Global ethical standards 0. Behaving ethically is at the heart of what it means to be a professional; it distinguishes professionals from others in the marketplace. This set of FAQs captures questions which may arise from candidates, assessors, counsellors, employers, and education providers relating to the impact of the new Rules of Conduct on entry and assessment to the profession.
The existing Rules of Conduct in place for RICS members and regulated firms since , have been updated following research and a membership wide consultation at the end of The Rules of Conduct are mandatory standards of professional conduct and practice expected of all RICS members, candidates, students, and regulated firms. There are five new Rules which have been updated to address challenges relating to sustainability, the use of data, and diversity and inclusion. The new Rules are based on the ethical principles of honesty, integrity, competence, service, respect, and responsibility.
The changes are intended to help the global profession respond to new risks and opportunities. The Rules of Conduct are based on ethical principles of honesty, integrity, competence, service, respect, and responsibility.
Whilst it is important you are aware of the changes, all candidates taking the Chartered or Associate assessment prior to the 2 February will continue to be tested on the current set of documents:. As this competency requires you to have a thorough knowledge of RICS regulations and Rules of Conduct, you should have an awareness of the new Rules and the date they will be effective. We understand that for some candidates there will be crossover between the current suite of documents and the new Rules.
If you submit your written submissions prior to 2 February , but then sit your assessment after the effective date, the assessors will be asked to take this into account.
If you submit your written submission after 2 February any evidence on the Ethics, Rules of Conduct and professionalism competency must be based on the new Rules. In line with the new Rules, the module will be replaced with a new version from 2 February Access to the current module will no longer be available from then.
Candidates who have successfully completed the current module prior to 2 February do not need to take the new version if they pass their assessment within 12 months of completing the current module.
However, if you decide to take the new version for the purposes of your assessment, this will void your original ethics module result and you would need to pass the new version to be eligible to submit for assessment.
To avoid any potential delay to you submitting for assessment we recommend you use the support materials and guidance available here to develop your competence on the new Rules. RICS has collaborated with qualified professionals around the world, as well as seeking input from outside the profession, to create new content which reflects the role of professionalism and the new Rules of Conduct.
The new RICS Professionalism module will be a mandatory requirement to achieve professional status when it launches on 2 February As with the current module, it will take approximately three hours to complete. More information will be available later this summer.
This competency requires you to understand the role of RICS, including a thorough knowledge of its regulations and Rules of Conduct. We briefly discuss each of these accounts here and explain the accounts in depth in Module 8. The change in retained earnings links consecutive balance sheets via the income statement: Ending retained earnings 5 Beginning retained earnings 1 Net income for the period 2 Dividends for the period. For now, view AOCI as income that has not been reflected in the income statement and is, therefore, excluded from retained earnings.
Treasury stock is the cost of the shares that Berkshire Hathaway has repurchased and not reissued. It can be seen as the opposite of contributed capital.
Treasury stock decreases equity when shares are repurchased hence, the negative sign. We defer discussion of this account to Modules 8 and 9. However, the change in cash is not what matters as that can be found from the balance sheet. The useful information this statement reports is the detailed cash inflows and outflows from operating, investing, and financing activities over a period of time.
This is due to timing differences between when revenue and expense items are recognized on the income statement and when cash is received and paid. We discuss this concept further in subsequent modules. Investing cash flows. Financing cash flows. Cash, December 31, Both cash flow and net income numbers are important for business decisions. Berkshire Hathaway did not pay dividends in The statement of cash flows is also linked to the balance sheet as the change in the balance sheet cash account reflects the net cash inflows and outflows for the period.
Items that impact one financial statement ripple through the others. Linkages among the four financial statements are an important feature of the accounting system. Information Beyond Financial Statements Important financial information about a company is communicated to various decision makers through means other than the four financial statements.
The broader business environment affects the level of profitability that a company can expect to achieve. Global economic forces and the quality and cost of labor affect the macroeconomy in which the company operates. Government regulation, borrowing agreements exacted by creditors, and internal governance procedures also affect the range of operating activities in which a company can engage.
In addition, strategic plans are influenced by the oversight of equity markets, and investors are loathe to allow companies the freedom to manage for the longer term. As competition intensifies, profitability likely declines, and the amount of assets companies need to carry on their balance sheet likely increases in an effort to generate more profit.
Such changes are revealed in the income statement and the balance sheet. Applying Competitive Analysis We apply the competitive analysis framework to help interpret the financial results of McLane Company. McLane is a subsidiary of Berkshire Hathaway and was acquired several years ago.
McLane is a wholesaler of food products; it purchases food products in finished and semifinished form from agricultural and food-related businesses and resells them to grocery and convenience food stores. The extensive distribution network required in this business entails considerable investment. Our analysis reveals that McLane is a high-volume, low-margin company. Its ability to control costs is crucial to its financial performance, including its ability to fully utilize its assets.
This analysis can be applied to almost any organization. SWOT analysis tries to understand particular Strengths and Weaknesses that give rise to specific Opportunities to exploit the Strengths and Threats caused by the Weaknesses. When used as part of an overall strategic analysis, SWOT can provide a good review of strategic options.
However, SWOT is sometimes criticized as too subjective. Two individuals can identify entirely different factors from a SWOT analysis of the same company.
This is partly because SWOT is intuitive and allows varying opinions on the relevant factors. Analyzing the Broader Business Environment Quality analysis depends on an effective business analysis.
Is it a startup, experiencing growing pains? Is it nearing the end of its life, trying to milk what it can from stagnant product lines? Are its products new, established, or dated? Do its products have substitutes? How complicated are its products to produce? Are buyers in good financial condition? Do buyers have substantial purchasing power? Can the seller dictate sales terms to buyers?
Are there many supply sources? Does the company depend on a few supply sources with potential for high input costs? Are markets open? Is the market competitive? Does the company have competitive advantages? Can it protect itself from new entrants? At what cost? How must it compete to survive? Is it going public? Is it seeking to use its stock to acquire another company? Is it in danger of defaulting on debt covenants? Are there incentives to tell an overly optimistic story to attract lower cost financing or to avoid default on debt?
What are their backgrounds? Can they be trusted? Are they com- petent? What is the state of employee relations? Is labor unionized? Does it have a strong and independent board of directors? Does a strong audit committee of the board exist, and is it populated with outsiders? Is it under investigation by regulators? Has it changed auditors? If so, why? Are its auditors independent? In sum, we must assess the broader business context in which a company operates as we read and interpret its financial statements.
A review of financial statements, which reflect business activities, cannot be undertaken in a vacuum. It is contextual and can only be effectively undertaken within the framework of a thorough understanding of the broader forces that impact company performance.
We should view the above questions as a sneak preview of those we will ask and answer throughout this book when we read and interpret financial statements for purposes of forecasting and valuation.
Prepare an income statement, balance sheet, and statement of cash flows for AXA at December 31, What differences do we observe? The solution is on page The reality is that GAAP allows companies choices in preparing financial statements. The choice of methods often yields financial statements that are markedly different from one another in terms of reported income, assets, liabilities, and equity amounts.
People often are surprised that financial statements comprise numerous estimates. Following are examples of how some managers are alleged to have abused the latitude available in reporting financial results. These questionable revenues boosted growth rates and sealed the deal. Swartz, convicted of taking unauthorized loans from the company. Autonomy Corp. Accounting standard setters walk a fine line regarding choice in accounting.
On one hand, they are concerned that choice in preparing financial statements will lead to abuse by those seeking to gain by influencing decisions of financial statement users.
Enron exemplifies the problems that accompany rigid accounting standards. A set of accounting standards relating to special purpose entities SPEs provided preparers with guidelines under which those entities were or were not to be consolidated.
Unfortunately, once the SPE guidelines were set, some people worked diligently to structure SPE transactions so as to narrowly avoid the consolidation requirements and achieve off-balance-sheet financing.
This is just one example of how, with rigid standards, companies can adhere to the letter of the rule, but not its intent. In such situations, the financial statements are not fairly presented. When financial statements are not fairly presented, it frustrates our attempt at determining where the company is currently. This leads to reductions in our ability to accurately determine where the company is going and impacts our estimate of what the company is worth.
For most of its existence, the FASB has promulgated standards that were quite complicated and replete with guidelines. This invited abuse of the type embodied by the Enron scandal. In recent years, the pendulum has begun to swing away from such rigidity. Moreover, since the enactment of the Sarbanes-Oxley Act, the SEC requires the chief executive officer CEO of the company and its chief financial officer CFO to personally sign a statement attesting to the accuracy and completeness of the financial statements.
This requirement is an important step in restoring confidence in the integrity of financial accounting. The Sarbanes-Oxley Act also imposed fines and potential jail time for executives.
Presumably, the prospect of personal losses is designed to make these executives more vigilant in monitoring the financial accounting system. Analysis of Financial Statements This section previews the financial statement analysis framework of this book.
Analysis of financial performance is crucial in assessing prior strategic decisions and evaluating strategic alternatives. Knowing that a company reports a profit is certainly positive as it indicates that customers value its goods or services and that its revenues exceed expenses.
However, we cannot assess how well it is performing without considering the context. Components of Return on Assets We can separate return on assets into two components: profitability and productivity. Profitability relates profit to sales. This ratio is called the profit margin PM , and it reflects the net income profit after tax earned on each sales dollar. Management wants to earn as much profit as possible from sales. Productivity relates sales to assets. This component, called asset turnover AT , reflects sales generated by each dollar of assets.
Management wants to maximize asset productivity, that is, to achieve the highest possible sales level for a given level of assets or to achieve a given level of sales with the smallest level of assets. To illustrate, Exhibit 1. These companies must earn a higher profit margin to yield an acceptable ROA. Technology companies typically maintain a high level of cash and short-term investments on their balance sheets, which allows them to respond quickly to opportunities.
The solid line represents those profitability and productivity combinations that yield a In this case, company earnings are compared to the level of stockholder not total investment. ROE reflects the return to stockholders, which is different from the return for the entire company ROA.
How can you disaggregate return on assets to identify areas for improvement? This step is crucial to decision making and valuation, and it is arguably a very difficult task. When we formalize predictions and state them in the form of financial projections, the quality of our forecasts is dependent on at least two factors. First, the quality of our analysis performed in Steps 1 and 2 in understanding the business environment and in adjusting and assessing financial information is crucial.
For example, if we fail to adjust for any off-balance-sheet financing, leverage is likely understated and future financing needs are inaccurately forecasted. Another example would be not recognizing the negative implications for future operations of growing inventory levels combined with flat or declining sales.
Second, the quality of our forecasts is dependent on our assumptions being realistic and achievable. For example, is a company, which has recently experienced sales declines, likely to become the industry leader?
Can a company increase sales when confronting a new entrant in the industry? Part of our task is to objectively examine what evidence supports, or challenges, the forecast assumptions we make. In sum, the importance of forecast quality cannot be overemphasized as it is vital to our estimates of where a company is going, which are direct inputs to valuation.
The theoretical linkage between earnings and stock prices is as follows: current earnings predict future earnings, and future earnings help determine expected future dividends, and these future dividends, when discounted, determine current stock price.
Numerous large-sample empirical studies provide evidence consistent with a linkage between earnings and prices. A subset of these studies finds a link between earnings changes and excess stock returns. It is no wonder that investors, analysts, and others devote so much time and effort to forecasting earnings.
This could be from an external standpoint such as whether to buy or sell shares as an investor or from an internal standpoint such as evaluating a potential acquisition or change in scope of operations.
All financial decisions involve valuation at some level. In making these decisions, we attempt to predict the future. The key to good valuation estimates is accurate forecasts of future cash flows. And, the key to forecasting is having a good understanding of where the firm currently is and the business environment in which it competes.
However, in most cases, we instead think of the worth of a company as the current value of expected payoffs. In Modules 12 to 14, we describe how to compute value using dividends, cash flows, and earnings as the payoffs.
Yet, there are situations where cash or earnings or dividends can work better for valuation purposes. We must develop the skills to understand where those situations are and where one, or a combination of different metrics, is best for valuation. At first glance, this method appears not to require the analysis performed in Steps 1, 2, and 3, as it generally utilizes market multiples determined from comparable firms. However, this is deceiving. Understanding where the company operates, where the company currently is, and where the company is going also drives valuation using multiples.
That is, our financial analysis influences the choice of market multiple, the choice of comparables, and interpretation of the valuation estimate. Research Insight Are Earnings Important? A study asked top finance executives of publicly traded companies to rank the three most important measures to report to outsiders. Alternatively, it could reflect myopic managerial concern about earnings.
The emphasis on earnings is noteworthy because cash flows continue to be the measure emphasized in the academic finance literature. Why is that? The study provides the following insights. Several executives mention that comparison to seasonally lagged earnings numbers provides a measure of earnings momentum and growth, and therefore is a useful gauge of corporate performance.
To the majority of finance chiefs surveyed, the answer is a resounding yes. Source: Graham, et al. The idea of market-efficiency is that security prices reflect available information and respond rapidly to new information when it is available. Some people incorrectly believe that this implies there is no gain to engaging in financial statement analysis.
However, if our expectations differ from those of other investors there exists an opportunity to make trades based on those beliefs. Market-efficiency requires effort from people to gather information, interpret it, and then make trades creating supply or demand pressures such that market prices adjust to a new equilibrium.
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