rory Posted December 29, 2015 Share Posted December 29, 2015 In line with Pabrai's advice I'm currently forming a checklist, but specifically with off-balance sheet liabilities in mind here. I'm interested in net-nets and Martin Whitman's approach so I'm trying to make adjustments based on asset values rather than cash flows. I've provided what I have so far and have attached links to sources I have used from Moodys and S and P, but would greatly appreciate any feedback and book/article recommendations to build knowledge about off-balance sheet liabilities. Parts b, d and e are probably what I am least unclear about. Net Current Asset Value (NCAV) Adjustments: a) Unfunded Pension Obligations and Self-Insurance Claims Subtract from NCAV Nb- unfunded pension obligation liability recognised on the balance sheet in US GAAP b) Executory contracts- Subtract from NCAV- • operating leases • forward purchase or sale commitments • take-or-pay contracts I've read that these are often cancelled on liquidation so perhaps no need to subtract? c) Options Issued – Reduce NCAV by the dollar % of value of options/market cap This is because the NCAV will be dispersed among a great number of shares when the options are exercised Example: 2 mil (options value)/ 18 mil (market cap)= 11.1% 1-.11= 0.89 40mil (NCAV) x 0.89= 35.6mil Adjusted NCAV d) Contingent obligations Subtract from NCAV 1) Contractual- these include: • Guarantees • Standby liquidity agreements (typically provided by financial institutions) • Letters of Credit 2) Non-contractual- these include: • Lawsuits- search report/articles for any estimated liabilities • Environmental Remediation e) Related Legal Entities Subtract RLE exposure from NCAV 1) Assets are sold to a Special Purpose Entity, but significant loss exposure to the assets and related liabilities has been retained e.g. in Securitization. In many securitization transactions, credit support is either provided by the originator (for example, a cash reserve account) or retained by the originator (if the subordinated tranches or equity is held) 2) Company has partial ownership in an Off-Balance Sheet Entity f) LIFO reserve Add back the LIFO reserve for companies using a FIFO method of inventory accounting. Net Present Value used Moodys- https://www.moodys.com/sites/products/AboutMoodysRatingsAttachments/2002900000432882.pdf S and P- https://www.nact.org/sponsorPubs/S&P_encyclopedia_of_analytical_adjustments.pdf Link to comment Share on other sites More sharing options...
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