chap003-Analyzing-Financing-Activities(財務報表分析-臺灣中興大學)

3CHAPTERAnalyzingFinancingActivitiesMcGraw-Hill/Irwin?2004TheMcGraw-HillCompanies,Inc.,AllRightsReserved.Aliabilityisaprobablefuturepaymentofassetsorservicesthatacompanyispresentlyobligatedtomakeasaresultofpasttransactionsorevents.DefinitionLiabilitiesPastPresentFutureBecauseofapastevent......forfuturesacrifices.…thecompanyhasapresentobligation...Current(short-term)LiabilitiesNoncurrent(Long-Term)LiabilitiesObligationswhosesettlementrequiresuseofcurrentassetsortheincurrenceofanothercurrentliabilitywithinoneyearortheoperatingcycle,whicheverislonger.Obligationsnotpayablewithinoneyearortheoperatingcycle,whicheverislonger.LiabilitiesClassificationOperatingLiabilitiesFinancingLiabilitiesObligationsthatarisefromoperatingactivities--examplesareaccountspayable,unearnedrevenue,advancepayments,taxespayable,postretirementliabilities,andotheraccrualsofoperatingexpensesObligationsthatarisefromfinancingactivities--examplesareshort-andlong-termdebt,bonds,notes,leases,andthecurrentportionoflong-termdebtLiabilitiesAlternativeClassificationLiabilitiesDisclosuresforCurrent(Financing)Liabilities

n

Compensatingbalancearrangements,includingthosenotrequiredbylaw n

Balancesheetsegregationof(1)legallyrestrictedcompensatingbalancesand

(2)unrestrictedcompensatingbalancesrelatedtolong-termborrowingarrangementsifbalancesarecomputableatafixedamountLiabilitiesDisclosuresforCurrent(Financing)Liabilities

n

Short-termbankandcommercialpaperborrowings,including:CommercialpaperborrowingsseparatelylistedinbalancesheetWeighted-averageinterestrateandtermsseparatelystatedforshort-termbankandcommercialpaperborrowingsWeighted-averageinterestrate,averageoutstandingborrowings,and maximummonth-endoutstandingborrowingsforshort-termbankdebtandcommercialpapercombinedfortheperiod n Disclosureofamountsandtermsofunusedlines ofcreditforshort-termborrowingarrangements (withamountssupportingcommercialpaper separatelystated)andofunusedcommitments forlong-termfinancingarrangements

LiabilitiesAccounting-BasedLiabilityRestrictions(Covenants)

Aim:Safeguardcreditors’investments

Commonrestrictionsinclude:

n

Dividenddistributionrestrictions

n Workingcapitalrestrictions

n Debt-to-equityratiorestrictions

n Seniorityofassetclaimrestrictions

n Acquisitionanddivestmentrestrictions

n Liabilityissuancerestrictions

Potentialinformationsources:Liabilityprospectus,annualreport,SECfilings,andcreditorinformationservices(e.g.,Moody’s)LeasesLeasingFactsLease–contractualagreementbetweenalessor(owner)andalessee(userorrenter)thatgivesthelesseetherighttouseanassetownedbythelessorfortheleasetermMLP–minimumleasepayments(MLP)ofthelesseetothelessoraccordingtotheleasecontractLeasesLeaseAccountingandReporting(1)CapitalLeaseAccountingForleasesthattransfersubstantiallyallbenefitsandrisksofownership—accountedforasanassetacquisitionandaliabilityincurrencebythelessee,andasasaleandfinancingtransactionbythelessor Alesseeclassifiesandaccountsforaleaseasacapitalleaseif, atitsinception,theleasemeetsanyoffourcriteria: (i) leasetransfersownershipofpropertytolesseebyendofthelease term (ii) leasecontainsanoptiontopurchasethepropertyatabargainprice (iii)leasetermis75%ormoreofestimatedeconomiclifeofthe property (iv)presentvalueofrentalsandotherminimumleasepaymentsat beginningofleasetermis90%ormoreofthefairvalueofleased propertylessanyrelatedinvestmenttaxcreditretainedbylessor

(2)OperatingLeaseAccountingForleasesotherthancapitalleases—thelessee(lessor)accountsfortheminimumleasepaymentasarentalexpense(income)LeasesLeaseDisclosureandOff-Balance-SheetFinancingLeaseDisclosureLesseemustdisclose:(1)futureMLPsseparatelyforcapitalleasesandoperatingleases—foreachoffivesucceedingyearsandthetotalamountthereafter,and(2)rentalexpenseforeachperiodanincomestatementisreported

Off-Balance-SheetFinancingOff-Balance-Sheetfinancingiswhenalesseestructuresaleasesoitisaccountedforasanoperatingleasewhentheeconomiccharacteristicsoftheleasearemoreinlinewithacapitallease—neithertheleasedassetnoritscorrespondingliabilityarerecordedonthebalancesheetLeasesFrequencyofCapitalandOperatingLeases

LeasesAccountingforLeases–AnIllustration

LeaseFacts?

AcompanyleasesanassetonJanuary1, 2000--ithasnootherassetsorliabilities?Estimatedeconomiclifeofleasedasset is5yearswithnosalvagevalue--companywill depreciatetheassetonastraight-linebasisoveritslife?

Leasehasafixednon-cancelabletermof5years withannualMLPsof$2,505paidattheendofeachyear? Interestrateontheleaseis8%peryear

LeasesAccountingforLeases–Illustration(continued)

LeaseAmortizationScheduleStraight-linedepreciation$2,000peryear([$10,000-$0]/5years)

YearBeg.YearLiabilityInterestandPrincipalComponentsofMLPYear-endLiabilityInterestPrincipalTotal20002001200220032004Totals$10,0008,2956,4544,4662,319$800664517358186$2,525$1,7051,8411,9882,1472,319$10,000$2,5052,5052,5052,5052,505$12,525$8,2956,4544,4662,3190

LeasesAccountingforLeases–Illustration(continued)

IncomeStatementEffectsofAlternativeLeaseAccountingLeasesAccountingforLeases–Illustration(continued)

BalanceSheetEffectsofCapitalizedLeasesLeasesEffectsofLeaseAccounting ImpactofOperatingLeasewhenCapitalLeaseisApt:? Operatingleaseunderstatesliabilities—improvessolvencyratios suchasdebttoequity? Operatingleaseunderstatesassets—canimprovereturnon investmentratios? Operatingleasedelaysexpenserecognition—overstatesincomein earlytermoftheleaseandunderstatesincomelaterinleaseterm? Operatingleaseunderstatescurrentliabilitiesbyignoringcurrent portionofleaseprincipalpayment—inflatescurrentratio&other liquiditymeasures? Operatingleaseincludesinterestwithleaserental(anoperating expense)—understatesbothoperatingincomeandinterest expense,inflatesinterestcoverageratios, understatesoperatingcashflow,&overstates financingcashflowLeasesConvertingOperatingLeasestoCapitalLeases

DeterminingthePresentValueofProjectedOperatingLeasePaymentsandLeaseAmortizationLeasesLeasesRestatedFinancialStatementsafterConvertingOperatingLeasestoCapitalLeases—BestBuy2001

LeasesEffectofConvertingOperatingLeasestoCapitalLeasesonKeyRatios-BestBuy2001PostretirementBenefitsDefined--Employer-providedbenefit(s)toemployeesafter retirementPensionbenefits--Employer-providedmonetarypensionbenefits toemployeesafterretirement,e.g.,monthlystipend untildeathOtherPostretirementEmployeeBenefits(OPEB)--Employer- providednon-pension(usuallynonmonetary)benefits afterretirement,e.g.,healthcareandlifeinsurancePostretirementBenefitsFactsTwokindsofPostretirementBenefitsPostretirementBenefitsPensionBasics

PensionPlan–agreementwithemployertoprovidepensionbenefitsinvolving3entities: employer-whocontributestotheplan;employee-whoderivesbenefits;andpensionfund

PensionFundAssets–accountadministeredbyatrustee,independentofemployer, entrustedwithresponsibilityofreceivingcontributions,investingtheminaproper manner,&disbursingpensionbenefitstoemployees

Vesting–specifiesemployee’srighttopensionbenefitsregardlessofwhetheremployee remainswiththecompanyornot;usuallyconferredafteremployeeservessome minimumperiodwiththeemployerPensionPlanCategories

Definedbenefit–aplanspecifyingamountofpensionbenefitsthatemployerspromise toprovideretirees;employerbearsriskofpensionfundperformance

Definedcontribution–aplanspecifyingamountofpensioncontributionsthatemployers maketothepensionplan;employeebearsriskofpensionfundperformance

FocusofPensionAnalysis Definedbenefitplansconstitutesthemajorshareofpensionplansandare thefocusofanalysisgiventheirimplicationstofuturecompany performanceandfinancialpositionPostretirementBenefitsElementsofthePensionProcessEmployerInvestment

Benefits(Disbursements)Contributions

PensionFundEmployeePostretirementBenefitsIllustrationofPensionAccumulationandDisbursementforaDefinedBenefitsPlan

Fundsrequiredatemployees’retirement:Presentvalueof10paymentsof$20,000perannumwithadiscountrateof8%perannum$134,200Annualpaymentsintothefundrequiredtoaccumulateto $134,200in15yearswithadiscountrateof8% perannum10yearsAnnualbenefitsof$20,000paidtoemployeefor10yearsPostretirementPreretirementRetirementBenefits=$20,000perannumContributions=$4,942perannum15yearsPostretirementBenefits

Accumulatedbenefitobligation(ABO)–actuarialpresentvalueofpensionbenefitspayable toemployeesatretirementbasedontheircurrentcompensationandserviceto-date

Projectbenefitobligation(PBO)–actuarialestimateoffuturepensionbenefitspayableto employeesonretirementbasedonexpectedfuturecompensationandserviceto-date

Vestedbenefitobligation(VBO)–actuarialestimateoffuturepensionbenefitspayableto employeesatretirementbasedoncurrentcompensation&benefitsvestedtoemployees

FundedStatus–DifferencebetweenthevalueoftheplanassetsandthePBO

Note:Planisoverfunded(underfunded)whenvalueofplanassetsexceeds(islessthan)PBO

NetEconomicPosition–PBOlessthevalueoftheplanassetsThreeAlternativeDefinitionsofPensionObligationRelationbetweenPlanAssetsandFundedStatusPostretirementBenefitsEconomicpensioncost--netcostarisingfromchangesinneteconomicpositionforaperiod;includesbothrecurringandnonrecurringcomponentsalongwithreturnonplanassetsRecurringpensioncostsconsistoftwocomponents:

Servicecost

–actuarialpresentvalueofpensionbenefitearnedbyemployees

InterestCost

–increaseinprojectedbenefitobligationarisingwhenpension paymentsareone-periodclosertobeingmade;computedbymultiplying beginning-periodPBObythediscountrateNonrecurringpensioncostsconsistoftwocomponents:

ActuarialGainorLoss

–changeinPBOthatoccurswhenoneormore actuarialassumptionsarerevisedinestimatingPBO

PriorServiceCost

–effectsofchangesinpensionplanrulesonPBOReturnonplanassets:

Actualreturnonplanassets

–pensionplan’searnings,consisting ofinvestmentincome—capitalappreciationanddividendandinterest received,lessmanagementfees;plusrealizedandunrealized appreciation(orminusdepreciation)ofotherplanassetsEconomicPensionCost

PostretirementBenefitsPensionAccountingExample–TheFacts

? Apensionplanwithasingleemployee,J.Smith,whojoinstheplan exactly5yearsagoonJanuary1,1996;Smithisduetoretireon Dec.31,2020,andisexpectedtolivefor10yearsafterretirement? J.Smith’scurrentcompensationis$10,000peryear;actuarial estimatesindicatecompensationisexpectedtoincrease4%peryear overthenext20years? Pensionplanspecifiesthefollowingformulafordeterminingan employee'spensionbenefit:“Annualpensionisequaltooneweek’s compensationattimeofretirementforeachyearwiththeplan”; employeesvest4yearsafterjoiningtheplan? AtDec.31,2000,thefairvalueofassetsinthepensionfundis$2,000; in2001,theemployercontributes$200tothepensionfund? Returnonpensionassetsis22%in2001;long-term returnisexpectedtobe10%peryear? Discountrateis7%peryearPostretirementBenefitsPensionAccountingExample–PensionObligation

DeterminingPensionObligationsunderDifferentAssumptions—J.SmithExample

Actual

Projected

Projected

AtDec.31,2020(Retirement)

Salaryperyear$10,000

$21,911

$21,911

$26,533

$26,533

Pensionperyear962

2,107

2,528

3,061

4,592

Valueofpension6,753

14,798

17,757

21,503

32,254

AtDec.31,2000

Presentvalueofpension1,745

3,824

AtDec.31,2001

Presentvalueofpension

4,091

4,910

5,946

8,9192000

Formula

2001

FormulaAssumptionChange

ActuarialPlan

Vestedbenefits(VBO) $1,745+ Benefitsnotvested 0= Accumulatedbenefitobligation(ABO) $1,745+ Effectofestimatedincreaseincompensation 2,079= Projectedbenefitobligation(PBO) $3,824

Note:PBO

ABO

VBO

PostretirementBenefitsPensionAccountingExample–EconomicPensionCost

RecurringcostsforJ.Smithexample:? PBOincreasesby$819in2001becauseSmithworksanextrayear–hence,thetermservicecost? Presentvalueincreasesfrom$3,824in2000to$4,092in2001—this$267increasearisesfromthe timevalueofmoney–hence,theterminterestcost(alsocomputedas7%x$3,824)

NonrecurringcostsforJ.Smithexample:? Actuarialchange(4%to5%growth)increasesestimatedcompensationatretirement from$21,911 to$26,533andincreasesthePBOatendof2001by$1,036(from$4,910to$5,946)—anactuarial loss? Pensionformulachangestoone-and-one-halfweek’scompensationperyearofserviceresultsin thepensionbenefitperyearincreasingby50%from$3,061to$4,592,whichincreasesPBOby $2,973($8,919-$5,946)—apriorservicecost

ReturnonplanassetsforJ.Smithexample:? Actualreturnonplanassetsis $440(22%of$2,000)

Insum,neteconomicpension costfortheJ.Smithexampleis:

Recurringcosts: Servicecost $819 Interestcost 267Nonrecurringcosts: Actuarialgainorloss 1,036 Priorservicecost 2,973Grosseconomicpensioncost $5,095Lessreturnonplanassets (440)Neteconomicpensioncost $4,655PostretirementBenefitsPensionAccountingExample–ArticulationofNetEconomicPositionandEconomicPensionCost:J.SmithExample

PensionObligation Beginningbalance 3,824 Servicecost 819 Interestcost 267 Actuarialgainorloss 1,036Benefitspaid 0 Priorservicecost 2,973 5,095 Endingbalance 8,919PensionAssetBeginningbalance 2,000Contributions 200Returnonassets 440 Benefitspaid 0Endingbalance 2,640NetEconomicPosition(FundedStatus)Contributions 200 Beginningbalance 1,824Returnonassets 440 Grosspensioncost 5,095Endingbalance 6,279EconomicPensionCostRecurringcostsServicecost 819Interestcost 267NonrecurringcostsActuarialgainorloss 1,036Priorservicecost 2,973Grosspensioncost 5,095Lessreturnonassets (440)Netpensioncost 4,655PostretirementBenefitsReportedpensioncost--defersrecognitionofeconomiceffectsvis-à-viseconomicpensioncost;eachdeferral(andamortization)follows:

Expectedreturnonplanassetsreducesreportedpensioncost--gainsandlosses fromthedifferencebetweenexpectedandactualreturnsaredeferredandamortizedto reducevolatility;expectedreturnonplanassetsiscomputedbymultiplyingtheexpected long-termrateofreturnonplanassetsbythemarketvalueofplanassetsatthe beginningoftheperiod.

Deferralandamortizationofnetgainsandlossesarisefromthedelayedrecognitionof deviationsfromexpectationsregardingbothpensionobligationsandpension assets—netgainsandlossesconsistof(1)thedifferencebetweenactualand expected returnonplanassetsand(2)actuarialgainsandlosses

Deferralandamortizationofpriorservicecostistheprocessofdelayingrecognitionof priorservicecosteffectsonreportedpensioncost(throughamortization)

Deferralandamortizationoftransitionlossorgainarisewhenaplanisinitiallyadopted— amortizedovertheaverageremainingserviceperiodofqualifiedemployeesNetReportedPosition--isthecumulativereportedpensioncostnetofcumulativecontributions—forthisreason,theliability(orasset)reportedinthebalancesheetiscalledAccrued(orPrepaid)PensionCost.

Reported(orNetPeriodic)PensionCostNetReportedPosition(orReportedStatus)PostretirementBenefits? Expectedreturnonplanassets—$200(10%of$2,000)intheJ.Smithexample? Deferralandamortizationofnetgainsandlosses—deferrednetgainsorlossesis $796($1,036actuariallossless$240nonrecurringreturn),ofwhich$21(1/20ofthe excessof$796over10%of$3,824)isamortizedin2001fortheJ.Smithexample? Deferralandamortizationofpriorservicecost—priorservicecostof$2,973is deferredand$149(1/20x$2,973)isamortizedintheJ.Smithexample? Deferralandamortizationoftransitionlossorgain—notransitiongainorlossinthe J.SmithexamplePensionAccountingExample–ReportedPensionCost

Economicpensioncost

Smoothing

Reportedpensioncost*Servicecost

$

819

$

—

Servicecost

$

819Interestcost 267 — Interestcost 267Actualreturn (440) (240) Expectedreturn (200)Actuarialgainorloss 1,036 1,036 —Netgainorloss — $ 796 —Priorservicecost 2,973 2,973 —Amortization: (21) Netgainorloss 21

(149) Priorservicecost 149Total

$

4,655

$

3,612

$

1,056*ThisalsoisreferredtoasNetPeriodicPensionCost.EconomicPensionCostversusReportedPensionCost—J.SmithExample

PostretirementBenefitsPensionAccountingExample–NetReportedPosition(ReportedStatus)ReportedStatusofPensionFundinBalanceSheet—J.SmithExample Projectedbenefitobligation $(8,919) Planassets 2,640 Fundedstatus $(6,279) Unrecognizedtransitionasset 0 Unrecognizednetgainorloss 775 Unrecognizedpriorservicecost 2,824 Accruedpensioncost(reportedstatus) $(2,680)PostretirementBenefits(similartopensionaccounting)Netcostreporting–consequencesofeventsandtransactionsaffectingOPEBplansare reportedasasingleamount—thisamountincludesatleastthreecomponents:(1)present valueoftheaccruedcostofdeferredcompensationpromisedinexchangeforemployee service,(2)interestcostaccruingfromthepassageoftimeuntilthesebenefitsarepaid,and(3) returnsfromtheinvestmentintheplan’sassetsDelayedrecognition--certainchangesinpostretirementobligations,includingthose arisingasaresultofaplaninitiationoramendment,andcertainchangesinthevalueofplan assetsthataresetasidetomeettheseobligations,arerecognizedthroughaprocessof deferralandamortizationOffsetting--planassetsrestrictedforpaymentofpostretirementbenefitsoffsetthe accumulatedpostretirementbenefitobligationindeterminingamountsrecognizedinthe balancesheetAccumulatedPostretirementBenefitObligation(APBO)–employer’sOPEBobligation

ExpectedPostretirementBenefitObligation(EPBO)–totalactuariallydeterminedcostsofprovidingfutureOPEB,recognizedovertheemployee’sexpectedserviceperiod

Note: APBOistheportionofEPBO“earned”byemployeeservicesasofagivendate (accumulatedbenefitsrecognizedto-date).FundedstatusofOPEBisthedifference betweenAPBOandthevalueofOPEBplanassetsFeaturesofOPEBAccountingLanguageofOPEBAccountingPostretirementBenefitsReportedOPEBcostincludesthesecomponents:Servicecosts—actuarialpresentvalueofOPEB“earned”byemployeesduringtheperiod;portionofEPBOattributabletothecurrentyearInterestcosts—imputedgrowthinAPBOduringtheperiodusinganassumeddiscountrate;interestiscompoundedbecauseAPBOisrecognizedonapresentvaluebasisAmortizationofnetgainsandlosses—amountsarisingwhenactualexperienceoftheplandiffersfrominitialestimatesor,alternatively,iftheexpectedreturnonassets differsfromactualreturn;theseamountsaredeferredandamortizedAmortizationofpriorservicecosts—costsarisingfromplanamendmentsthatchangebenefitsandareattributedtoemployeeservicerenderedpriortotheamendmentdate;thesecostsaredeferredandamortizedAmortizationoftransitionobligation—costsarisingfrominitialadoption,calledtransitionobligation,areidentifiedandmeasuredasthedifferencebetweenAPBOandplanassets(ifany)minusanypostretirementliabilitiespreviouslyrecorded;eitherimmediatelyrecognizethetransitionobligationwithachargetoincomeoramortizeitExpectedreturnonplanassets—thisreturnreducesthenetannualpostretirementexpenseiftheplanisfunded;thedifferencebetweenactualandexpectedreturnisdeferredandincludedintheunrecognizedportionofnetgainsandlossesReportedOPEBCost

PostretirementBenefitsPensionandOtherPostretirementBenefitsDisclosures-Merck&Co.,IncPostretirementBenefitsPensionandOtherPostretirementBenefitsDisclosures-Merck&Co.Inc.(continued)

PostretirementBenefitsPensionandOtherPostretirementBenefitsDisclosures—AlliedSignal(continued)

PostretirementBenefitsEconomicandReportedPostretirementCosts-Merck&Co.Inc.PensionServicecostInterestcostLosses(gains)ninvestmentActuarial(gains)lossesOtherlosses(gains)AmortizationTotalcosts(gains)OPEBServicecostInterestcostLosses(gains)ininvestmentsActuarial(gains)lossesOtherAmortizationTotalcostsTotalServicecostInterestcostLosses(gains)ininvestmentsActuarial(gains)lossesOtherlossesNetamortizationTotalcosts(gains)

Economic $ 190 217 258 283 (6)

_0

$943

$ 53 77 57 177 0

_0

$ 364

$ 243 295 315 460 (6)

0

$ 1,307

Deferred $ 0 0 (546) (283) 6

_0

$ (823)

$ 0 0 (141) (177) 0

_0

$ (318) $ 0 0 (687) (460 6

0

$ (1,141)

Amortized $ 0 0 0 0 0

28

$ 28 $ 0 0 0 0 0

(11)

$ (11)

$ 0 0 0 0 0

17

$ 17

Reported $ 190 217 (288) 0 0

28

$ 148

$ 53 77 (85) 0 0

(11)

$ 34 $ 243 295 (373) 0 0

17

$ 182PostretirementBenefitsEconomicandReportedPostretirementBenefits-Merck

PostretirementBenefitsReconciliationofEconomicandReportedChanges-Merck

PostretirementBenefitsReconciliationofEconomicandReportedChanges-Merck

PostretirementBenefitsEffectofActuarialAssumptionsonBenefitObligationandCost

Assumption

DirectionofChangeDirectionofEffecton

Economic*Reported*

PositionCost

Position

Cost

DiscountRate

+-

+-

-+IndefiniteIndefiniteIndefiniteIndefinite

ExpectedReturn+-NoeffectNoeffectNoeffectNoeffect

+--+

GrowthRate**

+-

-+

+--+

+-Notes:* Economicpositionreferstofundedstatus andreportedpositionreferstoaccrued benefitorcost. ** Growthratepertainstobothcompensation andhealthcarecosts.

PostretirementBenefitsFrequencyDistributionofActuarialAssumptionsPostretirementBenefitsFrequencyDistributionofActuarialAssumptionsPostretirementBenefitsFrequencyDistributionofActuarialAssumptionsContingenciesandCommitments

Contingencies--potentiallossesandgainswhoseresolutiondependsononeormorefutureevents.

Contingentliabilities--contingencieswithpotentialclaimsonresources --torecordacontingentliability(andloss)two conditionsmustbemet: (i) probableanassetisimpairedoraliability incurred,and (ii)theamountoflossisreasonablyestimable; -- todiscloseacontingentliability(andloss)there mustbeatleastareasonablepossibilityof incurrence

Contingentassets -- contingencieswithpotentialadditionstoresources -- acontingentasset(andgain)isnotrecordeduntil thecontingencyisresolved -- acontingentasset(andgain)canbedisclosedif probabilityofrealizationishigh

BasicsofContingenciesContingenciesshouldbe...

FrequencyofContingentLiabilitiesContingenciesandCommitments

ContingenciesandCommitments

Sourcesofusefulinformation:Notes,MD&A,andDeferredTaxDisclosures

Usefulanalyses:?Scrutinizemanagementestimates?Analyzenotesregardingcontingencies,including?Descriptionofcontingencyanditsdegreeofrisk?Amountatriskandhowtreatedinassessingriskexposure?Charges,ifany,againstincome?Recognizeabiastonotrecordorunderestimatecontingentliabilities?Bewareofbigbaths—lossreservesarecontingencies?ReviewSECfilingsfordetailsoflossreserves?Analyzedeferredtaxnotesforundisclosedprovisionsforfuturelosses

Note:Lossreservesdonotalterriskexposure, havenocashflowconsequences,anddonot provideinsurance

AnalyzingContingenciesContingenciesandCommitments

Commitments--potentialclaimsagainstacompany’sresourcesduetofuture performanceundercontractBasicsofCommitmentsFrequencyofCommitmentsOff-Balance-SheetFinancing

Sourcesofusefulinformation: NotesandMD&AandSECFilings

Usefulanalyses:? Scrutinizemanagementcommunicationsandpressreleases? Analyzenotesregardingcommitments,including ?Descriptionofcommitmentanditsdegreeofrisk ?Amountatriskandhowtreatedinassessingriskexposure ?Contractualconditionsandtiming? Recognizeabiastonotdisclosecommitments? ReviewSECfilingsfordetailsofcommitments

AnalyzingCommitmentsOff-Balance-SheetFinancing

Off-Balance-SheetFinancing--isthenon-recordingoffinancingobligations

MotivationTokeepdebtoffthebalancesheet—partofever-changinglandscape,whereasone