Financial Accounting

Topics: Stock, Stock market, Corporate finance Pages: 16 (2776 words) Published: June 23, 2013
B6013 Spring 2010

B6013 - Financial Accounting Financial Assets and Liabilities Shareholder’s Equity

Professor Urooj Khan o esso U ooj a

Outline – Session 19

1. Financial Assets and Liabilities
– Accounting for Financial Assets

2. Shareholder’s Equity
– – – – Capital Stock Cisco Case Dividends and Share Repurchases Comprehensive I C h i Income

B6013 Spring 2010 © Columbia Business School

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Prof. Urooj Khan

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B6013 Spring 2010

Background Readings and Practice Problems
•Shareholder’s Equity
– EWHM: M9 (pp. 1-23) and M5 (pp. 27-29) – Cisco Case

•Practice Problems
– E9-34, E9-43, E9-47, P9-49

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Principles for Treatment of Operating Leases
• Treat the assets under operating leases as if they were purchased on a given date and then depreciated using the same policy as purchased operating assets of the same type. • The funding of these operating leases is the PV of the lease payments AT THE INCEPTION OF THE LEASE…….hence LEASE h • The Operating Asset = Financing liability only at the start of the lease (and at the end when both will be zero) • The rental payment is a cash payment for funding which is split between interest (first) then repayment of principal…..JUST LIKE ANY BOND • The economic expense is then both “depreciation” of the operating asset AND the interest expense on the outstanding balance of the “lease-based” borrowing. borrowing • Going forward you acquire operating assets and then decide how to fund them (cash, borrow outright or borrow from leasing) These are the key things to understand for the whole process (which can get vey complicated)

B6013 Spring 2010 © Columbia Business School

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Prof. Urooj Khan

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B6013 Spring 2010

Measuring Financial Assets after Issuance
Classification Trading Available for Sale Hold to Maturity Measured at: At Fair Value At Fair Value At Original Cost Gain/Loss in: Net Income Equity via OCI q y N/A

 All assets assessed for other than temporary impairment
What happens when market prices/interest rates change? The answer is an evolving one as accounting regulators were moving towards a “fair value” approach for all financial assets and liabilities before being fair value liabilities, blamed for the credit crisis by many politicians around the world. All Financial Assets must first be classified as follows:

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Wells Fargo 12/2008

A Banks Asset’s

B6013 Spring 2010 © Columbia Business School

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Prof. Urooj Khan

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B6013 Spring 2010

Wells Fargo’s Marketable Securities at 12/08

Securities available for sale shown on balance sheet Takeaway: At any time there are unrealized gains and losses either in earnings, OCI (or even unrecognized)….there is a different liquidity/risk implication between realized and unrealized gains...so we need to carefully consider what the price change really means (fundamental or flow-related)? B6013 Spring 2010 © Columbia Business School

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Measuring Fair Value of Financial Instruments – The Basic Idea “A fair value measurement assumes that the asset or liability is exchanged in an orderly transaction between market participants to sell the asset or transfer the liability at the measurement date. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a date market participant that holds the asset or owes the liability. Therefore, the objective of a fair value measurement is to determine the price that would be received to sell the asset or paid to transfer the liability at the measurement date (an exit price)”.

Source: for all descriptions in the next few slides is: Accounting Standards Codification 820-10-35-..and relate primarily to SFAS 157

B6013 Spring 2010 © Columbia Business School

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Prof. Urooj Khan

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B6013 Spring 2010

How Measured? FAS 157 re Fair...
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