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Company valuation under IFRS

Interpreting and forecasting accounts using International Financial Reporting Standards

By Nick Antill and Kenneth Lee

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Company valuation under IFRS

Interpreting and forecasting accounts using International Financial Reporting Standards

By Nick Antill and Kenneth Lee

Jacket text

International Financial Reporting Standards (IFRS) are now mandatory in many parts of the world, including Europe, Australia and China. In addition, many countries are in the process of IFRS adoption. Lastly, foreign registrants in US companies no longer have to undertake a costly US-IFRS reconciliation. Therefore, it is clear that investors, analysts and valuers need to understand financial statements produced under IFRS to feed in to their valuations and broader investment decisions.

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 key aspects of IFRS including:

– Pensions
– Stock options
– Derivatives
– Provisions
– Leases

The text also sets out which countries use GAAP, as well as the key differences between IFRS and US GAAP treatments of these issues, in addition to 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, insurance and real estate companies. Accounting for mergers and disposals is first explained and then illustrated with a detailed potential acquisition using real companies.

About the author

After graduating in economics and politics, Nick began his career in the oil industry, working for BP and Saudi Aramco. He subsequently spent 16 years in the City of London as an equity investment analyst specialising in European energy companies, and as head of Morgan Stanley’s European oil and gas equity research team. Since 2000, he has been a director of an energy consultancy company, provided financial training mainly to investment bankers and has been retained as a consultant by the European equity research departments of two major investment banks. He has authored numerous articles, and a previous book (with Robert Arnott) entitled Valuing Oil and Gas Companies (Woodhead Publishing Ltd, 1994 and 2000).

About the author

Kenneth’s career has steadfastly remained centred around finance, research and education. Kenneth is an Associate Professorial Lecturer at the London School of Economics and Political Science, where he lectures on financial analysis and equity valuation, as well as being the programme director for the MSc Accounting and Finance and MSc Accounting, Organisations and Institutions.

Before academia Kenneth was a Managing Director and Head of European Equity Research at Barclays Capital, where he worked for eight years before leaving in August 2017 to take up a number of academic positions. Prior to this he was also a Managing Director and a ranked accounting and valuation analyst at Citi Investment Research in London. During this time Kenneth published extensively on accounting and valuation topics for investors and was ranked in the top three in the Institutional Investor Survey over more than a continuous ten-year period.

In the lead up to his investment banking career, Ken was a professional trainer for many years both in professional practice and financial markets. His love of training was behind his decision to leave his banking career for academia.

Kenneth graduated from Trinity College Dublin/Dublin Institute of Technology with a degree in Management Science. He is a Fellow of the Institute of Chartered Accountants, a member of the Institute of Taxation, a CFA Charterholder and a member of the Securities Institute. He holds a doctorate from Aston University on how sell-side analysts make stock recommendation decisions.

In addition to co-authoring Company Valuation Under IFRS, Ken has also co-authored an accounting book (with Deborah Taylor) entitled Financial Statement Analysis Under IFRS (Financial Edge, 2018).

Media coverage

From Media Review:

A very useful resource for anyone interested in company valuation in general and IFRS in particular.- The International Journal of Accountingissue 44, 2009

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From The International Journal of Accounting, Vol. 44:

Company valuation under IFRS Interpreting and forecasting accounts using International Financial Reporting Standards Nick Antill, Kenneth Lee This book is a practitioners’ guide to company valuation using financial statements under International Financial Reporting Standards (IFRS). It is motivated by two recent events: first, ?the grotesque mis-pricing of equities during the late 1990s? (p. xiii) that,… Read more »

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Chapter 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

Chapter 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

Chapter Three - What do we mean by 'return'?
1. IRR versus NPV
2. Calculating CFROI
3. Another approach: CROCI
4. Uses and abuses of ROCE

Chapter Four - Key issues in accounting and their treatment under IFRS
1. Revenue recognition and measurement
2. Stock options
3. Taxation
4. Accounting for pension obligations
5. Provisions
6. Leasing
7. Derivatives
8. Fixed assets
9. Foreign exchange

Chapter Five - Valuing a company
1. Building a forecast
2. Ratios and scenarios
3. Building a valuation
4. Frequent problems
5. Three period models
6. Conclusions regarding basic industrials

Chapter Six - The awkward squad
1. Utilities
2. Resource extraction companies
3. Banks
4. Insurance companies
5. Property companies

Chapter 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

Chapter Eight - Conclusions and continuations
1. Conclusions
2. Continuations

Further reading
IAS or IFRS in, or coming into, force
IFRS in Emerging Markets
Chinese Accounting Standards - major differences with IFRS
Analysis formulae

Published: 12/06/2008
Edition: 2nd
Pages: 430
Formats: hardback - ISBN 9781905641772
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