Financial Statement Analysis Part 4- February 2022- Identifying Accounting “Add Ons”

Unknown: Hello everybody welcome
to my financial statement analysis part four. In this
video we're going to be taking a look at some accounting add ons.
My disclaimer and copyright notice the Information and
opinions of this presentation are those of the author or the
not the author's employers or affiliated organizations
including but not limited to Irvine Valley College and the
South Orange County Community College District. The
presentation is for educational purposes only and does not
constitute any legal or accounting advice whatsoever.
This presentation is copyright 2008 to 2022 by Bennet
Tchaikovsky, All rights are reserved, any distribution is
strictly prohibited. Okay, so what we're going to do now is
we're going to take our two companies, meta platforms and
Twitter. And we're going to identify those accounting add
ons. And the accounting add ons we're going to talk about today
are mainly going to be operating leases, stock compensation,
expense, and goodwill and intangible assets. Let's start
with operating leases.

And before I go any further, in this
video, what I'm going to do, we're not done yet, what I'm
going to go through and do is I will go through and link this
playlist to you. And in this playlist, you'll see that there
are videos here on that will go more in depth in terms of what
each of these different items are. So let's go ahead and take
a look at the accounting add ons. And this is how if you're
taking my class, I want you to go through and identify them. So
what is an operating lease, an operating lease is going to be
something where I've signed a lease agreement, and in the
course of signing, so if I rent building space, what I'm
required to do is I'm required to record an asset and a related
liability. If I look at the balance sheet for Facebook, what
you're going to notice is is it says operating release, right of
use assets, it's about 7% of the total balance sheet.

What you're
also going to notice here is that you have operating leases,
operating lease liabilities, current. And you're going to
have over here operating lease liabilities non current. And
let's see if we have a another current asset. So the reason why
I'm pointing this out to you is I do not want you to go through.
And if you're filing on behalf of a company, I don't want you
to say oh, no, we're not going to show this. But if you think
about this intuitively, this is causing a great American balance
sheet gross up. What do I mean by that? If a company owns a
building so say a company owns a building, and we'll say that
building is worth, I don't know, we'll say it's worth 15,000,
right.

And I lease out this building to meta platforms. And
what meta used to have to do before I was a few years now,
but what they used to have to do is they would used to have to
just disclose the future lease payments in their financial
statements. These were what we would call operating leases, we
don't own the lease, we do not own the building at the end of
it, we would have the separation between capital and operating
leases, guess what now everything's an offer,
everything's a capital lease, or everything is going to be
disclosed on the books. And why I call this a gross up is
because say, landlord, asset. And then over here we have
tenant. So you've got 12 155 as their assets. And then we have
liabilities over here of and we'll go through and dig out
what the current portion is of the operating lease of right
over here. So what effectively is happening here? Well, if the
landlord owns this building outright, and the tenant is
leasing the space, we now have essentially a gross up of our
collective American balance sheets.

And I don't know what
the amount is going to be. But if you added up all the
operating lease right of use assets on all the publicly
traded companies, you will probably be able to figure it
out. And it's going to be just again, it's it's not a real in
my opinion. I understand why the FASB decided to go through and
why the SEC decided to go through and to put this on
there. But I don't think I think they really neglected on the
fact that it's really causing this gross up. I do think it
should be fully disclosed.

And in certain industries, people
were taking advantage of this. But for our purposes, it's
something that we want to back out. So let's go through. And so
if you're taking my class, we're going to identify these
accounting add ons. So for the operating lease, my total assets for meta meta
platforms, I'm going to say it right eventually, as of 1231,
night suit 1231 2112 3120. So my total assets as of 1231 21, or
185 987, my total assets as of 1231 20, or 159 316. So what I'm
going to do here is I'm going to say less my operating leases. So
my non current operating lease amount is going to be for the
balance sheet over here, this is going to be 12,000,000,001 55.
This over here is going to be 9,009,000,000 9,000,000,003 48.
Now, my current operating lease liabilities, this is where we're
going to have to go through and do some digging.

So one of the
things that we did, when we were going through and doing our
return on equity is we went through we were looking at the
more recent financial statements. So let's go over
here to our sec.gov and what I'm going to do is I'm going to look
up meta platforms, I want to go to their most recent 10k And
what I'm going to look at is for in their financial statements,
like go ahead and look at their now.

So prepaid expenses and
other current assets, this is about 4.6 billion. So what I
want to do is I want to look to see if in this dollar amount,
there's a current portion of the operating lease right of use
assets. So let's go ahead and see if we can find that we'll go
ahead and do a find prepaid expenses let's go ahead and
check this out. Okay, now, so let's let's try this one. Let's
try over here. Let's now try operating leases okay so let's go ahead operating
leases and let's see if we have any kind of a an amount Oh, here
we go. Oh, this is exciting. So by going through over here, and
looking at only look at the present value of the lease
liabilities let's see if these numbers match up.

So over here
we had our accounting add ons we had 12,000,000,001 55 Let's see
where that we can get that one around. Oh let's see here. Okay,
um, tu tu tu tu tu. Okay, so I think what I want to go through
and do is I want to kind of say that okay, the operating the
lease liabilities current and non current for my operating
leases, let's see if this matches up on my ION liability.
So what I'm trying to go through and do is I want to I want to
see where so we've got 12 746 And we've got 1127.

Okay, so
this is what's going on to our this is what's going on the
liability section of our balance sheet. And over here let's see
if we can find any other information what I'm really trying to do is
to find a see if I can find another asset okay. So I think
what I'm going to do a quandary So, what I'm going to do is I'm
just going to take out the amount of the liability on the
financial statements.

So let's just go ahead and do it that
way. So if I say over here, when I look at the accounting add
ons, let's go ahead and do it like this. Last the lease
liabilities, current, non current. So over here, my
balance sheet for Facebook current, non current. And then
we're going to have over here we're going to have assets
restated. of 150 to 114. For our lease liabilities for meta
platforms, we're going to go over here and say 1,000,023.
Over here, it's going to be 9,000,006 31. So let's say
instead of saying restated, let's say assets without lease,
lease, without operating leases, that's a better way to say it,
we don't want to call it restate it, that's gonna start freaking
out the SEC, when they check out this video. I'm sure I'm already
causing more panic for them.

I'm just kidding. They have to do
their job. Okay. So and the reason why I want to take this
out of assets is because in my opinion, this isn't really an
asset. That's my opinion, if you're doing this at home kids.
And if you file a financial statement and you violate GAAP,
you're going to be in big trouble. But we're not doing
that here. Today, what we're doing is we're doing financial
statement analysis. So the first thing we're going to do is we're
going to remove those operating leases now at the same time,
total liabilities, our total liabilities are going to be
41 108. And over here for the prior year is 3126. And then
we're going to say last, the lease liabilities current and
non current. So we're going to remove these from both our
assets and our liabilities. So liabilities without operating
leases. And as you can see, it looks significantly better for
this company. The one more interesting one is check out
Starbucks. Okay, so I've got my liabilities without operating
leases.

So that's our first going to be our first step.
Let's go ahead and also do this for Twitter. Okay, counting add ons now let's
go ahead and use our same formatting so our total assets
for Twitter are going to be 14 billion our lease liability current
portion we'll see if we get that over here. operating lease
slides file there we go current 222 177 non current 1 billion
and over here this is going to be 819 and our total liabilities
for Twitter Okay, so our non current Okay, so now what we've
kind of done over here for Twitter as we've kind of
normalized are assets and liabilities for this part so
that's going to be our first accounting add on. The next one
I want us to look at to go through and do is to do our net
income. So our next adjustment is going to be for stock
compensation expense. Okay, so for a stock
compensation expense.

We're going to take our net income And
our net income for Twitter was 221 million 409 a loss. And here
it was 1,135,000,000. And now what we're going to go through
and do is add back our stock compensation expense. When we go
over to try to figure out how to add up our determine our stock
compensation expense, where we're going to do so go over
here for Twitter and the best place generally to
find stock compensation expense is to go to our statement of
cash flows. So let's go ahead and go to our cash flows. And
the first thing you'll see right over here is we have
depreciation, amortization expense, stock based
compensation expense.

So this is 629 901. amounts and 629 million and then
over here, we're going to have 474 932. Okay. And with these
add ons, we're basically with this over here, we're going to
add this back. server here, net income loss adjusted. Okay. So
we're going to do now is we're going to go through and do the
same thing, but for meta platforms. And so over here, our net income
for meta platforms was 39 billion. Our net income for meta
platforms for the year ended December 31 2020, was 29
billion, our stock compensation expense for meta platforms, and
again, the best place to go to find this is going to be in our
statement of cash flows.

And when we look at our statement of
cash flow share based compensation, same as stock
compensation expense, this is 9,164,000,000. And over here, for Facebook for
meta platforms, this is going to be 6.5 billion, or
6,536,000,000. So what we've done effectively here with our
stock compensation expense, by adding this back, we're now at a
different little bit of a different level of net income
here. And this a number in it and as I was explaining in one
of the earlier videos before, the reason why this is kind of
becoming more and more of a critical number, especially for
a company like Mehta, is that when stock compensation expense
is recorded, we're debiting stock compensation expense, but
you're not crediting a liability. Rather what we end up
doing is we end up crediting shareholder we ended up
crediting additional paid in capital and to date, this
additional paid in capital has gone up primarily due to the
stock compensation expense not because of share issuances. So
in my opinion, our retained earnings has been not fairly
stating what is actually the amount of retained earnings. And
because the stock compensation expense, in my opinion is not
really an expense because you don't have to It's again, watch
the other videos and hear me talk about it.

Okay. So far our
final add on is going to be or final adjustment is going to be
goodwill and intangible assets. And to explain why we're going
to go through and do this for these companies. When we look at
the price to book ratio for Investopedia right over here,
when we go through and doing is we're going to have to go
through and say book value is also the topic tangible net
asset value of the company calculated as total assets minus
intangible assets and liabilities. So what we're going
to be going through and doing is that we're going to remove
goodwill, and other intangible assets. So when we compute the
price to book value, we'll have a little bit of an easier way of
going through and doing this. So right over here, less goodwill.
Let's go ahead and do this over here for Facebook. So right over
here, when we look at the balance sheet for Facebook, the
goodwill is right over here at 19 billion, the intangible
assets is over here, it's 634 billion. So these are really
going to be the other two that we're going to be deducting.
We've also kind of said that this right of use asset, this is
also considered to be kind of an intangible asset, at least
that's what I would say it is, if anything, I So again, we've
already deducted that in our analysis.

So our goodwill over
here is going to be 19,000,000,001 97. And then 634.
For the other intangible assets. Over here, this is going to be
623. And this here is going to be 19,050,000,000. Now, I'm not
saying that this Goodwill has no value, in fact, I think it
actually has an incredible amount of value because of what
Facebook has been able to do or what meta platforms has been
able to do with their with their goodwill. So assets as adjusted, or assets, less intangibles. So
over here, this would be 152. And so we're now coming down
over here, and we're further normalizing this. So let's go ahead and do the
same thing with Twitter. And we'll give ourselves a little
bit more room. So over here for Twitter, our goodwill that
basically that Twitter has is 1.3 billion. There are other
intangible assets are 69 million. So our assets less those
intangibles are about 11,000,011.

Point 3 billion. So
that's our goodwill. For 2020, balance sheet for Twitter 1.312.
And then over here, you've got intangible assets of There we
go. Okay. Now, in terms of talking about why do we go
through and and what you know, as we go through and look at
these add ons, I really want to encourage you to look at the
other videos I've made in this regard. But the importance in
terms of identifying these other intangible assets and these
accounting add ons is that, again, in my opinion, the leases
are not really real.

These are obligations in my opinion, that
should be disclosed in the footnotes to the financial
statements, they should not be included on the front of the
balance sheet. However, though, those are the rules that we
follow by. And I would say that that would actually be really
for any kind of like a land lease, or any kind of a space
lease. If I'm leasing office space. It that's really the way
it should be recorded. Now in terms of the goodwill and the
other intangibles, that can be somewhat be debatable, but
again, if a company is going to be sold, this goodwill is just
something we record as a result of acquiring another company. So
when we look at the price to book ratio, when we're comparing
the firm's market capitalization to its book value, what we're
really trying to do is to get a better sense of really like what
is that company truly worth? So, there we go.

In any event, I
want to thank you for joining me here today. If there are other
videos that you would like to see, please feel free to leave a
Comment if you're caught up if you're not in one of my classes
and you want me to take a look at the ratios that you've
selected please feel free to ask me such and I will be happy to
get back to you at any event have a great day and I look
forward to seeing you on the next video have a good one.

test attribution text

Add Comment