Course Outline Fall 2014

Tuesday(s), 11:30-2:30, W257 SSB, Starting Sep. 9th

Instructor Secretary Giri Kanagaretnam 416-736-5066 S344F Seymour Schulich Building Email: kkanagaretnam@schulich.yorku.ca Office Hours: Tuesdays 3:00 - 5:00 pm or by appointment

Filomena Petrilli 416 736-5063 S344K Seymour Schulich Building fpetrill@schulich.yorku.ca

Kiridaran (Giri) Kanagaretnam ACMA (U.K.), CPA, CMA, CGA is a Professor of Accounting at Schulich. He received his PhD from the Syracuse University and a MSEE from Purdue University. His research focuses on bank financial reporting, corporate governance and organizational trust and related issues.

Brief Description

Publicly-issued financial statements are “general purpose” statements issued to a variety of users and prepared using GAAP. However, statements are based on management’s financial statement objectives (e.g., profit maximization; income smoothing; tax minimization), as well as management estimates and disclosure decisions. Statements based on GAAP do not usually reflect the needs of the individual user. In this course, students will learn to apply diagnostic, analytical and judgmental skills to understanding financial statements from the point of view of external users who need to make various types of decisions such as performance evaluation, loan decisions, and stock valuations. Prerequisite[s]/Co-Requisite[s] Note: Not available to exchange students visiting Schulich. Prerequisite: SB/ACTG 2011 3.00 Contents Course Learning Outcomes ........................................................................................................................... 2 Deliverables at a Glance ................................................................................................................................ 2 Course Material............................................................................................................................................. 3 Student Preparation for Class and Class Participation: Expectations ........................................................... 3 Evaluation of Written Assignments/Projects and Exams .......................................................................... 3-6 Calculation of Course Grade ......................................................................................................................... 6 General Academic Policies: Grading, Academic Honesty, Accommodations and Exams ............................. 6 Quick Reference: Summary of Classes, Activities and Deliverables ............................................................. 7

ACTG 3000A 3.0: Financial Statement Analysis

ACTG 3000 p. 2 Course Learning Outcomes Owners, creditors, investors and the general public are entitled to receive a set of GAAP/IFRS financial reports of public organizations. Financial reporting is a means of communication. Just as languages facilitate oral and written communication, so too does GAAP/IFRS allow for the understanding of certain financial information. The objective for this course is on understanding the principles that embody GAAP/IFRS and its application (diagnostic, analytical and judgmental skills) to different and specific user needs. GAAP/IFRS is a series of guidelines that are intended for all public companies, in all stages of development, in all industries, regardless of ownership or financing structure. GAAP/IFRS’s main focus is the past, while a user’s needs may hinge on the future.The GAAP/IFRS model captures some aspects of organizational activities while missing many other aspects (such as the worth of people or value of ore in the ground). What has been missed by GAAP/IFRS may very well be of far greater importance to you, a specific decision maker, than what has been captured and reported. Nevertheless, until a better alternative is found, to succeed in business, we must understand the strengths and weaknesses of GAAP/IFRS statements to ensure that our decision-making is well informed, and glean all relevant information so that we can appropriately interpret the financial information we have at our disposal and make informed decisions. Accordingly, in this course, what is critical is our development of an understanding of what financial information tells us and what it does not. Thus, in this course, we will emphasize four important aspects of interpreting financial information:

1) We will learn to what extent we can depend upon GAAP/IFRS statements. 2) We will also learn when to recast GAAP/IFRS financial statements and how to forecast. 3) We will learn where and how to get additional financial and other information, to

supplement GAAP/IFRS disclosures. 4) We also will examine different valuation models as they relate to existing and forecasted

financial statements, and how different assumptions will impact assessment of a firm’s value.

Deliverables at a Glance The final grade for the course will be based on the following items weighted as indicated:

Mid-Term Exam 35% Individual Case Analysis 25% Individual Group Research Project 25% Groups of 6 Class Participation 15% Individual Total 100%

For details, see “Evaluations of Written Assignments/Projects and Exam”, p. 3-6.

ACTG 3000 p. 3 Course Material Readings for this course includes the following book. It is available for purchase from the York University bookstore: Palepu, Healy & Peek, Business Analysis & Valuation IFRS edition THIRD EDITION, Cengage Learning, 2013, ISBN 978-1-4080-5642-4 The Course Materials Database (CMD) has been created within Schulich’s Lotus Notes. It contains general information for Schulich students and information and materials specific to this course. Please check it frequently.

Student Preparation for Class and Class Participation: Expectations The class will involve lectures and case discussion. The lectures will present analytical techniques designed to address questions commonly asked by external financial statement users. The cases will give us the opportunity to see the techniques applied to a company. It is expected that students read required text and reading material prior to coming to class and come prepared for case discussion. It is also expected that students keep up to date on current business and economic issues. Preparation of these cases should be part of your normal preparation for class. Focus questions are contained in each case. Preparation for the cases is expected to average approximately 5 hours, and on a weekly basis one group of students will lead the class in a case discussion.

Evaluation of Written Assignments/Projects and Exam Mid-Term Exam: 35% There is a two-hour, in-class mid-term examination in week 10. Absences from exams are not acceptable. Absences for medical or serious personal reasons must be documented (by a note from a doctor, for example) and the instructor must be notified within 24 hours. If the exam is missed, you must 1) notify your instructor and Student Services in writing within 24 hours, and 2) present valid and documented support to Student Services within 48 hours, and ensure Student Services notifies your instructor. After these two steps are completed, you may write the exam at time to be arranged by the accounting area. Case Analysis (individual): 25% One key learning objective of this course is for you to integrate qualitative and quantitative analysis. The case is due at the beginning of class on week 6. Each student must also submit electronically via www.turnitin.com. The credentials for access will be made available on the CMD. Email submissions will not be accepted. The page limit is five pages. The report will not be READ or MARKED beyond the page limit. There is no restriction on the number or length of the appendices. All appendices must be referenced in the body of the text. Answer all questions

ACTG 3000 p. 4 for the case as specified. A strategic analysis, if applicable, can be included in a single page in the appendix and referred to in your report. Required formatting specifications are: Arial font, 11 point size, 1.5 spaced and 1 inch page margins. Class Participation: 15% Remember that the value of your degree depends very much on how well you and your fellow students contribute to classroom discussions and breakout groups. Those who take the opportunity to put their thoughts into words learn far, far more than those who simply listen passively. Preparing properly for class will increase the value of your contribution. To encourage you to do that, we have included 15% for class participation.

Included in the class participation mark is the student- led case discussion. Students will be asked to form groups (used for the final assignment) and each group will be asked to lead a case discussion once during the term. There are 7 student-led cases to be presented and discussed during class time, and prepared by the class ahead of time. For each of these student-led cases, one group is expected to lead the class discussion. It is expected that a) a brief overview of the case/problem(s) should be presented: 3 minutes; b) an analysis of each case should be presented by the group, which should include quantitative and qualitative analysis (where applicable): 10 minutes; and c) consideration and fielding of questions/class members points of view/other factors, especially integration of text material: 5 minutes.

Final Project: Group Analysis of Chosen Company 25% of the final grade, due last class The final group project is an opportunity for you to apply the analysis techniques covered in the course to a company of your choice. Your group will take on the role of a financial analyst making an equity investment recommendation. You are working in the research department of a large brokerage house and you are writing a report that will initiate your coverage of that company. You will present your report, forecasting assumptions and show the anticipated value of the company using both valuation multiples and a discounted cash flow approach. Your discussion should include how and why your analysis is based on particular assumptions, and what impact would different assumptions have on your analysis. Select a company of your choice that is publicly traded (www.sedar.com). Provide an analysis of the company and a valuation recommendation. Your analysis should include (but is not limited to): (i) Recommendation and basis for recommendation (executive summary);

(ii) Company description; (iii) Industry analysis

(iv) Ratio Analysis and competitive position of the company - Include a brief discussion of accounting policies and their effect on comparability to

competitors and year-over-year. (v) Build a financial forecast model in a spreadsheet package for five years out - Income statement forecast - Balance sheet forecast - Cash flow forecast - Include key risks to the forecast

ACTG 3000 p. 5 CLEARLY STATE YOUR ASSUMPTIONS AND 1) WHAT BASIS YOU ARE USING TO ESTABLISH/JUSTIFY YOUR KEY ASSUMPTIONS, AND 2) THE SENSITIVITY OF YOUR PROJECTIONS TO DIFFERENT ASSUMPTIONS. You will be required to include in your Appendix a hard copy summary of the spreadsheet output, as well as a CD or Data Key with the spreadsheets. (vi) Build at least two valuation models in a spreadsheet package (include them in Appendix).

Describe the assumptions you adopt for the valuation analysis. You must include at least two different equity valuations: 1) a residual income method, which must include a five-year forecast; and 2) comparable multiples method, based on normalized earnings/cash flows. What are some possible explanations for the difference in valuations? You are required to also hand in a hard copy summary of the valuation analysis in your Appendix, as well as a CD or Data Key with the spreadsheet of your valuation models. As well you are required to include any equity analysis you primarily relied upon in your appendix.

(vii) EXPLAIN HOW DIFFERENT METHODS RESULT IN DIFFERENT RESULTS FOR YOUR COMPANY. What are their key drivers and indicators of value for the company/industry?

(viii) Discuss if and how subjective and elective accounting policies impact: 1) risk assessment; and 2) valuation forecast.

(ix) MAKE A RECOMMENDATION. Which valuation do you think is most appropriate and why?

Be sure to state your key assumptions, why you believe those assumptions are reasonable and other limitations of each valuation approach as it pertains to the particular firm and industry.

Company Selection: Each group should analyse a different company (AND INDUSTRY), therefore once you have found a company you think you would like to analyse, please let me know by email for approval, and so that I can inform other groups that your company is no longer available. You should select a company by week 8 of the course. Groups should ideally have 5 members. Written Report (15 Marks): You should present your results in a written report. The report should be typed and should be no more than eight pages. The eight-page limit does not include a one page executive summary and supporting tables/spreadsheets. It is due at the beginning of the final class. Formatting specifications are the same as for the Case Analysis. One group member must also submit electronically via www.turnitin.com. The credentials for access will be made available on the CMD. Email submissions will not be accepted. Presentation (10 Marks): The presentation should take no more than 10 minutes to briefly present your strategic, accounting, forecasting and valuation analysis. Thus, the presentation is NOT supposed to describe HOW you developed your models and forecasts, instead, it should focus on your

ACTG 3000 p. 6 analysis, your choice of valuation models, your assumptions, which numbers were critical to your analysis (the key drivers) and which valuations you think are best and why. Grading: This project will count towards 25% of your final grade, with 15% assigned to the written report and the other 10% assigned to the group presentation. Generally all members of the group will receive the same mark. However, the group may choose to report on the relative performance of the other members of your group. If a group member(s) performance is significantly below or above that of other group members, a grade adjustment may be warranted. See the evaluation sheet on page 8 of this course outline. If the group decides to assess each group member independently, every member of the group must submit the evaluation sheet to the instructor for consideration and re-assessment.

General Academic Policies: Grading, Academic Honesty, Accommodations and Exams Grades at Schulich are based on a 9-value index system. The top grade is A+ (9) and the minimum passing grade is D (2). To keep final grades comparable across courses, the average course grade within a section of an undergraduate course is normally between 5.5 and 7.0. The Schulich School does not use a percentage scale or prescribe a standard conversion formula from percentages to letter grades. Conversions within a course are at the discretion of the instructor. For more details on the index, grading policy, and grade point average (GPA) requirements, see the Student Handbook or the Student Services & International Relations website: http://schulich.yorku.ca/client/schulich/schulich_lp4w_lnd_webstation.nsf/page/Academic+Policies+BBA?OpenDocument Academic honesty is fundamental to the integrity of university education and degree programs, and applies in every course offered at Schulich. Students should familiarize themselves with York University’s policy on academic honesty, which may be found in the Student Handbook and on the Student Services & International Relations website: http://www.schulich.yorku.ca/client/schulich/schulich_lp4w_lnd_webstation.nsf/page/Academic+Honesty!OpenDocument Accommodations. For accommodations sought due to exam conflicts, religious reasons, unavoidable absences or disabilities, please refer to the Student Handbook or contact Student Services. For counseling & disability services, contact Student Services or see http://www.yorku.ca/cds/. Exams (Absence from) Mid-term. Students who miss a mid-term examination must contact their course instructor within 24 hours and provide the course instructor with documentation substantiating the reason for the absence. A copy of the documentation must also be submitted to Student Services; it will be placed in the student’s file.

ACTG 3000 p. 7 Quick Reference: Summary of Classes, Activities and Deliverables

Topics, readings, and other preparations for every class are listed below. Note: If any changes in this schedule become necessary, notifications will be posted on the course CMD, and when changes need to be announced between classes, an email will be sent to students’ Lotus Notes email accounts, notifying them of the change.

WEEK CLASS TOPIC READINGS ASSIGNMENTS

Week 1 Sept. 9

Introduction-A Framework for Business Analysis and

Valuation

Chap. 1 text Group member selection for Class Discussion Cases and Final Project.

Week 2 Sept. 16

Strategy Analysis

Chap. 2 text

Class Discussion Case 1: Carrefour S.A., pages 223-238. Answer questions posted on CMD.

Week 3 Sept. 23

Accounting Analysis: The Basics

Chap. 3 text Class Discussion Case 2: Fiat Group, pages 118-135. Answer questions posted on CMD.

Week 4 Sept. 30

Accounting Analysis: Accounting Adjustments

Chap. 4 text

Class Discussion Case 3: Audi, BMW & Skoda’s R&D (page 169) & H&M and Burberry’s non-current assets (page 171).

Week 5 Oct. 7

Financial Analysis Chap. 5 text

Class Discussion Case 4: Ratios of three fashion designers (page 211) and The Fiat Group in 2008 (page 214). Project company selection (email the instructor choice of a company & the industry of focus)

Week 6 Oct. 14

Prospective Analysis: Forecasting

Chap. 6 text Individual Case Analysis due at the beginning of class. Answer questions posted on CMD.

Week 7 Oct. 21

Valuation Chap. 7 & 8 text Class Discussion Case 5: Estimating Hugo Boss’s equity value (page 298) Estimating Adidas’s equity value (page 300).

Week 8 Oct. 28

Valuation ICAO/CPA notes Class Discussion Case 6: Hugo Boss’s equity & Adidas’s terminal values (page 354) & Anheuser-Bush InBev S.A. (page 355).

Week 9 Nov. 4

Governance

Please see CMD for Assigned Reading Materials

Class Discussion 7: Summarize research papers.

Week 10 Nov. 11

Mid-Term Exam Mid-term exam

Week 11 Nov. 18

Credit Analysis & Distress Prediction

Chap. 10 text

Week 12 Nov. 25

Final Project Due

Group presentations

Final project due

ACTG 3000 p. 8

FINANCIAL STATEMENT ANALYSIS GROUP EVALUATION

This evaluation is intended to determine whether all the members of your group made a similar

contribution to the final project in terms of effort and/or ideas. List yourself first followed by

the other members of your group and assign each a grade of 1 to 5:

1 = effort is substantially below that of other group members 3 = effort is equal to the average of the group

5 = effort carried the group, and was above the group average performance

Please return your evaluation sheet to class on the day your final group project is due.

Note: If you do not submit an evaluation sheet I will assume that you have assigned all of the

members of your group the average grade (i.e., 3). Group Members: Poor Average Exceptional

YOURSELF 1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

1 2 3 4 5