Financial Education

IAS and US GAAP both require a statement of cash flows divided into operating, investing and financing sections. The two standards differ in the classification of certain items, particularly interest and dividend payments. The differences are summarized in the table below.

Some companies have stocks listed on several worldwide exchanges. There are a number of motivations for doing so:

• Access to foreign ownership, which diversifies the capital base and allows access to more sources of financing
• Possibly lower risk of a domestic takeover
• Increased profile in foreign markets, which may improve both financing opportunities and overall customer awareness of the company

Listing on a foreign exchange also introduces risks. For example, the share price may react to bad news in foreign markets that it would otherwise be insulated from.

Even though different assets may appear to have different characteristics, there are many factors that contribute to the returns of multiple assets. For example, companies in the same industry will have similar exposure to the overall industry supply and demand factors, and these industry factors will affect the stocks of both companies. There are broader economic forces that affect nearly every asset.

When individual assets are considered in isolation, these interrelationships are effectively being ignored. As a result, the investor’s overall risk and return opportunities are likely to be misunderstood.

Under IAS 16, as under US GAAP, property plant and equipment are initially recorded on the balance sheet at cost, and systematically charged to expense as depreciation. Unlike GAAP, IAS permits upward revaluation (to the fair value as of the revaluation date) of property, plant and equipment.

Typically, when assets are revalued downward the charge flows through the income statement. In the case of upward revaluation, however, the change typically bypasses the income statement and is made directly to equity. The exception to these general rules is when the revaluation reverses a previous revaluation. In such cases, the reporting mimics that of the original revaluation. So downward reversals go straight to equity, while upward reversals are reported in the P&L.

Exchange Traded Funds, or ETFs, are portfolios that trade on a stock exchange like shares of any company. They can be traded throughout market hours, sold short and margined. They are generally designed to track an index and offer an easy way to broadly diversify personal holdings.

ETFs are open-ended funds with special characteristics. Since most exchanges of the shares in the secondary market occur between two individuals rather than an individual and the fund, the manager needn’t worry about redemptions.  Although brokers can redeem large blocks of the shares, the redemption can be made “in kind,” leaving the risks of disposing of the portfolio holdings in the hands of the redeemer. Further, since the fund can exchange the most highly appreciated stocks without tax consequences, ETFs tend to have a tax advantage over other types of mutual funds. Finally, there is a management cost advantage because the fund manager does not have to keep track of who owns the shares.