International Financial Reporting Standards (IFRS) are now mandatory in Europe and are being adopted by other countries, including Australia. Items that have not been recorded before, or that were hidden away in the accounts, are much more visible under IFRS and will need to be carefully interpreted by investors and analysts.
Written by practitioners for practitioners, the book addresses valuation from the viewpoint of the analyst, the investor and the corporate acquirer. It starts with valuation theory: what is to be discounted and at what discount rate? It explains the connection between standard methodologies based on free cash flow and on return on capital. And it emphasizes that, whichever method is used, accurate interpretation of accounting information is critical to the production of sensible valuations. The authors argue that forecasts of cash flows imply views on profits and balance sheets, and that non-cash items contain useful information about future cash flows - so profits matter.
The book then addresses the implications for analysis and valuation of the key IFRS changes including:
It also explains the key differences between IFRS and US GAAP treatments of these issues, and their implications for analysis.
A detailed case study is used to provide a step by step valuation of an industrial company using both free cash flow and economic profit methodologies. The authors then address a range of common valuation problems, including cyclical or immature companies, as well as the specialist accounting and modelling knowledge required for regulated utilities, resource extraction companies, banks and insurance companies. Accounting for mergers and disposals is first explained and then illustrated with a detailed potential acquisition using real companies.
Index of exhibit
About the authors
Preface
Acknowledgments
An IFRS briefing
One - It's not just cash; accounts matter
1. Introduction - Valuation refresher
2. Distributions, returns and growth
3. Cash, accruals and profits
4. The Economic Profit model
5. The real world of specific forecasts
6. Introducing debt
Two - WACC - Forty years on
1. Risk and Return
2. Diversification and portfolio effects
3. The problem of growth
4. Leverage and the cost of equity
5. Building in tax shelters
6. Time varying WACC
7. The walking wounded - real options and capital arbitrage
8. International markets and foreign exchange rates
9. Conclusions on discount rates
Three - What do we mean by 'return'?
1. IRR versus NPV
2. Calculating CFROI
3. Another approach: CROCI
4. Uses and abuses of ROCE
Four - Key issues in accounting and their treatment under IFRS
1. Building a forecast
2. Ratios and scenarios
3. Building a valuation
4. Frequent problems
5. Conclusions regarding basic industrials
Six - The awkward squad
1. Utilities
2. Resource extraction companies
3. Banks
4. Insurance companies
Seven - An introduction to consolidation
1. Introduction
2. Treatment of Investments
3. Methods of consolidation
4. Further issues in consolidation
5. Accounting for associates and joint ventures
6. Purchase accounting and uniting of interests
7. Foreign subsidiaries
8. Accounting for disposals
9. Modelling mergers and acquisitions
Eight - Conclusions and continuations
1. Conclusions
2. Continuations
Further reading
Appendices
Analysis formulae
Index
About Nick Antill and Kenneth Lee
Nick Antill:
Since 2000, Nick has divided his time between training and consultancy in the areas of energy and finance, and currently works as an associate of BG Training and as a consultant for Citigroup. Previously, he spent 16 years in the City of London as an equity investment analyst specialising in European energy companies, finishing as head of the European team at Morgan Stanley. He began his career in the oil industry, where he worked as an economist with BP and Saudi Aramco. Previous publications include (with Robert Arnott) 'Valuing oil and gas companies'.
Kenneth Lee:
In what now seems like a previous life, Kenneth was an accountant and tax consultant with Arthur Andersen in Dublin. He then held various positions in the financial training business culminating in becoming the accounting specialist at BG Training. There he trained analysts from all the major banks and published 'Accounting for Investment Analysts: an international perspective'. In 2004, Kenneth joined Citigroup as the accounting and valuation analyst for Europe where he publishes and presents on the IFRS transition and valuation issues generally.
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