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Daniel Eskin is the Co-founder of Young and Invested. He has completed his BBA degree at University of Toronto, specializing in management and accounting. He is currently working with one of the Big 4 accounting firms in the audit capacity. Daniel has been interested in the financial markets... More
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  • IFRS 101: What Every Investor Needs to Know (Yes, you too!)
    A study on IFRS showed that 50% of companies demonstrated higher equity under IFRS accounting standards than GAAP, and a huge 65% showed higher earnings. Would that influence your investments? Most investors don’t realize that IFRS will have significant implications on financial statements, and are in danger of using outdated analysis methods and comparison to old benchmarks.
    Being one of the few accountants venturing into the financial markets, I thought it would be helpful to provide insight into how the upcoming MASSIVE global shift in accounting standards to IFRS (International Financial Reporting Standards) is going to affect financial statement analysis. The changes, officially being implemented by all publically accountable entities by 2011 are far from being as clear as those in financial reporting would like to see.
    Not only is the transition to IFRS pervasive to almost all areas of a company’s operations in terms of data acquisition, but a majority of public companies have been severely affected by the global recession in regards to credit attainment, causing cash flow shortages. Subsequently, it has been an unsuccessful effort to provoke company-wide transition to the IFRS system. On a similar note, investors have paid less than deserved attention to survey the IFRS terrain.
    In regards to current accounting standards in the US and Canada (called GAAP; mostly similar between the two countries), there are a few significant IFRS and GAAP differences that will affect your analysis of financial statements, and therefore investments and profitability. The first IFRS-compliant financial statements you will see will be for the 3 months ended March 31, 2011 (with comparatives of March 31, 2010.
    Here are a few of the most significant (upon more) differences you can expect:
    Disclosure
    On a good note, disclosure requirements under IFRS are heavier and will require companies to provide a higher degree of transparency (more fun reading materials). Although companies reporting in Canada and USA currently follow GAAP disclosure requirements, they tend to limit the number of financial statement subtotals used and disclosure provided in the notes for competitive reasons. IFRS requires more broken down income statements and balance sheets, so be prepared to see more subtotals and categories.
    MD&A will also require escalating amounts of detail. Interim reports during 2010 must have quantified information about how IFRS will affect the financial statements and company. Reconciliations between GAAP and IFRS must also be provided.
    Financial Instruments
    This should be an interesting one! Entities will have to evaluate the significance of financial instruments for their financial position and performance, as well as present the nature of related risks to which the entity is exposed to during the reporting period and how management handles those risks (qualitatively and quantitatively). Interestingly, this is coupled with a disclosure requirement for management to assess the company’s going concern assumption in MD&A.
    Hmm… I wonder if this rule to assess impact of financial instruments would have made a difference before 2008?
    But on a serious note, I hope this really serious standard is addressed with strict measures by auditors and companies. By the way, this applies to ALL companies owning financial instruments, even if it’s as simple as receivables and payables.
    Capital Assets
    Whereas GAAP does not allow revaluation to fair value (except write-downs due to impairment), IFRS allows companies to revalue assets at fair value if reliable measures allow to do so. For example, under current GAAP, buying a company Ferrari F430 at $160,000 would require me to record it at cost and take annual depreciation on it (less any additional impairments). Under IFRS, if my Ferrari F430 were suddenly considered rare, I can actually write it up in value to $200,000 or even $1,000,000 if the values are reliable. Although the revaluations can only be recognized in other comprehensive income (not part of continuing operations on the income statement), you can definitely expect A LOT more volatility on balance sheets and financial statements. Even if revaluations won’t be seen in continuing operations, the final total on the income statement will be affected by this, as will asset classes on the balance sheet.
    Make sure that your investment analysis scouts for any revaluations to fair value and accounts for it accordingly, giving it enough skeptical criticism to understand that sometimes it may not be as meaningful as it seems or an indicator of a solid competitive advantage.
    Revenue
    In general, revenue treatment in IFRS is similar to GAAP. It may be reasonable to use the same investing implications for revenue figures as current practice dictates.
    Other Major Differences
    Other major differences you will see pertain to measurement of capital assets, provisions such as allowance for doubtful accounts, accounting for leases, pension accounting and much more. This article cannot afford to be technically exhaustive, so I urge you to study the effects of IFRS further. Take a course, read a pamphlet, talk to your local CA/CPA – just be aware that the changes will be significant. I’d recommend to visit http://www.iasb.org/Home.htm.
    Although addressing these changes will be technically demanding, the risk of not doing so is high. Most investors will underestimate the impact of IFRS on their investing processes – a process that’s challenging enough already. Taking a proactive approach to IFRS’ effect on your investing analysis should help minimize the risks and maximize the benefits that a majority of investors won’t see coming.
    Nov 14 2:38 AM | Link | 2 Comments
  • Windows 7 to carry Techs up with Microsoft
    Windows 7 sales have so far been nothing short of expectations, exceeding sales of any other operating system by Microsoft for the first 10 days of release and obtaining the thumbs up from industry experts such as Walt Mossberg. From my own experience with it, very fun and comparable to Snow Leopard as well.
     
    The current situation...
    Vista lead to disappointing financial results for Microsoft in fiscal 08 and 09 and has made minimal encroachment into the corporate environment. Both the economic slowdown and the rumoured (and then turned real) dissatisfaction due to complexity and bugs with Vista provided reason for companies to defer upgrades from Windows XP; and since Windows 7 was rumoured to be released ever since 2007-ish, it made sense to put off any major investments both by homes and corporates.
    Now that Windows 7 will come out with practically every newly sold PC, software vendors won’t support products on old systems for long. For businesses, investing in the newest operating system also comes with preferential technical support from Microsoft and sometimes decreased support for prior operating systems. So investing in Windows 7 seems like a solid systematic decision that will come with backup from Microsoft.
     
    But wait, isn’t there a recession?
    Yes. Yes there is. But that’s not always the determining factor in the success of a business. An important fact that far supersedes the current recession is that (according to chipmaker Intel) the average age of the enterprise PC is approaching 5 years. Where I work, we get new laptops every 2 years. So, the average of 5 years is a pivotal point that may be more than enough to boost PC and Windows 7 sales in the next year. Enterprises waited long enough and despite the recession, there has been a build up in demand for PCs, and therefore, for Windows 7 as well.
    Although Microsoft’s earnings are known to be quite volatile due to the nature of their product offering, I see sales increasing and steady through 2010. Attached, of course, are stronger performance metrics from investors looking to fill their portfolio with some assured price appreciation and a decent 2% dividend for the next year or two.
     
    PC Industry
    What else is that the upcoming increase in PC sales and Windows 7 is likely to carry up the rest of the PC industry. This includes component makers, indirect and direct PC vendors, distributors and other areas of the PC supply chain. So make sure to stay vigilant for PC makers like Dell, Toshiba, Sony and HP, as well as chipmakers including Intel and AMD. They could easily benefit from big moves in the PC industry mentioned above.
     
    Disclosure: no positions.

    Tags: MSFT, INTC, AMD, DELL, TYO, HPQ, SNE
    Nov 06 1:05 AM | Link | Comment!
  • Gold: Bull’s and Bear’s Best Friend
    There may be a pot of gold bars and precious metal at the end of the rainbow after all – regardless of which direction the global economy heads from here on. Mining commodities such as copper, nickel, aluminum, and particularly gold, have traditionally been regarded as a hedge against inflation and bearish economic times. So it makes sense that gold has recently hit an all-time high and is seemingly on a continued ramp-up. However, I believe that gold and mining will flourish regardless of economic collapse or boom.
     
    First, the bear scenario
    History has already proven that gold thrives as an investment in bearish economic times. I don’t need to convince you that this is the case in the current global economy as well. Just for completeness – back to econ101, gold assumes its natural role as a store of value when purchasing power is threatened in the economy. This is the current situation in the United States, and as the dollar continues to decline in value, gold will become more precious globally. People and firms respond by fleeing to safety during times of uncertainty like this.
     
    A recent study performed by IBISWorld (April 27, 2009) on the mining industry supports this hypothesis that gold will significantly rise “due to investors seeing it as a reliable defensive investment”. Despite the fact that 89% of all gold mined is used in jewelery, of which sales are expected to decline with the recession, price increases will be driven by investments. Higher prices of gold and silver have also lead to increased industry revenues by 16% in 2008, and expected to be higher for fiscal 2009.
     
    Overall, as long as investors remain nervous about the economy, government debt / deficits / artificial stimulation, or inflation, gold will continue to be seen as a safe haven and prices would be pushed higher. It’s hard to estimate a ceiling, but doom-advocate Peter Schiff calls gold at $5,000. That may be a little extreme, but is just one of the views on gold’s potential.
     
    Then, the bull scenario
    Another consideration is that a steep recession would be followed by a sharp economic recovery, spurted by central bank interest rate cuts and government stimulus. If the government lives up to its recent promises, interest rates will stabilize one year out to prevent excess inflationary pressures. Unemployment will decrease, spending and capital investments will increase and somehow (perhaps magically) government debt will slowly start to stabilize.
     
    However, an important point to keep in mind is the massive loss of reputation and belief in the government’s ability to stabilize the economy that has occurred in the last year; in effect, this will lead investors to be vigilant during the ride up for matters like inflation. Regardless of an economic bullish scenario, investors will continue to use gold as a hedging tool against possible inflationary forces caused by government stimulus (or keeping interest rates too low for too long). Also, in this scenario, physical demand will be spurted in the jewelry (89%), dentistry (7%) and industrial (4%) gold market segments leading to price appreciation.

    Just for interest’s sake, other precious metals may also follow gold’s path in the bullish scenario. Based on a recent Societe Generale industry report (October 13, 2009), other precious metals such as copper, aluminum, nickel and lead will benefit from bullish forces. Copper and lead/zinc will benefit from limited supply as industrial consumption increases in China and elsewhere. Lead and zinc will be further boosted by a strong recovery in the steel industry and auto production. Current aluminum build-ups will begin to reverse as well.
     
    However…
    However, a third potential scenario is a moderately slow return to economic growth. In this situation, the US stimulus plan would take some time to take effect and the rest of the globe would assume a slow recovery as well. In this case, interest rates would slowly rise as promised by the government and unemployment levels would be extended by semi-weak consumer spending and low growth of business.
     
    The implications of this scenario on gold and precious metals are not as optimistic as in a strictly bear or bull scenario. As market confidence slowly improves, gold may no longer be used as a risk hedge and therefore prices may cease to increase. Furthermore, if the central bank acts as promised and begins to increase interest rates, reduced worries of inflation may also drive the demand of gold lower. Any increases in physical demand of gold would take too long to kick in and the reduced investment in gold would drive the price down prior to increased physical demand.
     
    Conclusion
    Gold’s breakout and achievement of an all-time high was a significant event.  The potential for gold as an investment is significantly more attractive in the bearish scenario for the next two to four years since fears of economic collapse would weigh much more heavily on gold investors than any of the other factors mentioned above; nevertheless, even if the global economy begins to pick up pace, gold and other relevant metals will still benefit and appreciate in the short and medium term. As mentioned, if neither a bullish or bearish scenario occurs, gold could potentially be exchanged for more lucrative investment opportunities.

    What do you think will happened in the next four years?

    Disclosure: long gold.

    Oct 27 11:19 PM | Link | Comment!
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