debit Leasehold asset
depreciation is a non cash flow item and won't affect cash flow statement
depreciation impact income statment
credit Leasehold liability
as we keep on paying (principal payment increasing), leasehold liability keeps dropping
interest payment is decreasing (take note that for ARO, interest payment is increasing)
This will impact cash flow. principal will impact cash flow (cff), interest will impact cfi.
Tuesday, July 20, 2010
Off Balance Sheet Financing
There are many types of off balance sheet of off balance sheet financing. The objective of learning off balance sheet financing is to know what it is, its impact and how to adjust for it.
Special purpose entity(SPE)
example: Enron
Enron setup lots of SPE for the sole purpose of getting loan from banks. Enron will provide corporate gurantee to its SPE. Its SPE will setup SPE and provide corporate gurantee and the list go on. When Enron goes burst, this web of SPE is so complex that no one knows who borrow money from who.
Take or pay contract
example: power purchase agreement (PPA)
Tenaga Nasional has two business: generation and distribution. Generation is more capital intensive. TNB setup PPA with companies such as YTL and Genting. Normally PPA goes by year. If TNB doesn't buy enough power from the generator as stipulated, TNB will need to pay compensation at the end. That's why TNB will have such earning patterns: 3 quarter of profits, suddenly at 4th quarter loss. As such for adjustment we need to debit income statement-> additional expense, credit accrual in balance sheet. By this we make it 'on' balance sheet.
Throughput Arrangment
This is a type of Take or Pay contract, but it is specific for oil & gas industry. Few years ago, some company want to build a pipeline from Kedah to Kelantan. To secure the usage of the pipeline, the company talk to the oil majors to agree with throughput agreement. The oil majors found it cheaper to continue using straits of Malacca rather than stick themselve to a throughput arrangment. The proposal fell through.
Throughput arrangment won't have impact to cashflow as it is a provision.
Factoring - Sale of Receivable
Imagine company A has trade receivable $100 million, cash $0 , borrowing $80 million. Company is solvent as its equity is positive. (note: equity=asset - liability, E=A-L). However, company will have problem if trade receivable is to be received in 1 month but borrowing is due today. Company have to find a company, known as a Factor, to sell its $100 million receivable. Factor will pay less than $100 million for the receivable. This is call the factoring process. A=E+L. A will decrease by $100 million, L will decrease by $80 million, E will decrease by $20 million. For CFO, increase by $80 million, CFI remains the same, CFF will decrease by $80 million. Profit will drop.
For factoring, there are two situations: 1) no recourse 2) with recourse
When A sell $100 million to factor, factor may be or may be not able to collect all the receivable. If factor cannot collect all receivable, there are two situation -> go back to collect from A or absorb the loss itself. If factor can go back to collect from A, it is known as with recourse. Otherwise it is known as no recourse.
If recourse happens, let say factor claiming $30 million from A. L of A will increase by $30 million, E will decrease by $30 million. Profit of A will decrease. CFF will increase, CFI the same, CFO decrease.
When a bank sell their loan, including NPL, it is called as securitisation, it is not a factoring process.
Leases
There are two leases : 1) operating 2) capital/finance
When A borrow money from bank to buy a house, it is loan. When A borrow money from bank to buy a car, it is a lease. The bank has the legal right for the car that's why when A default on loan, the bank can come at the middle of the night to pull away the car.
If company A make a borrowing and classify it as a operating lease, it will surface in balance sheet. Else it won't get surface in balance sheet.
Thus, the first step of doing analysis is to determine whether a lease is an operating lease, or a capital/finance lease. Features of capital lease are
i) title is transferred to leassee at the end of lease period, or
i.e. MAS buy plane by financing. At the end of the lease, the bank will not want to own the
plane.
ii) bargain purchase option (lessee may purchase the leased asset) exists, or
iii) lease period is at least 75% of asset's life, or
i.e. AirAsia borrow money to buy plane. It will tend to go for a 15 years financing rather than
5 years financing. This is because by going for longer tenure, AirAsia can 'buy' more plane
iv) present value of lease payment is at least 90% of fair value of asset
if operating lease, in balance sheet, we
debit leasable asset, credit leasable liability
in actual fact, we are debiting and crediting the PV (present value) of lease payable. i.e We are capitalizing the PV of the lease payable.
When we talk about PV, we need to have a discount rate. Discount rate is to be determined from the lower of the incremental borrowing cost of the lessee or the implicit interest rate of the lease (also known as the IRR). We choose the lower as the discount rate.
The reason wwe use the lower is because liability = summation of (lease payment / (1+discount rate))
with lower discount rate, we have higher liability
Special purpose entity(SPE)
example: Enron
Enron setup lots of SPE for the sole purpose of getting loan from banks. Enron will provide corporate gurantee to its SPE. Its SPE will setup SPE and provide corporate gurantee and the list go on. When Enron goes burst, this web of SPE is so complex that no one knows who borrow money from who.
Take or pay contract
example: power purchase agreement (PPA)
Tenaga Nasional has two business: generation and distribution. Generation is more capital intensive. TNB setup PPA with companies such as YTL and Genting. Normally PPA goes by year. If TNB doesn't buy enough power from the generator as stipulated, TNB will need to pay compensation at the end. That's why TNB will have such earning patterns: 3 quarter of profits, suddenly at 4th quarter loss. As such for adjustment we need to debit income statement-> additional expense, credit accrual in balance sheet. By this we make it 'on' balance sheet.
Throughput Arrangment
This is a type of Take or Pay contract, but it is specific for oil & gas industry. Few years ago, some company want to build a pipeline from Kedah to Kelantan. To secure the usage of the pipeline, the company talk to the oil majors to agree with throughput agreement. The oil majors found it cheaper to continue using straits of Malacca rather than stick themselve to a throughput arrangment. The proposal fell through.
Throughput arrangment won't have impact to cashflow as it is a provision.
Factoring - Sale of Receivable
Imagine company A has trade receivable $100 million, cash $0 , borrowing $80 million. Company is solvent as its equity is positive. (note: equity=asset - liability, E=A-L). However, company will have problem if trade receivable is to be received in 1 month but borrowing is due today. Company have to find a company, known as a Factor, to sell its $100 million receivable. Factor will pay less than $100 million for the receivable. This is call the factoring process. A=E+L. A will decrease by $100 million, L will decrease by $80 million, E will decrease by $20 million. For CFO, increase by $80 million, CFI remains the same, CFF will decrease by $80 million. Profit will drop.
For factoring, there are two situations: 1) no recourse 2) with recourse
When A sell $100 million to factor, factor may be or may be not able to collect all the receivable. If factor cannot collect all receivable, there are two situation -> go back to collect from A or absorb the loss itself. If factor can go back to collect from A, it is known as with recourse. Otherwise it is known as no recourse.
If recourse happens, let say factor claiming $30 million from A. L of A will increase by $30 million, E will decrease by $30 million. Profit of A will decrease. CFF will increase, CFI the same, CFO decrease.
When a bank sell their loan, including NPL, it is called as securitisation, it is not a factoring process.
Leases
There are two leases : 1) operating 2) capital/finance
When A borrow money from bank to buy a house, it is loan. When A borrow money from bank to buy a car, it is a lease. The bank has the legal right for the car that's why when A default on loan, the bank can come at the middle of the night to pull away the car.
If company A make a borrowing and classify it as a operating lease, it will surface in balance sheet. Else it won't get surface in balance sheet.
Thus, the first step of doing analysis is to determine whether a lease is an operating lease, or a capital/finance lease. Features of capital lease are
i) title is transferred to leassee at the end of lease period, or
i.e. MAS buy plane by financing. At the end of the lease, the bank will not want to own the
plane.
ii) bargain purchase option (lessee may purchase the leased asset) exists, or
iii) lease period is at least 75% of asset's life, or
i.e. AirAsia borrow money to buy plane. It will tend to go for a 15 years financing rather than
5 years financing. This is because by going for longer tenure, AirAsia can 'buy' more plane
iv) present value of lease payment is at least 90% of fair value of asset
if operating lease, in balance sheet, we
debit leasable asset, credit leasable liability
in actual fact, we are debiting and crediting the PV (present value) of lease payable. i.e We are capitalizing the PV of the lease payable.
When we talk about PV, we need to have a discount rate. Discount rate is to be determined from the lower of the incremental borrowing cost of the lessee or the implicit interest rate of the lease (also known as the IRR). We choose the lower as the discount rate.
The reason wwe use the lower is because liability = summation of (lease payment / (1+discount rate))
with lower discount rate, we have higher liability
Monday, July 5, 2010
A website that let us see the stock holding of the famous investor
Found a good website that let us see the stock holding of the famous
investment gurus.
http://www.coattailinvestor.com/members/default.aspx
for myself, the time needed to keep track of one single investor, Warren Buffett, is already involved enough. Must appreciate that thie coattailinvestor maintains much more than that. My site is at http://portfoliowatch.wordpress.com/
investment gurus.
http://www.coattailinvestor.com/members/default.aspx
for myself, the time needed to keep track of one single investor, Warren Buffett, is already involved enough. Must appreciate that thie coattailinvestor maintains much more than that. My site is at http://portfoliowatch.wordpress.com/
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