FINANCIAL STATEMENT ANALYSIS

Faculty of Banking and Finance

Lecturer: MSc. Nghiem Anh Thu
 CHAPTER 2
THE BALANCE SHEET

01 02 03 04
OVERVIEW INVENTORY ANALYSIS LONG-LIVED ASSET LIABILITIES & LEASING
ANALYSIS ANALYSIS
UNDERSTANDING
BALANCE SHEET

2
 04. LIABILITIES AND LEASING ANALYSIS

4.1 Bond issuance

4.2 Discount and premium bonds

4.3 Debt covenants & disclosure

4.4 Lease and pension accounting

4.5 Leverage and Coverage ratios

3 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 4.1 BOND ISSUANCE

Definition of Bond: A contractual promise between a

borrower (the bond issuer) and a lender (the bond holder)
that obligates the bond issuer to make payments to the
bondholder over the term of the bond

Two type of payment:

(1) Periodic interest payments

(2) Repayment of principal at maturity

4 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 4.1 BOND ISSUANCE

Discussion:

Corporate Bond in Vietnam market

2022-2023 – What happened

5 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 4.1 BOND ISSUANCE

Terminology:

❑ Face value/ Maturity value/ Par value

❑ Coupon rate
❑ Coupon payments
❑ Effective rate of interest/ Market rate of interest

6 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 4.1 BOND ISSUANCE

Terminology:

❑ Market rate of interest = Coupon rate → Par bond

❑ Market rate of interest > Coupon rate → Discount
bond
❑ Market rate of interest < Coupon rate → Premium
bond
❑Zero – Coupon bond: Issued at a discount from par
value & make no periodic interest payment

7 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 4.1 BOND ISSUANCE

Initial recognition, measurement & subsequent

measurement

▪ Bonds issued at Par

▪ Bonds issued at Discount or Premium

→ How Bonds recognition affects Balance sheet, Income

statement and Cash flow

8 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 4.2 DISCOUNT AND PREMIUM BONDS

Par Bond Discount Bond Premium Bond

Coupon rate = Bond’s Coupon rate < Bond’s Coupon rate > Bond’s
yield yield yield

Proceeds received equal to Proceeds received less than Proceeds received more
par value par value than par value

Interest expense = Coupon Interest expense < Coupon Interest expense < Coupon
payment payment payment

9 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 4.2 DISCOUNT AND PREMIUM BONDS

10 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 4.2 DISCOUNT AND PREMIUM BONDS

11 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 4.2 DISCOUNT AND PREMIUM BONDS

→ YTM method

12 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 4.2 DISCOUNT AND PREMIUM BONDS

13 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 4.2 DISCOUNT AND PREMIUM BONDS

Balance Sheet effects of Issuing a Bond

14 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 4.2 DISCOUNT AND PREMIUM BONDS

Income Statement effects of Issuing a Bond

15 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 4.2 DISCOUNT AND PREMIUM BONDS

Cash flow effects of Issuing a Bond

16 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 4.3 DEBT COVENANTS AND DISCLOSURE

❖ Debt Covenants
❑ The definition: Restrictions imposed by the lender on
the borrower to protect the lender’s position → reduce
default risk and borrowing costs
❑ Technical default: The lender/ bondholders can demand
immediate repayment of principal if the firm violates a
covenant

17 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 4.3 DEBT COVENANTS AND DISCLOSURE

❖ Debt Covenants
❑ Affirmative covenants: The borrower promises to do
certain things
▪ Make timely payments of principal and interest
▪ Maintain certain ratios
▪ Maintain collateral

18 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 4.3 DEBT COVENANTS AND DISCLOSURE

❖ Debt Covenants
❑ Negative covenants: The borrower promises to refrain
from certain activities
▪ Increasing dividends or repurchasing shares
▪ Issuing more debt
▪ Engaging in M&A

19 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 4.3 DEBT COVENANTS AND DISCLOSURE

❖ Debt Disclosure in the Footnotes or the Management

Discussion and Analysis section
▪ The nature of the liabilities
▪ Maturity dates
▪ Stated and effective interest rates
▪ Call provisions and conversion privileges
▪ Restrictions imposed by creditors
▪ Assets pledged as security
▪ The amount of debt maturing in each of the next 5 years

20 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 4.4 LEASE AND PENSION ACCOUNTING

❖ Why leasing an asset?

▪ Less initial cash outflow
▪ Less costly financing
▪ Less risk of obsolescence

21 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 4.4 LEASE AND PENSION ACCOUNTING

❖ Financial Reporting of Leases from Lessee

▪ Finance Lease: Both the benefits and risks of
ownership are substantially transferred to the
lessee
▪ Operating Lease: If either the benefits or the
risks of ownership are not substantially
transferred to the lessee

22 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 4.4 LEASE AND PENSION ACCOUNTING

23 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 4.4 LEASE AND PENSION ACCOUNTING

24 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 4.4 LEASE AND PENSION ACCOUNTING

❖ Financial Reporting of Leases from Lessor

▪ Finance Lease
▪ Operating Lease

25 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 4.5 LEVERAGE AND COVERAGE RATIOS

❖ Leverage ratio:
▪ Debt – to – asset ratio
▪ Debt – to – capital ratio
▪ Debt – to – equity ratio
▪ Financial leverage ratio

26 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 4.5 LEVERAGE AND COVERAGE RATIOS

❖ Coverage ratio:
▪ Interest coverage
▪ Fixed charge coverage

27 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 4.5 LEVERAGE AND COVERAGE RATIOS

28 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

THANK YOU

Lecturer: MSc. Nghiem Anh Thu

nghiemanhthu@ftu.edu.vn