🪴 Maixnor WU

Third Lecture FRA

Nov 04, 20255 min read

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Cash Flow Statement

  • cash flow has direct and indirect method
    • direct: looking at THE bank account (if there is one) and adding up all transactions
    • indirect: P/L Statement result (EBIT normally) + Non-Cash Transactions in reverse
  • definition capitalization: anything we put on the asset side
  • operating cash flow generally (indirect method):
    • EBIT
      • depr
    • +/- working capital i.e. current assets (excluding cash) - current liabilities
  • investment cash flow generally (direct method):
      • cash outflow (investing)
      • cash inflow (disinvesting)
    • !!! only of how much I paid and got back later, dividends not included (part of net profit, therefore already in operating cashflow)
  • finance cash flow generally (direct method):
      • cash outflow (paying back loan)
      • cash inflow (taking out loan)
  • free cash flow
    • “The key metric to judge the success of a firm” - CEO of Siemens
    • equivalent to disposable income in Personal Finance
    • operating CF + investment CF
    • used for buying subsidiaries other long-term investments
  • cash equivalents → can be liquidated within 3 months
  • net change in cash = operating CF + investment CF + finance CF
  • income tax comes after cash flow calculations but is a cash outflow
    • income tax is separately with cash outflow
    • directly reported → extra line within cash flow calculations
  • operating CF must be positive → ultimate goal is not profit, but positive cash flow
  • re-invest at minimum amount of depreciation → keep up production

  • AG & Co. KGaA

    • not an Aktiengesellschaft → not an actual corporation, although treated as one
    • “Kapitalgesellschaft auf Aktien” → structure in Germany for large family businesses
    • Duck Typing but with companies… so damn funny
    Link to original
  • selling of inventory in P/L
      • cost of goods sold
      • income of sales
    • = profit (hopefully)
  • inventory can only be written down, never up
  • sale of non-current asset
    • cash-inflow → + invensting CF
    • gain/loss (sale price - book value)
      • EBT +/-
      • non-cash → operating CF -/+

Provisions

Intangible Assets

  • must be identifiable
  • indefinite/definite useful life span
    • yearly impairment check to indefinite assets → write down
  • initially measured at cost (purchase or production cost)

Research and Development

  • research is never capitalized → never on balance sheet, pure expense
  • development must be capitalized under IFRS → on balance sheet
    • requirements: technical feasibility, intention and ability to use/sell
  • development must never be capitalized under AT and DE laws

Goodwill

  • brand names
    • only acquired brand names may be capitalized
      • e.g. Adidas may not capitalize on Adidas brand, but on Reebok brand, which they bought
  • patents
    • acquired: capitalize costs
    • internal: capitalize if identifiable costs
  • in general everything which contributes to earnings but is not in balance sheet
    • Reputation
    • HR & Culture
    • Connections and Contracts
  • Goodwill can be a large part of deals (e.g. 80% of Instagrams price when bought by Meta was goodwill)
    • future integration and synergy mostly for the reason
  • under IFRS Goodwill is never depreciated

How to get

  • given buying a whole company (not on stock market)
  • the fair value is bought at purchase price (fair value + goodwill)
  • purchase price: 300
    • fair value of assets: 200
    • amazing engineers employed: 100 ← this is the goodwill

Taxation

Value Added Tax

Income Tax

  • Group Effective Tax Rate
    • Group with all subsidiaries buy an aggregate amount of income tax
  • pure Income Tax
  • communal Income Tax
  • etc → anything which taxes profits

Tax Base

  • tax base → what value is the total tax derived from
    • universally: profit - tax-deductions
  • in continental Europe the deductions are quite few
  • in anglosaxon system the deductions are quite numerous

Current vs Deferred Tax

  • current: needs to be payed right now
  • deferred: taxes which will probably occur in the future
    • almost like a provision, but with taxes (also on asset side)
    • tax loss carry-forward
      • if I have a loss this year then next year I have to pay less
      • if that is certain I can book it as an asset

Tax Reconciliation Statement

  • if the whole worldwide income was subject to local taxation
    • because local income is subject to local tax

Taxable Profit

  • definition of taxable profit is not the exact tax base
    • almost all countries have amendments (each country has different rules)
  • A sort of Indirect Method
    • Accounting Profit before Tax
      • individual statement → taxation happens on legal entity
      • Disallowed Expenses
        • Excess Depreciation
          • Impairment, Write-downs (e.g. write-down for bad debt), other estimates
        • Excess Provision
        • Fines
        • Hospitality
          • going on a nice dinner/lunch with your customers, buying concert tickets
      • Special Allowances
        • Capital Investment, etc
          • e.g. dividend income → avoid double taxation
          • not a benefit, just a basic principle to keep the system going
      • Non-Taxable Income
        • not allowed to deduct from accounting profit, but from taxable income
    • Calculate tax by statutory tax rate (Austria 23%)
    • = Current Tax Expense of Year XXXX
      • feeds back into income statement (P/L)
      • EBIT - Income Tax + Deferred Tax
      • = Net Profit “After Tax”
    • Effective Tax Rate

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