[SOLVED] CS finance ACCT6101 Session #1: Introduction to Valuation

ACCT6101 Session #1: Introduction to Valuation

PART 1 Background

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ACCT7106 Session #7: Reformulating the Financial Statements
overarching objective:
to conduct fundamental value for the purpose of estimating the intrinsic value of a firms common shares
requires an understanding of the firms value drivers
need to accumulate a tool kit as the basis for developing the pro forma Financial Statements

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2

projected over the forecast horizon

core inputs into the valuation modelxg

Balance Sheet (B/S)
Income Statement (I/S)
Statement of Cash Flows (SCF)

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STEP 1
Understanding the past

Information collection
Understanding the business
Accounting analysis
Financial ratio analysis
Cash flow analysis

STEP 2
Forecasting the future

Structured forecasting
Income Statement forecasts
Balance sheet forecasts
Cash flow forecasts

STEP 3
Valuation

Cost of capital
Valuation models AE, FCF, D
Valuation ratios
Complications
Negative values
Value creation and destruction

Figure 1.1Lundholm & Sloan, Framework for Equity Valuation

Sessions #3 #9

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Stage 1 Understanding the Business
Strategy Analysis
product market
competition
regulatory constraints
business strategies
technology
Stage 2 Analysing Information
Accounting Analysis & Financial Analysis
quality of accounting information
reformulating the F/S to uncover business activities
ratio and cash flow analysis
Stages of the Analysis
Stage 3 Prospective Analysis: Forecasting
pro-forma Income Statement
Balance Sheet
Statement of Cash Flows

Stage 4 Prospective Analysis: Valuation
Abnormal Earnings Model
Alternative Valuation Models
Statement of Cash Flows
Stage 5 Prospective Analysis: Application
investment decision

investor decision to buy, hold, sell
manager decision to adopt strategy or not

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external environment
economic prospects
macroeconomic factors
socio-cultural forces
political / regulatory

Industry dynamics
Porters five forces
(suppliers, buyers, new entrants, substitutes, rivalry)

Analysis of Financial Statements
understanding current F/S
re-formulating the F/S
accounting quality

analysts reports
management forecasts
financial press
???

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Financial Statements AASB 101:
Balance Sheet
Income Statement and/or Statement of Comprehensive Income
Statement of Changes in Equity
Statement of Cash Flows
Notes to the financial statements
building blocks definitions specific to accounting
accounting principles AASB / IFRS rules to guide accounting decisions/choices
recognition (item to F/S) versus disclosure (notes)
accountability & stewardship
accountabilitypreservation by management of the resources entrusted to them
stewardship efficient use by management of resources entrusted to them (earning a return)

articulationFinancial Statements constitute an integrated system

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beginning stock
Beginning Balance Sheet
Cash
+ Other assets
= Total Assets
Liabilities
= Shareholders Equity (BVt-1)
Statement of Changes in S/E
Cash from operations
+ Net Income & OCI
= Net Change in S/E
Cash Flow Statement
Cash from operations
+ Cash from investing
+ Cash from financing
= Net change in cash
Income Statement
Revenue
Expenses
= Net Income (NPAT)
Ending Balance Sheet
Cash
+ Other assets
= Total Assets
Liabilities
= Shareholders Equity (BVt)

flows
ending stock

pro forma Income Statement
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caution for clean surplus and consistent estimates, the accounting system must reconcile
articulation: must concurrently develop the pro forma B/S and SCF
201920202021E2022E2023E
Sales38,17637,408 ? ? ?
Other operating revenue288376
Cost of sales(29,253)(28,043) ? ? ?
Other income428108
Administrative expenses(8,031)(8,081) ? ? ?
Other expenses(146)
Share equity investments5(6)
Financing costs(42)(443) ? ? ?
Income tax expense(347)(341) ? ? ?

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Objectives:
separate operating activities from financing activities
Operations: buying and selling goods and services
Financing: the companys use of debt and equity to finance its operations, as well as the companys investment in financial assets
Why separate? industrial companies generate value from their operations, not from their financial activities
alter several accounting classifications
for the Income Statement, separate revenues and expenses based on their driver (sales volume or other), and whether they are recurring or non-recurring
PART 2 Reformulation

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Balance Sheet Reformulation
Assets
=
Liabilities
+
Shareholders Equity
Operating Assets (OA)
Financial Assets (FA)
Operating Liabilities (OL)
Financial Obligations (FL)
accounting equation

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Shareholders Equity
S/E
net financial obligations
(FOFA)
net operating assets
(OAOL)
=
+
Assets (A)=Liabilities (L)+Shareholders Equity (S/E)

reformulating
[OA+FA]= [OL+FO]+S/E
(OAOL) =(FOFA) +S/E

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Step #1 Operating Assets (OA) versus Financial Assets (FA)

Operating Assets (OA) assets used in selling goods and services (the companys business)
Financial Assets (FA) assets used to invest excess cash (investments not tied to the business)
two broad criteria:
nature of the item itself
function of the item in the companys operations
typical indicators of Financial Assets (FA) (none are decisive on their own):
the item is financial nature, such as investments in debt/equity securities
typically measured at fair value e.g., investments in debt or equity
typically earn interest or dividends for the company
the asset is not integrated into the companys operations
separating operating cash (OA) and financial cash (FA) is a matter of judgement (e.g., 0.5% of sales revenue)

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Step #2 Operating Liabilities (OL) versus Financial Obligations (FO)

Operating Liabilities (OL) liabilities associated with selling goods and services (the companys business)
Financial Obligations (FO) sources of financing other than CSE (basically debt)

typical indicators of Financial Obligations (FO):
the company pays interest on them and has an obligation to repay
most are measured at amortised cost (or rarely fair value)
the liability is not integrated with the companys operations
items for reclassification
dividends payable treat as part of S/E
preference shares treat as a financial obligation (FO) and dividend as a financial expense
derivative securities given the challenges of specifically confirming the nature of each contract, we will treat derivative financial assets as FA and derivative financial liabilities as FO
leases under AASB16, all leases recognised as finance leases lease assets treated as operating assets, lease obligations as financial obligations, and lease interest as a financial expense

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re: Coles

OA (after checking note)
OA (after checking note)
FA
OA (after checking note)
OA (after checking note)
OA / FA (0.5%)

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OA (after checking note)
OA (after checking note)
OA (after checking note)
OA (after checking note)
OA (after checking note)
OA (after checking note)

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OL (after checking note)
FO (after checking note)
FO (after checking note)
FO (after checking note)
OL/FO (after checking note)
OL/FO (after checking note)
OL (assumed)
OL (assumed)
* Note 2.9 reveals that 2019 provisions include amounts for lease provisions FO

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2020201920202019
OA17,5029,028FA847749
OL5,2976,308FO10,437112
NFO9,590(637)
S/E2,6153,357
NOA12,2052,720NFO + S/E12,2052,720

Reformulation Summary Coles
** The reported 2019 figures are NOT directly comparable with the reported 2020 figures because of the adoption of AASB 16 (leases) which brought lease commitments into the B/S as both right of use assets and lease liabilities

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PART 3 Income Statement Reformulation
overview reformulation of the AASB/IFRS Income Statement and Statement of Comprehensive Income into a Reformulated Income Statement such that it:
divides Income Statement items into operating versus financing activity related
further divides operating income into three categories, based on whether the items are recurring and driven by sales
reallocates income tax expense to remove the tax effects of debt financing/financial assets
divides OCI into operating and financing aspects

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Process (as per schema on the next slide)
Step #1: divide every line item in the Income Statement between operating and financing
Step #2: divide operating items into:
core operating income from sales
core other operating income
unusual operating income
Step #3: divide income tax expense between:
core operating income from sales
core other operating income
unusual operating Income
net financial expense (or net financial income)
Step #4: divide OCI items (after-tax) between operating and financing

AASB/IFRS Income Statement & Statement of Comprehensive Income

Sales
COGS
= Gross margin
Other expenses
= EBITDA
Depreciation & amortisation
= EBIT
+ Interest revenue
Interest expense
= PBT
Income tax expense
= NPAT
+OCI (with tax effects)
= Comprehensive Income (CI)
Reformulated Income Statement

Core Operating Income from Sales (before-tax)
Core Other Operating Income (before-tax)
Unusual Operating Income (before-tax)
Net Financial Expense (before-tax)

Steps 1 and 2
Step 3
Step 4
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Mark Wallis, UQ
Operating OCI (after-tax)
Financing OCI (after-tax)
Tax allocation:
Tax shield from NFE
Tax on Core Other OI
Tax on Unusual OI
Tax on Core OI from Sales

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Step #1: divide every line item in the Income Statement between operating and financing
Operating items revenues/expenses (or gains/losses) related to the companys operations
Financing items revenues/expenses (or gains/losses) related to the companys financing activities
consider information in the notes and the companys operating model (judgement)
try to be consistent in how you reformulate the B/S and I/S
Step #2: divide operating items into:
core operating income from sales recurring operating income related to the companys main operations (driven by sales volume) e.g., sales, COGS, wage expense
core other operating income recurring operating income that is not related to the companys main operations (not driven by sales volume)
unusual operating income non-recurring (one-time) operating income

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Core OI from sales
Core other OI
Core OI from sales
Core other OI
Core OI from sales & Unusual OI*
Core other OI
Unusual OI (also Step #3 re: tax)
Core financing expense (NFE)
Step #3
* Note 1.4 indicates that Administrative expenses include an impairment reversal of $41 million in 2020 and an impairment expense of $42 million in 2019Unusual OI
Core financing expense (NFE)

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Summary Coles reformulated Income Statement (following Steps #1 & #2)
20202019
Core OI from Sales (before tax)1,243934
Core Other OI (before tax)478721
Core OI (before tax)1,7211,655
Unusual OI (before tax)41315
Core NFE (before tax)(443)(188)

versus reported profit before tax from the I/S
20202019
Profit before tax1,3191,425

* 2020 reconciles; 2019 does NOT profit from discontinued operations after tax = 357

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Step #3: divide income tax expense between:
core operating income from sales
core other operating income
unusual operating Income
net financial expense (or net financial income)

Note:Australia has a stated corporate tax rate of 30% (for large companies)
we will use the 30% rate for the disaggregation process above
(while the true tax rate is rarely exactly 30% for most companies, the staged approach that we adopt will accommodate the differences)

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Staged approach allocation tax in the reverse order, with the tax expense deemed to be associated with core operating income from sales calculated as the residual amount i.e.,

1st calculate the debt tax shield (extra tax) associated with NFE (NFI)
= NFE x 30% (or NFI x 30%)

2nd calculate tax expense/deduction associated with Unusual Operating Income
= Unusual OI x 30%

3rd calculate tax expense/deduction associated with Core Other Operating Income
= Core Other OI x 30%

4th calculate tax expense associated with Core Operating Income from Sales
= Income tax expense + Tax shield from NFE (-Extra tax paid on NFI) Tax expense (+deduction) from Unusual OI Tax expense (+deduction) from Core Other OI

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To illustrate, consider the following reformulated Income Statement:
Core Operating Income from Sales 300
Core Other Operating Income 200
Unusual Operating Income 100
Net Financial Expenses(200)
Profit Before Tax 400
Tax Expense(130)
Net Profit After Tax (NPAT) 270

allocation of the tax expense
1st tax shield from Net Financial Expenses= 0.30 * 200 = 60
2ndtax on Unusual Operating Income = 0.30 * 100 = 30
3rdtax on Core Other Operating Income= 0.30 * 200= 60
4thtax on Core Operating Income from Sales= 130 + 60 30 60 = 100

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Aside why is the tax allocation associated with Net Financial Expenses added back?

interest expense is tax deductible whereas dividends are paid out of after-tax income
Net Financial Expenses provide a tax shield (i.e., they reduce taxes)

to illustrate,A no debtB debt
Operating Income1,0001,000
Net Financial Expenses (400)
Profit Before Tax 1,000600
Tax Expense @ 30%(300) (180)
Net Profit After Tax 700420

for B, debt provides a tax shield of 120 (= 0.30*400)
the true tax expense on Operating Income is 300 (= 180 + 120)

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PART 4 further illustration
Sales Revenue2,000Core Operating Income from Sales
Rental Income20Core Other Operating Income
Total Revenue2,020
Cost of Goods Sold(1,000)Core Operating Income from Sales
Wage Expense(250)Core Operating Income from Sales
Advertising Expense(50)Core Operating Income from Sales
Interest Income20Net Financial Expense
Share of profit from equity-accounted investments10Core Other Operating Income
Gain on sale of property30Unusual Operating Income
Restructuring charges(10)Unusual Operating Income
EBITDA770
Depreciation & Amortisation(250)Core Operating Income from Sales
EBIT520
Interest Expense(100)Net Financial Expense
Profit Before Tax (PBT)420
Tax Expense @ 30%(126)
Net Profit After Tax (NPAT)294

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reformulated
Core Operating Income from Sales (before tax)
Sales2,000
COGS(1,000)
Wage expense(250)
Advertising expense(50)
Depreciation & Amortisation (250)450

Core Other Operating Income (before tax)
Rental income20
Share of profit from equity-accounted investments10 30

Unusual Operating Income (before tax)
Gain on sale of property30
Restructuring charges (10)20

Net Financial Expenses (before tax)
Interest expense(100)
Interest income20(80)420 = PBT

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Tax Allocation:

1st tax shield from Net Financial Expenses= 0.30 * 80 = 24
2ndtax on Unusual Operating Income = 0.30 * 20 =6
3rdtax on Core Other Operating Income= 0.30 * 30=9
4thtax on Core Operating Income from Sales= 126 + 24 6 9 = 135

Core Operating Income from Sales (after tax)450 135=315

Core Other Operating Income (after tax) 30 9= 21

Unusual Operating Income (after tax) 20 6= 14

Net Financial Expenses (after tax) (80) + 24=(56)294 = NPAT

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Step #4: divide Other Comprehensive Income items (after-tax) between operating and financing
typical operating OCI items:
FX translation gain/loss
actuarial gain/loss on defined benefit plans
revaluation of PPE
typical financial OCI items:
gain/loss from fair value changes in financial assets that go through OCI
gain/loss from cash flow hedges and fair value hedges
gain/loss from fair value changes in financial obligations

Coles
note tax effect on OCI item is provided

cash flow hedge
financial OCI

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Returning to the previous illustration, now extended to include a series of OCI items

NPAT294
Other Comprehensive Income
Asset revaluation 40operating
fair value gain on shares carried at FV 20
tax effect (6)
loss on re-measurement of defined benefits plan(10)
tax effect3
Total OCI 47
Comprehensive Income341

financing
operating

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Core Operating Income from Sales (after tax)450 135=315
Core Other Operating Income (after tax) 30 9= 21
Unusual Operating Income (after tax) 20 6= 14
Net Financial Expenses (after tax) (80) + 24=(56)

Operating OCI (after tax) 40 10 + 3= 33
Financing OCI (after tax) 20 6= 14

Total Operating Income (after tax) = 315 + 21 + 14 + 33383
Total Net Financial Expense = (56) + 14(42)

Comprehensive Income (after tax) 341

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Coles reformulated Income Statement
20202019
Core OI from Sales (before tax)1,243934
Core Other OI (before tax)478721
Unusual OI (before tax)41315**
Core NFE (before tax)(443)(188)
Tax expense341347
OCI cash flow hedge(17)(2)
tax effect51

315**357 profit from discontinued operations after tax42 impairment expense
re: discontinuednote 5.3 profit before tax = 509; tax expense = 152

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1st tax shield from Net Financial Expenses= 0.30 * 443 = 132.9
2ndtax on Unusual Operating Income = 0.30 *41 =12.3
3rdtax on Core Other Operating Income= 0.30 * 478= 143.4
4thtax on Core Operating Income from Sales= 341 + 132.9 12.3 143.4 = 318.2
re: 2020
Core Operating Income from Sales (after tax)1,243 318.2= 924.8
Core Other Operating Income (after tax) 478 143.4= 334.6
Unusual Operating Income (after tax) 41 12.3=28.7
Net Financial Expenses (after tax) (443) + 132.9=(310.1)
Financing OCI (after tax) (17) + 5= (12)

Total Operating Income (after tax) = 924.8 + 334.6 + 28.71,288.1
Total Net Financial Expense (after tax) = (310.1) + (12) (322.1)
Comprehensive Income (after tax)966

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1st tax shield from Net Financial Expenses= 0.30 * 188 =56.4
2ndtax on Unusual Operating Income = 0.30 *42 =12.6
3rdtax on Core Other Operating Income= 0.30 * 721= 216.3
4thtax on Core Operating Income from Sales= 347 + 56.4 + 12.6 216.3 = 199.7
re: 2019
Core Operating Income from Sales (after tax)934 199.7= 734.3
Core Other Operating Income (after tax) 721 216.3= 504.7
Unusual Operating Income (after tax) (42 12.6) + 357= 327.6
Net Financial Expenses (after tax) (188) + 56.4=(131.6)
Financing OCI (after tax) (2) + 1= (1)

Total Operating Income (after tax) = 924.8 + 334.6 + 28.71,566.6
Total Net Financial Expense (after tax) = (131.6) + (1) (132.6)
Comprehensive Income (after tax)1,434

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PART 5 Reformulation of the Statement of Cash Flows
The IFRS / AASB SCF (direct method) has the following basic structure
Cash Flow from Operations (CFO)

Cash Flow from Investing (CFI)

Cash Flow from Financing (CFF)
=
Change in Cash & Cash Equivalents

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The key objectives when reformulating the Statement of Cash Flows are:
to separate operating activities (cash flows and investments to/from OAs and OLs) from financing activities (cash flows and investments to/from FAs and FOs)
to calculate the firms free cash flow (FCF), and show how it is generated and used (FCF is the cash that a company generates from its operations in excess of its cash used for investments in net operating assets)
to separate equity and debt financing cash flows

note:unlike the I/S, we are not doing a full reformulation of the CF statement but rather just fixing several classification problems

why?the AASB/IFRS cash flow statement is also already formulated to separate financing cash flows from operating/investing cash flows
the SCF is not as important as the I/S and the B/S are for valuation

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Reformulated Statement of Cash Flows
Adjusted Cash flow from operationsC
Adjusted Cash investment in operating assets I
Free Cash Flow (FCF)C + I
Equity financing flows
dividends & share repurchasesXX
share issuances(XX)E
Debt financing flows
net purchase of financial assets(XX)
interest on financial assets (after tax)XX
net issue of debtXX
interest on debt (after tax)(XX)F
Total Financing cash flowsE + F

Uses of FCF in financing activities

Generation of FCF from operating activities

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Generation of Free Cash Flow (FCF) = C + I
cash generated by operations less cash used for investment in operating assets
adjusted cash flow from operations (C): cash receipts/payments related to the companys operations (operating assets and operating liabilities)
adjusted cash flow from investing (I): cash receipts/payments related to investments in long-term operating assets (e.g., pp&e, intangibles, acquisitions)

note: all of these cash flows are related to net operating assets (NOA)
FCF > 0 the company has spare (or free) cash that can paid out to shareholders and financial obligations, or invested in financial assets

FCF < 0 the companys operations are not generating enough cash to fund its current investments in net operating assetsthe company will need to raise capital from shareholders and financial obligations, or by selling financial assets41Uses of Free Cash Flow (FCF) = E + F :Equity financing cash flows (E): cash transactions with shareholders (dividends, share repurchases, and share issues)Debt financing cash flows (F):cash receipts/payments related to financial obligations (FO) e.g., proceeds from borrowings/repayment of borrowing, and interest paidcash receipts/payments related to financial assets e.g., investment in financial cash, sale of short-term investments/purchase of short-term investments, and interest receivednote: all of these cash flows are related to net financial obligations (NFO) and shareholders equity (S/E)42classification problems requiring adjustment interest paid/receivedinvestments in financial assetsseparation of cash & cash equivalents into investment in operating cash and investment in financial cashre: net interest received / paidshould be classified as a debt financing use of cash (F) interest received is clearly related to FAs and interest paid is clearly related to FOsany reclassification must adjust for tax effects (i.e., remove tax shields)43re: investments in financial assetsunder AASB / IFRS, these items typically appear under CFIthey are related to debt financing activities (not operating assets), and must be reclassified as debt uses of cash (F)re: operating versus financial cashin reformulating the B/S, cash & cash equivalents were separated into operating cash (an operating asset, OA) and financing cash (a financial asset, FA) rule of thumb 0.5% of sales revenuegiven this separationthe change in operating cash should be included in Ithe change in financing cash should be included in F44Cash Flow from Operations (CFO)cash receipts from customers2,400payments to suppliers(1,000)payments to employees(500)rent paid(100)interest received10interest paid(100)income tax paid(180)Net CFO530Cash Flow from Investing (CFI)purchase of short-term investments(100)payments for PPE(200)Net CFI(300)Cash Flow from Financingdividends paid(150)shares issued50proceeds from borrowings200Net CFF100Change in Cash & Cash Equivalents330Illustration reformulate the followingAASB Statement of Cash Flowsassuming30% tax ratesplit in cash * cash equivalents of 30re: operating cash300 re: financing cash45Free Cash Flow:Adjusted CFO = Creported CFO530.0interest received(10.0)interest paid100.0tax shield = (10 100) * 0.30(27.0)Adjusted CFO (C)593.0Adjusted CFI = I:reported CFI(300.0)purchase of short-term investments100.0investment in operating cash(30.0)Adjusted CFI (I)(230.0)FCF = C + I = 593 230 363.0Reformulated Cash Flow StatementUses of Free Cash Flow: Debt financing cash flows = Fnet interest paid (after tax)(63.0)proceeds from borrowings200.0purchase of short-term investments(100.0)investment in financing cash(300.0) Debt financing cash flows (F)(263.0) Equity financing cash flows = Edividends paid(150.0)shares issued50.0 Equity financing cash flows (E)(100.0) FCF = E + F(363.0)46FFF20202019cash & cash equivalents 992 940Sales revenue37,40838,176operating cash @ 0.5% 187 191 financing cash 805 74913 E; bal I47Equity (E)Debt (D)48Free Cash Flow:Adjusted CFO = Creported CFO2,552interest received(7)interest paid37interest lease payments399 tax shield = (7 429) * 0.30(129)Adjusted CFO (C)2,852Adjusted CFI = I: reported CFI(658) investment in operating cash4 share-based payment expense(13)Adjusted CFI (I)(667)FCF = C + I2,185Reformulated Coles 2020 Cash Flow StatementUses of Free Cash Flow: Debt financing cash flows = Fnet interest paid (after tax)(300)proceeds from borrowings5,120repayment of borrowings(5,226)payment of lease principal(846) investment in financing cash(56) Debt financing cash flows (F)(1,308)Equity financing cash flows = Edividends paid(873)share-based payment expense13shares purchased(17) Equity financing cash flows (E)(877) FCF = E + F(2,185)49PART 6 Reformulation of the Statement of Changes in Owners EquityBasic objectives of the reformulation exerciseseparate transactions with shareholders (E) (equity financing) and comprehensive income (CI) (operating income and debt financing)fix some classification problems within accountingaside:basic reclassificationspreference shares remove from S/E balances and add to financial obligations (FO)non-controlling interest group with S/E (for our purposes)dividends payable / dividends declared adjust S/E balances and remove from FOnote:the clean surplus relation is based on Comprehensive Income (CI) and not NPAT 50Accounting adjustmentComprehensive IncomeDividendsBVt-1BVtNCC51Reformulated Statement of Changes in Shareholders EquityBeginning Book Value of Common Equity BVt-1+ Net effect of Transactions with Common Shareholders+ capital contributions (share issues) share repurchases cash dividends to common shareholders= Net cash contributions + Effect of operations and non-equity financing+ Net Income (from the I/S)+ Other Comprehensive Income (OCI) preferred share dividends= Comprehensive income available to common shareholdersEnding Book Value of Common Equity BVt52PART 7 Reformulation Summarynew (reformulated) accounting relations:Balance Sheet: NOA = NFO + S/EIncome Statement: CI = OI (after tax) + NFE (after tax)Cash Flow Statement: FCF = C + I = F + EEquity Statement: Change in S/E = CI + E** note, within this formulation, NFE will be a negative number, and E will be a negative number if the only material net equity financing item is the payment of dividendsNow turn to consider the relations across the reformulated statements (insights provided)53from the reformulated B/SNOA = NFO + S/ENOA = NFO + S/Efrom the reformulated equity statement S/E = CI + EcombiningNOA = NFO + S/E = NFO + CI + Eassume from the reformulated SCFF = NFE (after tax) + NFO NFO = F NFE (after tax)NOA = NFO + CI + E = F NFE (after tax) + CI + Efrom the reformulated I/SCI = OI (after tax) + NFE (after tax)NOA = F NFE (after tax) + CI + E = OI (after tax) + (F + E) NOA = OI (after tax) + FCF or rearrangingFCF = NOA OI (after tax)54NOA = OI (after tax) + FCF note this relation creates an important theoretical link between the cash flow statement and the income statement/balance sheetBeginning Stock FlowsEnding StockNOAt-1 NOA = [OIt + FCFt]NOAt NFOt-1 NFO = [FCFt NFEt Et] NFOt = S/Et-1 = OIt + NFEt + Et = S/Et*********************************note, through a similar algebraic process, it is also possible toshow: NFO = FCF NFE Eadditionally, from the equity statement and the clean surplus relation,S/E = CI + E and from the reformulated I/S, CI = OI + NFE55NOA = OI (after tax) – FCF FCF = OI (after tax) NOAnote this relation creates an important theoretical link between the cash flow statement and the income statement/balance sheetBeginning Stock FlowsEnding StockNOAt-1 NOA = [OIt + FCFt]NOAt NFOt-1 NFO = [FCFt NFEt Et] NFOt = S/Et-1 = OIt + NFEt + Et = S/Et*********************************note, through a similar algebraic process, it is also possible toshow: NFO = FCF NFE Eadditionally, from the equity statement and the clean surplus relation,S/E = CI + E and from the reformulated I/S, CI = OI NFECIS/E = CI + E 56NOA2019 = 13,102* NOA = [OIt + FCFt]NOA2020 = 12,205= 1,288 2,185NFO2019 = 10,576** NFO = [FCF NFE E]NFO2020 = 9,590= 2,185 + 322 + 877S/E2019 = 2,526*** OIt + NFEt + EtS/E2020 = 2,615= 1,288 322 877* 2019 reported NOA = 2,720adoption of AASB 16 (leases) = + 10,832adjusted 2019 NOA = 13,102** 2019 reported NFO = (637)adoption of AASB 16 (leases) = + 11,213adjusted 2019 NFO = 10,576*** 2019 reported S/E = 3,357adoption of AASB 16 (leases) = 831adjusted 2019 S/E = 2,526see Notes 1.6, 2.7, 2.9, 7.5Reconciliation Coles 2020 Note/recall the overarching objective of the reformulation process is to facilitate the forecasting exercise0V =tx( 1+ tkt)t =1 =E( tx )t(1+k)t=1n +E( nx ) (1+ g)k g1n(1+k)0V=tx(1+tkt)t=1=E(tx)t(1+k)t=1n+E(nx)(1+g)k-g1n(1+k)/docProps/thumbnail.jpeg