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1ACCT5907-无代写
时间：2024-03-01
1ACCT5907 International Financial Statement Analysis
Term 1, 2024
Week 1: Introduction
Lecturer: Leonard Lau
Course teaching structure
Weeks 1- 6 Mr Leonard Lau
Weeks 7 - 10 A/Prof Youngdeok Lim (LIC)
2
Framework
Lecture 1
ACCT 5907 International Financial Statement Analysis
2024 T1
The course material and the lecture delivery of the material is for
educational purposes only and do not constitute investment advice.
3
Topic 1: Learning Objectives
A diminishing role of fundamental analysis?
• Increasing role of "The Narrative”?
• Tesla as example
• A "limited role" for fundamental analysis?: finding red flags
Financial Reporting Earnings Quality (FREQ) framework as a tool to identify red flags
• General Electric as an example
Sources of financial analysis information
• Investor relations
• SEC forms
• Other sources
Identifying good/bad news, analyzing performance and finding Red Flags
• Analysing performance
o YoY, Sequential (QoQ)
o Versus expectations
• AAPL as example
Course related issues: Diversity of student experience and feedback. Tips on navigating the course and lectures structure
Including our frequent use of weblinks
4
The role of the fundamental analyst (us)
https://www.bloomberg.com/news/articles/2018-12-04/hedge-fund-dream-job-is-vanishing-
as-harsh-new-reality-sets-in
(if behind paywall, avail from UNSW library via Bloomberg.com)
‘Analysts as young as 30 are facing what they might call “headwinds” in a changing Wall Street.
Automated trading, a world awash in data and passive investing have made stock pickers less
influential. Hedge fund fees are down, making analysts targets for cuts. European regulations
have put researchers out of work.’
‘Quentin Koh, a former analyst at a macro fund, watched as data and computer scientists
increasingly edged out fundamental analysts. … At 30, … he quit his job to learn to code.’
https://www.philstockworld.com/2019/12/15/a-profound-shift-is-under-way-among-investors-morgan-stanley-thinks-
2020-will-be-the-year-of-the-quants
Macro-economic factors of fundamental analysis: Interest Rate, Inflation, GDP
https://www.cnbc.com/advertorial/2018/02/12/macro-economic-factors-of-fundamental-analysis.html
5
46
The role of The Narrative
• This is not something found in orthodox economics or finance that you will study in your textbooks
but is a new direction in behavioral economics or finance.
• Schiller, Narrative Economics (not exam., to illustrate new direction of economics)
https://www.nber.org/papers/w23075
• Simpler and short article, Shiller, A New Age of Economics is Dawning, Fortune. Jan2020, Vol.
181 Issue 1, p43-43. 1p. (UNSW lib)
• A long and somewhat whimsical article demonstrating the role of “The Narrative” with Tesla as
example:
• https://www.epsilontheory.com/figaro/
(sometimes accessible, if not key points are illustrated over next few slides)
• Uses Natural Language Processing (NLP) mentioned in article of Morgan Stanley Year of the
Quants
• The Narrative dominates the fundamentals
How tweets by Tesla’s Elon Musk have moved markets
https://www.reuters.com/business/finance/how-tweets-by-teslas-elon-musk-have-moved-markets-2021-11-08/
7
The Narrative: Tesla
Focus on good news Stock price rises
8
The Narrative: Tesla (continued)
Narrative stalls, bad news Stock price flat
slowly dominates good
9
The Narrative: Tesla (continued)
Bad news dominates Stock price declines
• From 3Q-2019, the narrative for Tesla has turned positive resulting in recent all time high stock price; in weeks 5, we
will see some of the news that lead to the positive turnaround in the narrative.
10
Does fundamental analysis have a future?
… or do we can still find a job in fundamental analysis?
Some people say, “Do not worry, in the long run fundamental analysis
will be vindicated”, but …
“In the long run we are all dead..”
“Markets can remain irrational a lot longer than you and I can remain solvent”
- John Maynard Keynes
• YES we do !
11
Artificial Intelligence (AI) and Fundamental Analysis (CFA)
(future career reference resource, non-examinable)
https://www.cfainstitute.org/-/media/documents/book/rf-lit-review/2020/rflr-artificial-intelligence-in-asset-
management.ashx
Combining fundamental and factor approaches—what’s called “quantamental” could produce
superior returns
https://www.morganstanley.com/ideas/quant-fundamental
But it is a more limited role: Red Flags
• Finding “Red Flags” (problem issues) that contradict the Narrative
• Pay attention to revenue: timing, measurement, uncertainty, and ultimate cashflow.
• Pay attention to signals from inventories: peer benchmark, turnover ratio, LIFO.
• Pay attention to capitalisation policies and deferred costs: expense vs asset.
• Pay attention to the relationship of cashflow and net income: doubtful accruals.
• Other potential red flags
• Depreciation methods and useful lives
• Fourth-quarter surprises
• Related-party transactions
• Non-operating income or one-time sales included in revenue
• Classification of expenses or narrative as “non-recurring”
• Gross/operating margins out of line with competitors or industry.
• Finding Red Flags, making predictions & response
• To illustrate how you find red flags for profit, example Carson Block (of Muddy Waters: not the blues singer)
https://www.bloomberg.com/news/articles/2017-06-06/muddy-waters-to-announce-new-hong-kong-listed-short-on-wednesday-j3l0l5v0
(If you cannot access this Bloomberg article on the internet try the UNSW Online Library, sometimes if you search for article title you can find the same article reproduced
elsewhere.)
12
Financial Reporting & Earnings Quality (FREQ)
Qualitative characteristics of useful financial information:
A. Fundamental Qualities
1. Relevance
• Predictive
• Confirmatory
• Materiality
2. Faithful Representation
• Complete
• Neutral (not bias)
• Free from error
B. Enhancing Qualities
3. Comparability
4. Verifiability
5. Timeliness
6. Understandability
C. Traditional Qualities
(not in conceptual framework)
7. Prudence / Conservatism
These qualitative characteristics are defined in Conceptual Framework for Financial Reporting (CF). They are taught in
introductory financial accounting courses. Detailed understanding of the CF is not required in this course. It is a starting point
to understand the concept of quality information.
13
General Electric: How did CEO Jack Welch do it?
Earnings smoothing (management) vs faithful representation
14
General Electric: Financial Reporting – Earnings Quality
• Welch as the CEO
– FREQ
• Good: Predictable, smooth, persistent. Predictable earnings make it easier for analysts to build
models and make forecasts
• Bad: earnings management, bias. The predictability may be artificial and be the result of
earnings management/ smoothing
– TENSION
• There are good and bad FREQs that can be inferred
• Immelt as the CEO
– FREQ
• Bad: not predictable, not smooth, not persistent
• Good: unmanaged earnings, faithful representation, neutral. The unpredictable earnings series
faithfully represents the true state of company performance; and helps investors/analyst
understand the factors that drive performance
– TENSION
• See above
15
General Electric FREQ … postcript
http://www.nytimes.com/2009/08/07/business/07norris1.html
(UNSW eJournal ProQuest, 7Aug 2009, Inside GE a little bit of Enron)
“I was sometimes asked to squirrel away ‘excess earnings’ in fake accounts with made-up names, to be
used when earnings were down in later months,” he said. One such account was called “Plug.”
"Years ago, I would sit down at analyst luncheons and everybody would joke about GE and how they
were cooking their earnings under Jack Welch then of course again under Immelt...GE took off like a
rocket under take numbers (that is, until the crisis)."
Everybody said, "it's 3% of the S&P 500, we should benchmark it because if we only have 1%, then we'd
be short 2% after it took off like a rocket under fake numbers.
From the archived article: https://www.zerohedge.com/news/2019-08-15/markopolos-ge-bankruptcy-waiting-happen
⇒ Informed analysts knew that GE was cooking their books but they willfully went along with it.
Why? Conflict of interest and career risk: If they follow the crowd/herd/index and lose money, they will be losing money
with all the others and they would keep their jobs, if they did not and underperformed then they would be fired.
How One of The Country’s Most Storied CEO Destroyed His Legacy
https://www.nytimes.com/2022/11/21/opinion/jack-welch-ge-jeff-immelt.html
16
Quality Spectrum of Financial Reports
Financial Reporting Quality vs Earnings Quality
Source: International Financial Statements Analysis, Chapter 11, CFA Institute
How do we analyse information? Quiz
• Skill1: Filter and identify relevant information that is likely to move the price of the company’s
stock, or to make predictions about future performance.
• Skill2: Compare performance with respect to relevant benchmarks, e.g. year-on-year,
sequential and expectations.
• Skill3: Conduct analysis using the Financial Reporting and Earnings Quality (FREQ)
framework:
a) FREQ: Label the issue or Red Flag that you have identified with a short explanation
b) INFER: Explain your reasoning process in arriving at above point
c) ADJUST: The numbers to arrive at a number before management discretion, or explain which are
the appropriate figures that you should be using in your analysis
d) RESPOND: What you will do after doing the above 3 items.
e) RETROSPECT: What was the market’s judgement, did the market agree with you?
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Sources of Information: Getting information
1. Company’s Investor Relations Website : For example Tesla https://ir.tesla.com/
2. USA SEC Company Filings Search: https://www.sec.gov/edgar/searchedgar/companysearch.html
2. Earnings announcement and filing:
• Current report for major event announcement: 8-K
• Quarterly financial report: 10Q. Yearly financial report: 10K
• Foreign issuers: 6K and 20F
3. Other SEC filing examples:
• Some hot US IPOs of Chinese electric vehicle companies, e.g. Li Auto (NASDAQ:LI), Xpeng (NYSE: XPEV)
• IPO prospectus
• Preliminary prospectus for foreign company: F-1, F-1/A (note red words on cover, document is known as a Red
Herring)
• US company will be S-1
• Final prospectus for IPO: 424B4
• 13F filed quarterly by institutional investment managers with at least $100 million in assets under management.
4. SEC Filling identification requirement for ACCT5907: You only need to know the forms referred to in this course: 6-K,
8-K, 10-Q, 10-K, 20-F, F-1, S-1, 424B4, 13F
• https://www.sec.gov/forms Forms that are amended have “/A”
19
Week 3 Quiz: A preview of the requirement
• Question 1: What are the good news and the bad news?
• Question 2: Did performance improve/ worsen?
– Quarter-on-Quarter (Sequential), Year-on-Year (YoY more important because of seasonality)
– Versus investor/analyst expectations (=predictions)
– Beat (good)? Meet (meh)? Miss (bad)?
– News must be material
• Question 3: What information that the company tell us that can help predict future
performance?
• RETROSPECTIVE:
– We compare our analysis with subsequent market action
– Who judges whether news is good or bad? The Market
– Because your lecturer cannot judge for you whether THE news as a whole, is good or bad, we can
only judge whether your explanation for deciding whether news is good or bad is reasonable
– As such, in this course we will give you marks for answers with supporting explanations.
– In general, answers without supporting reasons will get no marks even if it may be correct.
• Show QuizTEMPLATE.docx
20
https://finance.yahoo.com/quote/AAPL/analysis?p=AAPL
On 9 Sep 2020
21
Identifying headline good news vs bad news
Apple Sep 2018-Q4, 1 Nov 2018 SEC Filing (1 of 4)
Based on the SEC 8K and the supporting financial exhibits:
https://www.sec.gov/Archives/edgar/data/320193/000032019318000142/0000320193-18-000142-index.htm
Independent analyst commentary
https://talkmarkets.com/content/us-markets/apple-tumbles-on-soft-guidance-iphone-sales-miss?post=196936
https://www.businessinsider.com.au/apple-will-no-longer-report-iphone-sales-unit-numbers-2018-11?
• “Q4 EPS: 2.91BN, beating Exp. $2.78 – good news
• Revenue: $62.9BN, beating Exp. $61.44 billion – good news
• iPhone sales: 46.9 million, missing Exp. 48.4 million – bad news
• iPad sales: 9.8 million, missing Exp. 10.5 million, and down from 10.3 million a year ago –bad
& bad news
• Mac sales: 5.3 million, beating Exp. 4.9 million, and down from 5.4 million a year ago – good &
bad news
• iPhone ASP: $793, up from $618, smashing Exp. $729 – good news
• Guidance for holiday quarter revenue: $89-$93billion, with the midline below Wall Street
estimates of $92.74 billion – bad news
22
Of the above, the last items most important according to Morgan Stanley analyst Katie Huberty,
who said that: "Guidance will be the most important driver of investor sentiment as it provides the first
read on iPhone XR demand." And judging by the market's reaction, the company's guidance could
have been better.”
•FREQ predictability
– The lowered guidance disappointed the existing predictions of analysts
– INFER Investors were expecting revenue with a mean of $92.74, but the guidance range of
$89-93b, … midline below analyst expectations, or the range was lowered such that the
upperbound was at the mean of analyst expectations
23
Good news and bad news:
Consist of historical performance and forward-looking items
Apple Sep 2018-Q4, 1 Nov 2018 SEC Filing (2 of 4)
• In a conference call CFO said verbally that Apple will stop reporting unit sales in future
– See EX 99-2 for unit sales
• FREQ transparency
– Apple announced that it will stop providing unit sales which was an important piece of information
to investors
– INFER “Apple has ‘something to hide’”: possibly trying to hide future falling unit sales but
camouflaging it with higher prices to maintain reported dollar revenue
• FREQ predictability
– Management’s decision to no longer provide unit sales will make it harder for analysts to predict
future performance
– INFER The unit sales information together with the Average Selling Price (ASP) was used by
analysts to understand and predict demand and pricing power for products
https://www.cnbc.com/2018/11/01/apple-will-stop-reporting-how-many-iphones-ipads-and-macs-it-sells.html
24
Good news and bad news:
Apple announce to stop reporting how many iPhones, IPads and Macs it sells each quarter
Apple Sep 2018-Q4, 1 Nov 2018 SEC Filing (3 of 4)
https://www.cnbc.com/2018/11/02/heres-what-every-major-analyst-had-to-say-about-apples-earnings.html
“Apple’s stock sank in Friday’s premarket,
• a day after the company reported disappointing iPhone shipment data and provided
guidance for its first fiscal quarter that fell short of analyst expectations.
• But Wall Street analysts told clients on Friday they were concerned about
management’s decision to stop breaking apart iPhone unit sales, an insight some
investors used to gauge demand for the company’s latest products.”
• Good news or bad news?
25
Market overall reaction
“Apple has something to hide”?
Apple Sep 2018-Q4, 1 Nov 2018 SEC Filing (4 of 4)
Apple slashes Q1 revenue guidance after Q1 was over
Apple Dec 2019-Q1, 2 Jan 2019 (1 of 3)
Letter from Tim Cook to Apple Investors (2 Jan 2019)
https://www.sec.gov/Archives/edgar/data/320193/000032019319000002/0000320193-19-000002-index.htm
Apple slashes revenue guidance, says iPhone sales are weak in China — shares tank
https://www.cnbc.com/2019/01/02/apple-warns-on-q1-results.html
• Revenue guidance cut to $84b for Dec 2019Q1 from already lowered guidance of $89-$93billion
previously
• Uncommon to make revenue/earnings warning out of earnings announcement (very bad news)
• FREQ predictability
• Lowered guidance disappointed the existing predictions of analysts
• INFER The special announcement to lower revenue guidance for Dec 2019 quarter to $84b
disappointed the market beyond the lowered guidance in earnings announcement on 1 November
2019.
26
Based on the subsequent quarter SEC 8K filing:
https://www.sec.gov/Archives/edgar/data/320193/000032019319000007/0000320193-19-000007-index.htm
Independent analyst commentary:
https://talkmarkets.com/content/us-markets/apple-jumps-after-beating-muted-expectations-despite-5-billion-plunge-in-china-
sales?post=208407&page=2
• Revenue of $84.310BN, while down from $88.293BN a year ago (YoY bad news) - the first decline in
Apple's holiday quarter revenue since 2001 - beat Wall Street estimates of $83.97BN (good news - which
was guided by Apple’s lowered guidance of $84b)
• EPS of $4.18, just above the consensus exp. of $4.17 (good news barely), up 7.5% from $3.89 YoY (good
news)
• Sometimes beating EPS by $0.01 is suspicious as it looks artificial (maybe bad news instead)
• iPhone -15% YoY ;
• China -26.7% YoY (bad news)
• Note: no more EX-99.2 with unit breakdown
Apple “Bad news is over”? What every major analyst says
https://www.cnbc.com/2019/01/30/apple-beats.html
27
Apple slightly beat the lowered guidance when reported Q1
Apple Dec 2019-Q1, 29 Jan 2019 (2 of 3)
Investor reaction seems to be relief. Also note another possible trick companies use, lowering
expectations so as to beat
28
Apple slightly beat the lowered guidance when reported Q1
Apple Dec 2019-Q1, 29 Jan 2019 (3 of 3)
Earnings Announcement: Definition and Impact on Market
https://www.investopedia.com/terms/e/earnings-announcement.asp
Earnings Surprise: Overview, Examples, and Formulas
https://www.investopedia.com/terms/e/earningssurprise.asp
What is an Earnings Conference call?
https://www.investopedia.com/terms/e/earnings-call.asp
We saw earlier that the most significant bad news was mentioned in the conference call related to the Apple
Sep 2018-Q4, 1 Nov 2018 earnings announcement.
Originally it was a NASDAQ rule that there should be a conference call for investors to dial in and ask
questions of management about the earnings announcement.
It has become an international practice. Another famous example of an earnings conference call
Conference call (check out from 1:02:50, “closing remarks”)
https://cleantechnica.com/2019/01/30/tesla-4th-quarter-2018-conference-call-live-webcast-blog/
Transcript
https://www.fool.com/earnings/call-transcripts/2019/01/31/tesla-tsla-q4-2018-earnings-conference-call-transc.aspx
Search for “OK. Great. I think that's all we have time for our -- today. Thank you very much for your questions,
and Elon would like to have some closing remarks.”
• Deepak is retiring (again).
• The most important information was?
• Senior management leaving company, esp CFO is very colourful Red Flag
• Sneaked in as closing comments
29
What is an Earnings Conference call?
• “Telsa shares drop sharply after Musk announces CFO Deepak Ahuja is leaving the
company for the second time.”
https://www.cnbc.com/2019/01/30/musk-says-tesla-cfo-deepak-ahuja-is-leaving-the-company.html
• “The Departure Of Tesla's CFO Is A Huge Negative For The Stock.”
https://www.forbes.com/sites/jimcollins/2019/01/30/the-departure-of-teslas-cfo-is-a-huge-negative-for-the-stock/
• "Another fun Tesla conference call : Bizarre Tesla Conference Call Q1 2018.”
https://www.youtube.com/watch?v=h-dyiASgGkk
• “Here are highlights of Elon Musk’s strange Tesla earnings call: ‘They’re killing me’”
https://www.cnbc.com/2018/05/03/here-are-highlights-of-elon-musks-strange-tesla-earnings-call-theyre-killing-me.html
• “Softbank CEO to Skip Earnings Call”
https://www.bloomberg.com/news/videos/2023-02-07/softbank-ceo-to-skip-earnings-call
30
More information sources
Management Discussion & Analysis (MD&A):
https://www.investopedia.com/terms/m/mdanalysis.asp
Industry and economic data, e.g. consultancy
https://www.gartner.com/en/newsroom/press-releases/2020-08-25-gartner-says-global-smartphone-sales-declined-20--in-
Supply chain
https://asia.nikkei.com/Business/Technology/Apple-to-start-producing-first-5G-iPhones-in-mid-September
If you cannot get the original source Nikkei article, try google search for alternate site that reproduce this
article:
• This type of information will help you predict upcoming performance, from Quiz:
• “(3) Prediction: what is the most important item of information from the earnings announcement that will
help investors predict the future performance/result of the company, and why? (1.5 mark)”
• Other companies’ information from company visits by analysts
• Companies are likely to say negative things about their competitors
• Or blame their problems on other firms in their supply chain, so can learn about those companies that
way
31
More information sources
32
… and have an independent mindset
Need to be skeptical: bias from companies, media
https://www.bloomberg.com/news/articles/2019-10-24/-short-holiday-season-just-an-excuse-for-panicking-
retailers
Re 2 Jan 2019 revenue guidance announcement
https://login.wwwproxy1.library.unsw.edu.au/login?url=https://search.ebscohost.com/login.aspx?direct=true&db=buh&AN
=140619634&site=ehost-live&scope=site
In our language
“Warning flags" = red flags
"Mania" = the narrative
33
Break then Course Admin
• 10 min break at about the mid-point of seminar
• Attendance will be taken
34
Course related & updates
• How to study this course?
• How to study.pdf
• Quiz (15% x 3 = 45%)
– Quiz 1: Week 3 (Sat 2 March, 14.00-16.00 (2 hours),
– Quiz 2: Week 6 (Sat 23 March, 14.00-15.00 (1 hour)
– Quiz 3: Week 9 (Sat 13 April, 14.00-16.00 (2 hours))
• Open-book/internet test
• See example questions & answers on moodle
• Presentation marks from week 2
• 2+3 marks
– Bonus (100+5) / 100
• Email your slides to your lecturer in advance
• Final (55%) (TBA, Inspera, on campus invigilated Exam)
• See a past exam paper on moodle
• Examination scheduling
• There was no scaling for this course in 2023T1 and in 2023T3.
• Presentation 5 bonus marks for you to scale yourself.
35
How to request weblink presentation
for
extra 5 participation marks
• Friday 9am lecture notes for the following week released on
Moodle
• Look through the slides and choose a first and second
preference weblink for a back up option
• Email to Leonard (Weeks 1-6) or Youngdeok (Weeks 7-10)
to request the link
• Leonard or Youngdeok will confirm if weblink available
• Email Leonard or Youngdeok your presentation slides the
day BEFORE your lecture
• Keep it as a short and simple summary of weblink: 2-3
slides (approx. 3 mins) max
• Get in early!!
36
Suggested email template
To: S.L.LAU@unsw.edu.au
Subject: Week 2 Presentation Request
Name: ____________________
Student ID: ___________________
Class: T18, W11, W15, H09, H15
First preference URL: __________________
Second preference URL: ________________
Navigating your student experience in ACCT5907
• From myExperience survey
• Very practical. The course contents directly link with the views toward financial statements and how to find
out different kinds of accounting tricks and how we can interpret the financial statements.
• The quiz format is something brand new to me and I think it indeed improves my ability of searching
information and analyzing them. To prepare for the weekly presentation, I felt I got involved in the class.
The Course
• Lecture 1 Information and analytical framework
• Lecture 2-4: Issues/ red flags (FREQ) related to financial statements
• Income statement
• Balance sheet
• Cashflow statement
• Lecture 5-10
• Components of financial statements where issues/ red flags (FREQ) have been observed
• Long Lived Assets, Income Tax, Passive investment
• Employee Compensation, Overseas Exposure, and Active investments
37
Navigating your student experience in ACCT5907
On the course structure
Lecture
• Issues, red flags, and FREQ enumerated
• Fundamental and important issues are discussed first while your mind is fresh.
• The fundamental issues identified initially may not have a clear or direct relationship with the Financial Reporting-
Earnings Quality (FREQ) qualitative characteristics.
• When this happens, the issue could be made up of a few sub-issues such as “a bias measurement with deliberately
made complex disclosure impeding understandability”. We look forward to some robust discussions with you.
• Basic stuff: This course focuses on the big issues in our analysis: When your mind is saturated and you have
probably switched-off! We want you to focus on the big picture.
• Follow-up: More / newer information on companies or issues identified earlier in the course may be followed up later in
the course with extended concepts. These follow-ups could be confirmatory, rebuttal, or attempt to improve the accuracy
and completeness of our previous analysis.
• Weekly key themes: Each weekly topic usually has 4~6 key learning objectives or themes only. Try to keep them in mind!
• Be resourceful: Web links and web articles may not be visually attractive. Getting use to them is a form of training for
you to efficiently and accurately synthesise information that are relevant, timely, and allow you to use them to
compare against other information, companies, and analysis to achieve your analytical objective.
38
Weblinks
Some students have trouble understanding why the lecture slides is full of weblinks:
• Weblinks provide topical content for this course to supplement the theories of the textbook to
enhance learning realism, relevance and context.
• They illustrate the content point relevant to this course as expressed in the bullet point
in relation to the weblink.
Potential Weblink Access Issue:
• If weblinks is behind a paywall, information on alternate access via UNSW library will be
provided.
• The lecture and lecture slides have demonstrated various ways to access these weblinked
articles.
• For some websites not available from UNSW library and may be difficult to access behind a
firewall, more information will be provided in slides such as snapshot or quotes.
• We have checked to make sure weblinks work just before slides are posted on Moodle.
• Please do feedback if you discovered any weblinks not working.
39
Reference Book
40
https://ebookcentral.proquest.com/lib/unsw/detail.action?docID=6028172
Term 1, 2024
Week 1: Introduction
Lecturer: Leonard Lau
Course teaching structure
Weeks 1- 6 Mr Leonard Lau
Weeks 7 - 10 A/Prof Youngdeok Lim (LIC)
2
Framework
Lecture 1
ACCT 5907 International Financial Statement Analysis
2024 T1
The course material and the lecture delivery of the material is for
educational purposes only and do not constitute investment advice.
3
Topic 1: Learning Objectives
A diminishing role of fundamental analysis?
• Increasing role of "The Narrative”?
• Tesla as example
• A "limited role" for fundamental analysis?: finding red flags
Financial Reporting Earnings Quality (FREQ) framework as a tool to identify red flags
• General Electric as an example
Sources of financial analysis information
• Investor relations
• SEC forms
• Other sources
Identifying good/bad news, analyzing performance and finding Red Flags
• Analysing performance
o YoY, Sequential (QoQ)
o Versus expectations
• AAPL as example
Course related issues: Diversity of student experience and feedback. Tips on navigating the course and lectures structure
Including our frequent use of weblinks
4
The role of the fundamental analyst (us)
https://www.bloomberg.com/news/articles/2018-12-04/hedge-fund-dream-job-is-vanishing-
as-harsh-new-reality-sets-in
(if behind paywall, avail from UNSW library via Bloomberg.com)
‘Analysts as young as 30 are facing what they might call “headwinds” in a changing Wall Street.
Automated trading, a world awash in data and passive investing have made stock pickers less
influential. Hedge fund fees are down, making analysts targets for cuts. European regulations
have put researchers out of work.’
‘Quentin Koh, a former analyst at a macro fund, watched as data and computer scientists
increasingly edged out fundamental analysts. … At 30, … he quit his job to learn to code.’
https://www.philstockworld.com/2019/12/15/a-profound-shift-is-under-way-among-investors-morgan-stanley-thinks-
2020-will-be-the-year-of-the-quants
Macro-economic factors of fundamental analysis: Interest Rate, Inflation, GDP
https://www.cnbc.com/advertorial/2018/02/12/macro-economic-factors-of-fundamental-analysis.html
5
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The role of The Narrative
• This is not something found in orthodox economics or finance that you will study in your textbooks
but is a new direction in behavioral economics or finance.
• Schiller, Narrative Economics (not exam., to illustrate new direction of economics)
https://www.nber.org/papers/w23075
• Simpler and short article, Shiller, A New Age of Economics is Dawning, Fortune. Jan2020, Vol.
181 Issue 1, p43-43. 1p. (UNSW lib)
• A long and somewhat whimsical article demonstrating the role of “The Narrative” with Tesla as
example:
• https://www.epsilontheory.com/figaro/
(sometimes accessible, if not key points are illustrated over next few slides)
• Uses Natural Language Processing (NLP) mentioned in article of Morgan Stanley Year of the
Quants
• The Narrative dominates the fundamentals
How tweets by Tesla’s Elon Musk have moved markets
https://www.reuters.com/business/finance/how-tweets-by-teslas-elon-musk-have-moved-markets-2021-11-08/
7
The Narrative: Tesla
Focus on good news Stock price rises
8
The Narrative: Tesla (continued)
Narrative stalls, bad news Stock price flat
slowly dominates good
9
The Narrative: Tesla (continued)
Bad news dominates Stock price declines
• From 3Q-2019, the narrative for Tesla has turned positive resulting in recent all time high stock price; in weeks 5, we
will see some of the news that lead to the positive turnaround in the narrative.
10
Does fundamental analysis have a future?
… or do we can still find a job in fundamental analysis?
Some people say, “Do not worry, in the long run fundamental analysis
will be vindicated”, but …
“In the long run we are all dead..”
“Markets can remain irrational a lot longer than you and I can remain solvent”
- John Maynard Keynes
• YES we do !
11
Artificial Intelligence (AI) and Fundamental Analysis (CFA)
(future career reference resource, non-examinable)
https://www.cfainstitute.org/-/media/documents/book/rf-lit-review/2020/rflr-artificial-intelligence-in-asset-
management.ashx
Combining fundamental and factor approaches—what’s called “quantamental” could produce
superior returns
https://www.morganstanley.com/ideas/quant-fundamental
But it is a more limited role: Red Flags
• Finding “Red Flags” (problem issues) that contradict the Narrative
• Pay attention to revenue: timing, measurement, uncertainty, and ultimate cashflow.
• Pay attention to signals from inventories: peer benchmark, turnover ratio, LIFO.
• Pay attention to capitalisation policies and deferred costs: expense vs asset.
• Pay attention to the relationship of cashflow and net income: doubtful accruals.
• Other potential red flags
• Depreciation methods and useful lives
• Fourth-quarter surprises
• Related-party transactions
• Non-operating income or one-time sales included in revenue
• Classification of expenses or narrative as “non-recurring”
• Gross/operating margins out of line with competitors or industry.
• Finding Red Flags, making predictions & response
• To illustrate how you find red flags for profit, example Carson Block (of Muddy Waters: not the blues singer)
https://www.bloomberg.com/news/articles/2017-06-06/muddy-waters-to-announce-new-hong-kong-listed-short-on-wednesday-j3l0l5v0
(If you cannot access this Bloomberg article on the internet try the UNSW Online Library, sometimes if you search for article title you can find the same article reproduced
elsewhere.)
12
Financial Reporting & Earnings Quality (FREQ)
Qualitative characteristics of useful financial information:
A. Fundamental Qualities
1. Relevance
• Predictive
• Confirmatory
• Materiality
2. Faithful Representation
• Complete
• Neutral (not bias)
• Free from error
B. Enhancing Qualities
3. Comparability
4. Verifiability
5. Timeliness
6. Understandability
C. Traditional Qualities
(not in conceptual framework)
7. Prudence / Conservatism
These qualitative characteristics are defined in Conceptual Framework for Financial Reporting (CF). They are taught in
introductory financial accounting courses. Detailed understanding of the CF is not required in this course. It is a starting point
to understand the concept of quality information.
13
General Electric: How did CEO Jack Welch do it?
Earnings smoothing (management) vs faithful representation
14
General Electric: Financial Reporting – Earnings Quality
• Welch as the CEO
– FREQ
• Good: Predictable, smooth, persistent. Predictable earnings make it easier for analysts to build
models and make forecasts
• Bad: earnings management, bias. The predictability may be artificial and be the result of
earnings management/ smoothing
– TENSION
• There are good and bad FREQs that can be inferred
• Immelt as the CEO
– FREQ
• Bad: not predictable, not smooth, not persistent
• Good: unmanaged earnings, faithful representation, neutral. The unpredictable earnings series
faithfully represents the true state of company performance; and helps investors/analyst
understand the factors that drive performance
– TENSION
• See above
15
General Electric FREQ … postcript
http://www.nytimes.com/2009/08/07/business/07norris1.html
(UNSW eJournal ProQuest, 7Aug 2009, Inside GE a little bit of Enron)
“I was sometimes asked to squirrel away ‘excess earnings’ in fake accounts with made-up names, to be
used when earnings were down in later months,” he said. One such account was called “Plug.”
"Years ago, I would sit down at analyst luncheons and everybody would joke about GE and how they
were cooking their earnings under Jack Welch then of course again under Immelt...GE took off like a
rocket under take numbers (that is, until the crisis)."
Everybody said, "it's 3% of the S&P 500, we should benchmark it because if we only have 1%, then we'd
be short 2% after it took off like a rocket under fake numbers.
From the archived article: https://www.zerohedge.com/news/2019-08-15/markopolos-ge-bankruptcy-waiting-happen
⇒ Informed analysts knew that GE was cooking their books but they willfully went along with it.
Why? Conflict of interest and career risk: If they follow the crowd/herd/index and lose money, they will be losing money
with all the others and they would keep their jobs, if they did not and underperformed then they would be fired.
How One of The Country’s Most Storied CEO Destroyed His Legacy
https://www.nytimes.com/2022/11/21/opinion/jack-welch-ge-jeff-immelt.html
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Quality Spectrum of Financial Reports
Financial Reporting Quality vs Earnings Quality
Source: International Financial Statements Analysis, Chapter 11, CFA Institute
How do we analyse information? Quiz
• Skill1: Filter and identify relevant information that is likely to move the price of the company’s
stock, or to make predictions about future performance.
• Skill2: Compare performance with respect to relevant benchmarks, e.g. year-on-year,
sequential and expectations.
• Skill3: Conduct analysis using the Financial Reporting and Earnings Quality (FREQ)
framework:
a) FREQ: Label the issue or Red Flag that you have identified with a short explanation
b) INFER: Explain your reasoning process in arriving at above point
c) ADJUST: The numbers to arrive at a number before management discretion, or explain which are
the appropriate figures that you should be using in your analysis
d) RESPOND: What you will do after doing the above 3 items.
e) RETROSPECT: What was the market’s judgement, did the market agree with you?
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Sources of Information: Getting information
1. Company’s Investor Relations Website : For example Tesla https://ir.tesla.com/
2. USA SEC Company Filings Search: https://www.sec.gov/edgar/searchedgar/companysearch.html
2. Earnings announcement and filing:
• Current report for major event announcement: 8-K
• Quarterly financial report: 10Q. Yearly financial report: 10K
• Foreign issuers: 6K and 20F
3. Other SEC filing examples:
• Some hot US IPOs of Chinese electric vehicle companies, e.g. Li Auto (NASDAQ:LI), Xpeng (NYSE: XPEV)
• IPO prospectus
• Preliminary prospectus for foreign company: F-1, F-1/A (note red words on cover, document is known as a Red
Herring)
• US company will be S-1
• Final prospectus for IPO: 424B4
• 13F filed quarterly by institutional investment managers with at least $100 million in assets under management.
4. SEC Filling identification requirement for ACCT5907: You only need to know the forms referred to in this course: 6-K,
8-K, 10-Q, 10-K, 20-F, F-1, S-1, 424B4, 13F
• https://www.sec.gov/forms Forms that are amended have “/A”
19
Week 3 Quiz: A preview of the requirement
• Question 1: What are the good news and the bad news?
• Question 2: Did performance improve/ worsen?
– Quarter-on-Quarter (Sequential), Year-on-Year (YoY more important because of seasonality)
– Versus investor/analyst expectations (=predictions)
– Beat (good)? Meet (meh)? Miss (bad)?
– News must be material
• Question 3: What information that the company tell us that can help predict future
performance?
• RETROSPECTIVE:
– We compare our analysis with subsequent market action
– Who judges whether news is good or bad? The Market
– Because your lecturer cannot judge for you whether THE news as a whole, is good or bad, we can
only judge whether your explanation for deciding whether news is good or bad is reasonable
– As such, in this course we will give you marks for answers with supporting explanations.
– In general, answers without supporting reasons will get no marks even if it may be correct.
• Show QuizTEMPLATE.docx
20
https://finance.yahoo.com/quote/AAPL/analysis?p=AAPL
On 9 Sep 2020
21
Identifying headline good news vs bad news
Apple Sep 2018-Q4, 1 Nov 2018 SEC Filing (1 of 4)
Based on the SEC 8K and the supporting financial exhibits:
https://www.sec.gov/Archives/edgar/data/320193/000032019318000142/0000320193-18-000142-index.htm
Independent analyst commentary
https://talkmarkets.com/content/us-markets/apple-tumbles-on-soft-guidance-iphone-sales-miss?post=196936
https://www.businessinsider.com.au/apple-will-no-longer-report-iphone-sales-unit-numbers-2018-11?
• “Q4 EPS: 2.91BN, beating Exp. $2.78 – good news
• Revenue: $62.9BN, beating Exp. $61.44 billion – good news
• iPhone sales: 46.9 million, missing Exp. 48.4 million – bad news
• iPad sales: 9.8 million, missing Exp. 10.5 million, and down from 10.3 million a year ago –bad
& bad news
• Mac sales: 5.3 million, beating Exp. 4.9 million, and down from 5.4 million a year ago – good &
bad news
• iPhone ASP: $793, up from $618, smashing Exp. $729 – good news
• Guidance for holiday quarter revenue: $89-$93billion, with the midline below Wall Street
estimates of $92.74 billion – bad news
22
Of the above, the last items most important according to Morgan Stanley analyst Katie Huberty,
who said that: "Guidance will be the most important driver of investor sentiment as it provides the first
read on iPhone XR demand." And judging by the market's reaction, the company's guidance could
have been better.”
•FREQ predictability
– The lowered guidance disappointed the existing predictions of analysts
– INFER Investors were expecting revenue with a mean of $92.74, but the guidance range of
$89-93b, … midline below analyst expectations, or the range was lowered such that the
upperbound was at the mean of analyst expectations
23
Good news and bad news:
Consist of historical performance and forward-looking items
Apple Sep 2018-Q4, 1 Nov 2018 SEC Filing (2 of 4)
• In a conference call CFO said verbally that Apple will stop reporting unit sales in future
– See EX 99-2 for unit sales
• FREQ transparency
– Apple announced that it will stop providing unit sales which was an important piece of information
to investors
– INFER “Apple has ‘something to hide’”: possibly trying to hide future falling unit sales but
camouflaging it with higher prices to maintain reported dollar revenue
• FREQ predictability
– Management’s decision to no longer provide unit sales will make it harder for analysts to predict
future performance
– INFER The unit sales information together with the Average Selling Price (ASP) was used by
analysts to understand and predict demand and pricing power for products
https://www.cnbc.com/2018/11/01/apple-will-stop-reporting-how-many-iphones-ipads-and-macs-it-sells.html
24
Good news and bad news:
Apple announce to stop reporting how many iPhones, IPads and Macs it sells each quarter
Apple Sep 2018-Q4, 1 Nov 2018 SEC Filing (3 of 4)
https://www.cnbc.com/2018/11/02/heres-what-every-major-analyst-had-to-say-about-apples-earnings.html
“Apple’s stock sank in Friday’s premarket,
• a day after the company reported disappointing iPhone shipment data and provided
guidance for its first fiscal quarter that fell short of analyst expectations.
• But Wall Street analysts told clients on Friday they were concerned about
management’s decision to stop breaking apart iPhone unit sales, an insight some
investors used to gauge demand for the company’s latest products.”
• Good news or bad news?
25
Market overall reaction
“Apple has something to hide”?
Apple Sep 2018-Q4, 1 Nov 2018 SEC Filing (4 of 4)
Apple slashes Q1 revenue guidance after Q1 was over
Apple Dec 2019-Q1, 2 Jan 2019 (1 of 3)
Letter from Tim Cook to Apple Investors (2 Jan 2019)
https://www.sec.gov/Archives/edgar/data/320193/000032019319000002/0000320193-19-000002-index.htm
Apple slashes revenue guidance, says iPhone sales are weak in China — shares tank
https://www.cnbc.com/2019/01/02/apple-warns-on-q1-results.html
• Revenue guidance cut to $84b for Dec 2019Q1 from already lowered guidance of $89-$93billion
previously
• Uncommon to make revenue/earnings warning out of earnings announcement (very bad news)
• FREQ predictability
• Lowered guidance disappointed the existing predictions of analysts
• INFER The special announcement to lower revenue guidance for Dec 2019 quarter to $84b
disappointed the market beyond the lowered guidance in earnings announcement on 1 November
2019.
26
Based on the subsequent quarter SEC 8K filing:
https://www.sec.gov/Archives/edgar/data/320193/000032019319000007/0000320193-19-000007-index.htm
Independent analyst commentary:
https://talkmarkets.com/content/us-markets/apple-jumps-after-beating-muted-expectations-despite-5-billion-plunge-in-china-
sales?post=208407&page=2
• Revenue of $84.310BN, while down from $88.293BN a year ago (YoY bad news) - the first decline in
Apple's holiday quarter revenue since 2001 - beat Wall Street estimates of $83.97BN (good news - which
was guided by Apple’s lowered guidance of $84b)
• EPS of $4.18, just above the consensus exp. of $4.17 (good news barely), up 7.5% from $3.89 YoY (good
news)
• Sometimes beating EPS by $0.01 is suspicious as it looks artificial (maybe bad news instead)
• iPhone -15% YoY ;
• China -26.7% YoY (bad news)
• Note: no more EX-99.2 with unit breakdown
Apple “Bad news is over”? What every major analyst says
https://www.cnbc.com/2019/01/30/apple-beats.html
27
Apple slightly beat the lowered guidance when reported Q1
Apple Dec 2019-Q1, 29 Jan 2019 (2 of 3)
Investor reaction seems to be relief. Also note another possible trick companies use, lowering
expectations so as to beat
28
Apple slightly beat the lowered guidance when reported Q1
Apple Dec 2019-Q1, 29 Jan 2019 (3 of 3)
Earnings Announcement: Definition and Impact on Market
https://www.investopedia.com/terms/e/earnings-announcement.asp
Earnings Surprise: Overview, Examples, and Formulas
https://www.investopedia.com/terms/e/earningssurprise.asp
What is an Earnings Conference call?
https://www.investopedia.com/terms/e/earnings-call.asp
We saw earlier that the most significant bad news was mentioned in the conference call related to the Apple
Sep 2018-Q4, 1 Nov 2018 earnings announcement.
Originally it was a NASDAQ rule that there should be a conference call for investors to dial in and ask
questions of management about the earnings announcement.
It has become an international practice. Another famous example of an earnings conference call
Conference call (check out from 1:02:50, “closing remarks”)
https://cleantechnica.com/2019/01/30/tesla-4th-quarter-2018-conference-call-live-webcast-blog/
Transcript
https://www.fool.com/earnings/call-transcripts/2019/01/31/tesla-tsla-q4-2018-earnings-conference-call-transc.aspx
Search for “OK. Great. I think that's all we have time for our -- today. Thank you very much for your questions,
and Elon would like to have some closing remarks.”
• Deepak is retiring (again).
• The most important information was?
• Senior management leaving company, esp CFO is very colourful Red Flag
• Sneaked in as closing comments
29
What is an Earnings Conference call?
• “Telsa shares drop sharply after Musk announces CFO Deepak Ahuja is leaving the
company for the second time.”
https://www.cnbc.com/2019/01/30/musk-says-tesla-cfo-deepak-ahuja-is-leaving-the-company.html
• “The Departure Of Tesla's CFO Is A Huge Negative For The Stock.”
https://www.forbes.com/sites/jimcollins/2019/01/30/the-departure-of-teslas-cfo-is-a-huge-negative-for-the-stock/
• "Another fun Tesla conference call : Bizarre Tesla Conference Call Q1 2018.”
https://www.youtube.com/watch?v=h-dyiASgGkk
• “Here are highlights of Elon Musk’s strange Tesla earnings call: ‘They’re killing me’”
https://www.cnbc.com/2018/05/03/here-are-highlights-of-elon-musks-strange-tesla-earnings-call-theyre-killing-me.html
• “Softbank CEO to Skip Earnings Call”
https://www.bloomberg.com/news/videos/2023-02-07/softbank-ceo-to-skip-earnings-call
30
More information sources
Management Discussion & Analysis (MD&A):
https://www.investopedia.com/terms/m/mdanalysis.asp
Industry and economic data, e.g. consultancy
https://www.gartner.com/en/newsroom/press-releases/2020-08-25-gartner-says-global-smartphone-sales-declined-20--in-
Supply chain
https://asia.nikkei.com/Business/Technology/Apple-to-start-producing-first-5G-iPhones-in-mid-September
If you cannot get the original source Nikkei article, try google search for alternate site that reproduce this
article:
• This type of information will help you predict upcoming performance, from Quiz:
• “(3) Prediction: what is the most important item of information from the earnings announcement that will
help investors predict the future performance/result of the company, and why? (1.5 mark)”
• Other companies’ information from company visits by analysts
• Companies are likely to say negative things about their competitors
• Or blame their problems on other firms in their supply chain, so can learn about those companies that
way
31
More information sources
32
… and have an independent mindset
Need to be skeptical: bias from companies, media
https://www.bloomberg.com/news/articles/2019-10-24/-short-holiday-season-just-an-excuse-for-panicking-
retailers
Re 2 Jan 2019 revenue guidance announcement
https://login.wwwproxy1.library.unsw.edu.au/login?url=https://search.ebscohost.com/login.aspx?direct=true&db=buh&AN
=140619634&site=ehost-live&scope=site
In our language
“Warning flags" = red flags
"Mania" = the narrative
33
Break then Course Admin
• 10 min break at about the mid-point of seminar
• Attendance will be taken
34
Course related & updates
• How to study this course?
• How to study.pdf
• Quiz (15% x 3 = 45%)
– Quiz 1: Week 3 (Sat 2 March, 14.00-16.00 (2 hours),
– Quiz 2: Week 6 (Sat 23 March, 14.00-15.00 (1 hour)
– Quiz 3: Week 9 (Sat 13 April, 14.00-16.00 (2 hours))
• Open-book/internet test
• See example questions & answers on moodle
• Presentation marks from week 2
• 2+3 marks
– Bonus (100+5) / 100
• Email your slides to your lecturer in advance
• Final (55%) (TBA, Inspera, on campus invigilated Exam)
• See a past exam paper on moodle
• Examination scheduling
• There was no scaling for this course in 2023T1 and in 2023T3.
• Presentation 5 bonus marks for you to scale yourself.
35
How to request weblink presentation
for
extra 5 participation marks
• Friday 9am lecture notes for the following week released on
Moodle
• Look through the slides and choose a first and second
preference weblink for a back up option
• Email to Leonard (Weeks 1-6) or Youngdeok (Weeks 7-10)
to request the link
• Leonard or Youngdeok will confirm if weblink available
• Email Leonard or Youngdeok your presentation slides the
day BEFORE your lecture
• Keep it as a short and simple summary of weblink: 2-3
slides (approx. 3 mins) max
• Get in early!!
36
Suggested email template
To: S.L.LAU@unsw.edu.au
Subject: Week 2 Presentation Request
Name: ____________________
Student ID: ___________________
Class: T18, W11, W15, H09, H15
First preference URL: __________________
Second preference URL: ________________
Navigating your student experience in ACCT5907
• From myExperience survey
• Very practical. The course contents directly link with the views toward financial statements and how to find
out different kinds of accounting tricks and how we can interpret the financial statements.
• The quiz format is something brand new to me and I think it indeed improves my ability of searching
information and analyzing them. To prepare for the weekly presentation, I felt I got involved in the class.
The Course
• Lecture 1 Information and analytical framework
• Lecture 2-4: Issues/ red flags (FREQ) related to financial statements
• Income statement
• Balance sheet
• Cashflow statement
• Lecture 5-10
• Components of financial statements where issues/ red flags (FREQ) have been observed
• Long Lived Assets, Income Tax, Passive investment
• Employee Compensation, Overseas Exposure, and Active investments
37
Navigating your student experience in ACCT5907
On the course structure
Lecture
• Issues, red flags, and FREQ enumerated
• Fundamental and important issues are discussed first while your mind is fresh.
• The fundamental issues identified initially may not have a clear or direct relationship with the Financial Reporting-
Earnings Quality (FREQ) qualitative characteristics.
• When this happens, the issue could be made up of a few sub-issues such as “a bias measurement with deliberately
made complex disclosure impeding understandability”. We look forward to some robust discussions with you.
• Basic stuff: This course focuses on the big issues in our analysis: When your mind is saturated and you have
probably switched-off! We want you to focus on the big picture.
• Follow-up: More / newer information on companies or issues identified earlier in the course may be followed up later in
the course with extended concepts. These follow-ups could be confirmatory, rebuttal, or attempt to improve the accuracy
and completeness of our previous analysis.
• Weekly key themes: Each weekly topic usually has 4~6 key learning objectives or themes only. Try to keep them in mind!
• Be resourceful: Web links and web articles may not be visually attractive. Getting use to them is a form of training for
you to efficiently and accurately synthesise information that are relevant, timely, and allow you to use them to
compare against other information, companies, and analysis to achieve your analytical objective.
38
Weblinks
Some students have trouble understanding why the lecture slides is full of weblinks:
• Weblinks provide topical content for this course to supplement the theories of the textbook to
enhance learning realism, relevance and context.
• They illustrate the content point relevant to this course as expressed in the bullet point
in relation to the weblink.
Potential Weblink Access Issue:
• If weblinks is behind a paywall, information on alternate access via UNSW library will be
provided.
• The lecture and lecture slides have demonstrated various ways to access these weblinked
articles.
• For some websites not available from UNSW library and may be difficult to access behind a
firewall, more information will be provided in slides such as snapshot or quotes.
• We have checked to make sure weblinks work just before slides are posted on Moodle.
• Please do feedback if you discovered any weblinks not working.
39
Reference Book
40
https://ebookcentral.proquest.com/lib/unsw/detail.action?docID=6028172
