the nature of each contract, we will treat ‘derivative financial assets’ as FA and ‘derivative financial liabilities’ as FO
leases – under AASB16, all leases recognised as finance leases lease assets treated as operating assets, lease obligations as financial obligations, and lease interest as a financial expense
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re: Coles
OA (after checking note)
OA (after checking note)
FA
OA (after checking note)
OA (after checking note)
OA / FA (0.5%)
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OA (after checking note)
OA (after checking note)
OA (after checking note)
OA (after checking note)
OA (after checking note)
OA (after checking note)
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OL (after checking note)
FO (after checking note)
FO (after checking note)
FO (after checking note)
OL/FO (after checking note)
OL/FO (after checking note)
OL (assumed)
OL (assumed)
* Note 2.9 reveals that 2019 ‘provisions’ include amounts for ‘lease provisions’ FO
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2020 2019 2020 2019
OA 17,502 9,028 FA 847 749
OL 5,297 6,308 FO 10,437 112
NFO 9,590 (637)
S/E 2,615 3,357
NOA 12,205 2,720 NFO + S/E 12,205 2,720
Reformulation Summary – Coles
** The reported 2019 figures are NOT directly comparable with the reported 2020 figures because of the adoption of AASB 16 (leases) which brought lease commitments into the B/S as both ‘right of use assets’ and ‘lease liabilities’
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PART 3 – Income Statement Reformulation
overview – reformulation of the AASB/IFRS Income Statement and Statement of Comprehensive Income into a Reformulated Income Statement such that it:
divides Income Statement items into operating versus financing activity related
further divides operating income into three categories, based on whether the items are recurring and driven by sales
reallocates income tax expense to remove the tax effects of debt financing/financial assets
divides OCI into operating and financing aspects
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Process (as per schema on the next slide) –
Step #1: divide every line item in the Income Statement between operating and financing
Step #2: divide operating items into:
core operating income from sales
core other operating income
unusual operating income
Step #3: divide income tax expense between:
core operating income from sales
core other operating income
unusual operating Income
net financial expense (or net financial income)
Step #4: divide OCI items (after-tax) between operating and financing
AASB/IFRS Income Statement & Statement of Comprehensive Income
Sales
– COGS
= Gross margin
– Other expenses
= EBITDA
– Depreciation & amortisation
= EBIT
+ Interest revenue
– Interest expense
= PBT
– Income tax expense
= NPAT
+OCI (with tax effects)
= Comprehensive Income (CI)
Reformulated Income Statement
Core Operating Income from Sales (before-tax)
Core Other Operating Income (before-tax)
Unusual Operating Income (before-tax)
Net Financial Expense (before-tax)
Steps 1 and 2
Step 3
Step 4
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Mark Wallis, UQ
Operating OCI (after-tax)
Financing OCI (after-tax)
Tax allocation:
Tax shield from NFE
Tax on Core Other OI
Tax on Unusual OI
Tax on Core OI from Sales
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Step #1: divide every line item in the Income Statement between operating and financing
Operating items – revenues/expenses (or gains/losses) related to the company’s operations
Financing items – revenues/expenses (or gains/losses) related to the company’s financing activities
consider information in the notes and the company’s operating model (judgement)
try to be consistent in how you reformulate the B/S and I/S
Step #2: divide ‘operating items’ into:
core operating income from sales recurring operating income related to the company’s main operations (driven by sales volume) e.g., sales, COGS, wage expense
core other operating income recurring operating income that is not related to the company’s main operations (not driven by sales volume)
unusual operating income non-recurring (one-time) operating income
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Core OI from sales
Core other OI
Core OI from sales
Core other OI
Core OI from sales & Unusual OI*
Core other OI
Unusual OI (also Step #3 re: tax)
Core financing expense (NFE)
Step #3
* Note 1.4 indicates that ‘Administrative expenses’ include an ‘impairment reversal’ of $41 million in 2020 and an ‘impairment expense’ of $42 million in 2019 ‘Unusual OI’
Core financing expense (NFE)
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Summary – Coles reformulated Income Statement (following Steps #1 & #2)
2020 2019
Core OI from Sales (before tax) 1,243 934
Core Other OI (before tax) 478 721
Core OI (before tax) 1,721 1,655
Unusual OI (before tax) 41 315
Core NFE (before tax) (443) (188)
versus reported profit before tax from the I/S
2020 2019
Profit before tax 1,319 1,425
* 2020 reconciles; 2019 does NOT ‘profit from discontinued operations after tax’ = 357
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Step #3: divide income tax expense between:
core operating income from sales
core other operating income
unusual operating Income
net financial expense (or net financial income)
Note: Australia has a stated corporate tax rate of 30% (for large companies)
we will use the 30% rate for the disaggregation process above
(while the true tax rate is rarely exactly 30% for most companies, the staged approach that we adopt will accommodate the differences)
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‘Staged approach’ allocation tax in the reverse order, with the tax expense deemed to be associated with core operating income from sales calculated as the residual amount i.e.,
1st – calculate the debt tax shield (extra tax) associated with NFE (NFI)
= NFE x 30% (or NFI x 30%)
2nd – calculate tax expense/deduction associated with Unusual Operating Income
= Unusual OI x 30%
3rd – calculate tax expense/deduction associated with Core Other Operating Income
= Core Other OI x 30%
4th – calculate tax expense associated with Core Operating Income from Sales
= Income tax expense + Tax shield from NFE (-Extra tax paid on NFI) – Tax expense (+deduction) from Unusual OI – Tax expense (+deduction) from Core Other OI
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To illustrate, consider the following reformulated Income Statement:
Core Operating Income from Sales 300
Core Other Operating Income 200
Unusual Operating Income 100
Net Financial Expenses (200)
Profit Before Tax 400
Tax Expense (130)
Net Profit After Tax (NPAT) 270
allocation of the tax expense –
1st tax shield from Net Financial Expenses = 0.30 * 200 = 60
2nd tax on Unusual Operating Income = 0.30 * 100 = 30
3rd tax on Core Other Operating Income = 0.30 * 200 = 60
4th tax on Core Operating Income from Sales = 130 + 60 – 30 – 60 = 100
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Aside – why is the tax allocation associated with Net Financial Expenses added back?
interest expense is tax deductible whereas dividends are paid out of after-tax income
Net Financial Expenses provide a ‘tax shield’ (i.e., they reduce taxes)
to illustrate, A – no debt B – debt
Operating Income 1,000 1,000
Net Financial Expenses – – – (400)
Profit Before Tax 1,000 600
Tax Expense @ 30% (300) (180)
Net Profit After Tax 700 420
for B, debt provides a ‘tax shield’ of 120 (= 0.30*400)
the ‘true’ tax expense on Operating Income is 300 (= 180 + 120)
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PART 4 – further illustration
Sales Revenue 2,000 Core Operating Income from Sales
Rental Income 20 Core Other Operating Income
Total Revenue 2,020
Cost of Goods Sold (1,000) Core Operating Income from Sales
Wage Expense (250) Core Operating Income from Sales
Advertising Expense (50) Core Operating Income from Sales
Interest Income 20 Net Financial Expense
Share of profit from equity-accounted investments 10 Core Other Operating Income
Gain on sale of property 30 Unusual Operating Income
Restructuring charges (10) Unusual Operating Income
EBITDA 770
Depreciation & Amortisation (250) Core Operating Income from Sales
EBIT 520
Interest Expense (100) Net Financial Expense
Profit Before Tax (PBT) 420
Tax Expense @ 30% (126)
Net Profit After Tax (NPAT) 294
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reformulated
Core Operating Income from Sales (before tax)
Sales 2,000
COGS (1,000)
Wage expense (250)
Advertising expense (50)
Depreciation & Amortisation (250) 450
Core Other Operating Income (before tax)
Rental income 20
Share of profit from equity-accounted investments 10 30
Unusual Operating Income (before tax)
Gain on sale of property 30
Restructuring charges (10) 20
Net Financial Expenses (before tax)
Interest expense (100)
Interest income 20 (80) 420 = PBT
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Tax Allocation:
1st tax shield from Net Financial Expenses = 0.30 * 80 = 24
2nd tax on Unusual Operating Income = 0.30 * 20 = 6
3rd tax on Core Other Operating Income = 0.30 * 30 = 9
4th tax on Core Operating Income from Sales = 126 + 24 – 6 – 9 = 135
Core Operating Income from Sales (after tax) 450 – 135 = 315
Core Other Operating Income (after tax) 30 – 9 = 21
Unusual Operating Income (after tax) 20 – 6 = 14
Net Financial Expenses (after tax) (80) + 24 = (56) 294 = NPAT
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Step #4: divide Other Comprehensive Income items (after-tax) between operating and financing
typical operating OCI items:
FX translation gain/loss
actuarial gain/loss on defined benefit plans
revaluation of PPE
typical financial OCI items:
gain/loss from fair value changes in financial assets that go through OCI
gain/loss from cash flow hedges and fair value hedges
gain/loss from fair value changes in financial obligations
Coles
note – tax effect on OCI item is provided
cash flow hedge
financial OCI
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Returning to the previous illustration, now extended to include a series of OCI items
NPAT 294
Other Comprehensive Income
Asset revaluation 40 operating
fair value gain on shares carried at FV 20
tax effect (6)
loss on re-measurement of defined benefits plan (10)
tax effect 3
Total OCI 47
Comprehensive Income 341
financing
operating
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Core Operating Income from Sales (after tax) 450 – 135 = 315
Core Other Operating Income (after tax) 30 – 9 = 21
Unusual Operating Income (after tax) 20 – 6 = 14
Net Financial Expenses (after tax) (80) + 24 = (56)
Operating OCI (after tax) 40 – 10 + 3 = 33
Financing OCI (after tax) 20 – 6 = 14
Total Operating Income (after tax) = 315 + 21 + 14 + 33 383
Total Net Financial Expense = (56) + 14 (42)
Comprehensive Income (after tax) 341
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Coles reformulated Income Statement
2020 2019
Core OI from Sales (before tax) 1,243 934
Core Other OI (before tax) 478 721
Unusual OI (before tax) 41 315**
Core NFE (before tax) (443) (188)
Tax expense 341 347
OCI – cash flow hedge (17) (2)
tax effect 5 1
315** 357 ‘profit from discontinued operations after tax’ – 42 ‘impairment expense’
re: discontinued note 5.3 profit before tax = 509; tax expense = 152
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1st tax shield from Net Financial Expenses = 0.30 * 443 = 132.9
2nd tax on Unusual Operating Income = 0.30 * 41 = 12.3
3rd tax on Core Other Operating Income = 0.30 * 478 = 143.4
4th tax on Core Operating Income from Sales = 341 + 132.9 – 12.3 – 143.4 = 318.2
re: 2020
Core Operating Income from Sales (after tax) 1,243 – 318.2 = 924.8
Core Other Operating Income (after tax) 478 – 143.4 = 334.6
Unusual Operating Income (after tax) 41 – 12.3 = 28.7
Net Financial Expenses (after tax) (443) + 132.9 = (310.1)
Financing OCI (after tax) (17) + 5 = (12)
Total Operating Income (after tax) = 924.8 + 334.6 + 28.7 1,288.1
Total Net Financial Expense (after tax) = (310.1) + (12) (322.1)
Comprehensive Income (after tax) 966
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1st tax shield from Net Financial Expenses = 0.30 * 188 = 56.4
2nd tax on Unusual Operating Income = 0.30 * 42 = 12.6
3rd tax on Core Other Operating Income = 0.30 * 721 = 216.3
4th tax on Core Operating Income from Sales = 347 + 56.4 + 12.6 – 216.3 = 199.7
re: 2019
Core Operating Income from Sales (after tax) 934 – 199.7 = 734.3
Core Other Operating Income (after tax) 721 – 216.3 = 504.7
Unusual Operating Income (after tax) (42 – 12.6) + 357 = 327.6
Net Financial Expenses (after tax) (188) + 56.4 = (131.6)
Financing OCI (after tax) (2) + 1 = (1)
Total Operating Income (after tax) = 924.8 + 334.6 + 28.7 1,566.6
Total Net Financial Expense (after tax) = (131.6) + (1) (132.6)
Comprehensive Income (after tax) 1,434
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PART 5 – Reformulation of the Statement of Cash Flows
The IFRS / AASB SCF (direct method) has the following basic structure –
Cash Flow from Operations (CFO)
Cash Flow from Investing (CFI)
Cash Flow from Financing (CFF)
=
Change in Cash & Cash Equivalents
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The key objectives when reformulating the Statement of Cash Flows are:
to separate operating activities (cash flows and investments to/from OAs and OLs) from financing activities (cash flows and investments to/from FAs and FOs)
to calculate the firm’s free cash flow (FCF), and show how it is generated and used (FCF is the cash that a company generates from its operations in excess of its cash used for investments in net operating assets)
to separate equity and debt financing cash flows
note: unlike the I/S, we are not doing a ‘full’ reformulation of the CF statement but rather just fixing several “classification problems”
why? the AASB/IFRS cash flow statement is also already formulated to separate financing cash flows from operating/investing cash flows
the SCF is not as important as the I/S and the B/S are for valuation
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Reformulated Statement of Cash Flows
Adjusted Cash flow from operations C
Adjusted Cash investment in operating assets I
Free Cash Flow (FCF) C + I
Equity financing flows
dividends & share repurchases XX
share issuances (XX) E
Debt financing flows
net purchase of financial assets (XX)
interest on financial assets (after tax) XX
net issue of debt XX
interest on debt (after tax) (XX) F
Total Financing cash flows E + F
‘Uses’ of FCF in financing activities
Generation of FCF from operating activities
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Generation of Free Cash Flow (FCF) = C + I
cash generated by operations less cash used for investment in operating assets
adjusted cash flow from operations (C): cash receipts/payments related to the company’s operations (operating assets and operating liabilities)
adjusted cash flow from investing (I): cash receipts/payments related to investments in long-term operating assets (e.g., pp&e, intangibles, acquisitions)
note: all of these cash flows are related to net operating assets (NOA)
FCF > 0 the company has spare (or ‘free’) cash that can paid out to shareholders and financial obligations, or invested in financial assets
FCF < 0 the company’s operations are not generating enough cash to fund its current investments in net operating assets the company will need to raise capital from shareholders and financial obligations, or by selling financial assets 41 Uses of Free Cash Flow (FCF) = E + F : Equity financing cash flows (E): cash transactions with shareholders (dividends, share repurchases, and share issues) Debt financing cash flows (F): cash receipts/payments related to financial obligations (FO) e.g., proceeds from borrowings/repayment of borrowing, and interest paid cash receipts/payments related to financial assets e.g., investment in financial cash, sale of short-term investments/purchase of short-term investments, and interest received note: all of these cash flows are related to net financial obligations (NFO) and shareholders’ equity (S/E) 42 “classification problems” requiring adjustment – interest paid/received investments in financial assets separation of ‘cash & cash equivalents’ into ‘investment in operating cash’ and ‘investment in financial cash’ re: net interest received / paid should be classified as a debt financing use of cash (F) – interest received is clearly related to FAs and interest paid is clearly related to FOs any reclassification must adjust for tax effects (i.e., remove tax shields) 43 re: investments in financial assets under AASB / IFRS, these items typically appear under CFI they are related to debt financing activities (not operating assets), and must be reclassified as debt uses of cash (F) re: operating versus financial cash in reformulating the B/S, ‘cash & cash equivalents’ were separated into ‘operating cash’ (an operating asset, OA) and ‘financing cash’ (a financial asset, FA) – ‘rule of thumb’ 0.5% of sales revenue given this separation the change in ‘operating cash’ should be included in I the change in ‘financing cash’ should be included in F 44 Cash Flow from Operations (CFO) cash receipts from customers 2,400 payments to suppliers (1,000) payments to employees (500) rent paid (100) interest received 10 interest paid (100) income tax paid (180) Net CFO 530 Cash Flow from Investing (CFI) purchase of short-term investments (100) payments for PPE (200) Net CFI (300) Cash Flow from Financing dividends paid (150) shares issued 50 proceeds from borrowings 200 Net CFF 100 Change in Cash & Cash Equivalents 330 Illustration – reformulate the following AASB Statement of Cash Flows assuming 30% tax rate split in ‘cash * cash equivalents’ of 30 re: operating cash 300 re: financing cash 45 Free Cash Flow: Adjusted CFO = C reported CFO 530.0 interest received (10.0) interest paid 100.0 tax shield = (10 – 100) * 0.30 (27.0) Adjusted CFO (C) 593.0 Adjusted CFI = I: reported CFI (300.0) purchase of short-term investments 100.0 investment in operating cash (30.0) Adjusted CFI (I) (230.0) FCF = C + I = 593 – 230 363.0 Reformulated Cash Flow Statement Uses of Free Cash Flow: Debt financing cash flows = F net interest paid (after tax) (63.0) proceeds from borrowings 200.0 purchase of short-term investments (100.0) investment in financing cash (300.0) Debt financing cash flows (F) (263.0) Equity financing cash flows = E dividends paid (150.0) shares issued 50.0 Equity financing cash flows (E) (100.0) FCF = E + F (363.0) 46 F F F 2020 2019 cash & cash equivalents 992 940 Sales revenue 37,408 38,176 ‘operating cash’ @ 0.5% 187 191 ‘financing cash’ 805 749 13 E; bal I 47 Equity (E) Debt (D) 48 Free Cash Flow: Adjusted CFO = C reported CFO 2,552 interest received (7) interest paid 37 interest – lease payments 399 tax shield = (7 – 429) * 0.30 (129) Adjusted CFO (C) 2,852 Adjusted CFI = I: reported CFI (658) investment in operating cash 4 share-based payment expense (13) Adjusted CFI (I) (667) FCF = C + I 2,185 Reformulated Coles 2020 Cash Flow Statement Uses of Free Cash Flow: Debt financing cash flows = F net interest paid (after tax) (300) proceeds from borrowings 5,120 repayment of borrowings (5,226) payment of lease principal (846) investment in financing cash (56) Debt financing cash flows (F) (1,308) Equity financing cash flows = E dividends paid (873) share-based payment expense 13 shares purchased (17) Equity financing cash flows (E) (877) FCF = E + F (2,185) 49 PART 6 – Reformulation of the Statement of Changes in Owners’ Equity Basic objectives of the reformulation exercise separate transactions with shareholders (E) (equity financing) and comprehensive income (CI) (operating income and debt financing) fix some classification problems within accounting aside: basic reclassifications preference shares – remove from S/E balances and add to financial obligations (FO) non-controlling interest – group with S/E (for our purposes) dividends payable / dividends declared – adjust S/E balances and remove from FO note: the ‘clean surplus’ relation is based on Comprehensive Income (CI) and not NPAT 50 Accounting adjustment Comprehensive Income Dividends BVt-1 BVt NCC 51 Reformulated Statement of Changes in Shareholders’ Equity Beginning Book Value of Common Equity BVt-1 + Net effect of Transactions with Common Shareholders + capital contributions (share issues) – share repurchases – cash dividends to common shareholders = Net cash contributions + Effect of operations and non-equity financing + Net Income (from the I/S) + Other Comprehensive Income (OCI) – preferred share dividends = Comprehensive income available to common shareholders Ending Book Value of Common Equity BVt 52 PART 7 – Reformulation Summary ‘new’ (reformulated) accounting relations: Balance Sheet: NOA = NFO + S/E Income Statement: CI = OI (after tax) + NFE (after tax) Cash Flow Statement: FCF = C + I = F + E Equity Statement: Change in S/E = CI + E ** note, within this formulation, NFE will be a negative number, and E will be a negative number if the only material net equity financing item is the payment of dividends Now turn to consider the relations across the reformulated statements (insights provided) 53 from the reformulated B/S NOA = NFO + S/E NOA = NFO + S/E from the reformulated equity statement S/E = CI + E combining NOA = NFO + S/E = NFO + CI + E assume from the reformulated SCF F = NFE (after tax) + NFO NFO = F – NFE (after tax) NOA = NFO + CI + E = F – NFE (after tax) + CI + E from the reformulated I/S CI = OI (after tax) + NFE (after tax) NOA = F – NFE (after tax) + CI + E = OI (after tax) + (F + E) NOA = OI (after tax) + FCF or rearranging FCF = NOA – OI (after tax) 54 NOA = OI (after tax) + FCF note – this relation creates an important theoretical link between the cash flow statement and the income statement/balance sheet Beginning Stock Flows Ending Stock NOAt-1 NOA = [OIt + FCFt] NOAt – NFOt-1 – NFO = – [FCFt – NFEt – Et] – NFOt = S/Et-1 = OIt + NFEt + Et = S/Et ********************************* note, through a similar algebraic process, it is also possible to show: NFO = FCF – NFE – E additionally, from the equity statement and the clean surplus relation, S/E = CI + E and from the reformulated I/S, CI = OI + NFE 55 NOA = OI (after tax) - FCF FCF = OI (after tax) – NOA note – this relation creates an important theoretical link between the cash flow statement and the income statement/balance sheet Beginning Stock Flows Ending Stock NOAt-1 NOA = [OIt + FCFt] NOAt – NFOt-1 – NFO = –[FCFt – NFEt – Et] – NFOt = S/Et-1 = OIt + NFEt + Et = S/Et ********************************* note, through a similar algebraic process, it is also possible to show: NFO = FCF – NFE – E additionally, from the equity statement and the clean surplus relation, S/E = CI + E and from the reformulated I/S, CI = OI – NFE CI S/E = CI + E 56 NOA2019 = 13,102* NOA = [OIt + FCFt] NOA2020 = 12,205 = 1,288 – 2,185 NFO2019 = 10,576** NFO = [FCF – NFE – E] NFO2020 = 9,590 = – 2,185 + 322 + 877 S/E2019 = 2,526 *** OIt + NFEt + Et S/E2020 = 2,615 = 1,288 – 322 – 877 * 2019 reported NOA = 2,720 adoption of AASB 16 (leases) = + 10,832 adjusted 2019 NOA = 13,102 ** 2019 reported NFO = (637) adoption of AASB 16 (leases) = + 11,213 adjusted 2019 NFO = 10,576 *** 2019 reported S/E = 3,357 adoption of AASB 16 (leases) = – 831 adjusted 2019 S/E = 2,526 see Notes 1.6, 2.7, 2.9, 7.5 Reconciliation – Coles 2020 Note/recall – the overarching objective of the reformulation process is to facilitate the forecasting exercise 0V = tx ( 1+ tk t)t =1 ∞ ∑ = E( tx ) t (1+k)t=1 n ∑ + E( nx ) (1+ g) k − g 1 n (1+k) 0 V = t x ( 1+ t k t ) t=1 ¥ å = E( t x ) t (1+k) t=1 n å + E( n x ) (1+g) k-g 1 n (1+k) /docProps/thumbnail.jpeg