Basic Monetary Economic Model (V-Model)

Not a rocket science though!!! But still it possibly, in a very summarized and exhaustive way, describes the basic model of Monetary Macroeconomics, which will be my focus area for next few months!!! Though the box is self explanatory, but couple of points is worth mentioning:

• As economy grows and thus GDP and per capita disposable income, demand increases but the production capacity (thus supply) being less elastic increases at less than demand. So, it leads to inflationary condition. This situation moderates as economy develops further as more skilled labor, knowledge and capital are deployed efficiently. And thus the inflationary pressure moderates.

• Higher inflationary situation leads central banks to assume tight monetary policy. CBs increase interest rates and adopt other tight policies (as we see in India). It stifles growth for a temporary period but do not generally stop the momentum of growth engine.


Economies in various Stages:

A: BRICS, Mexico, etc.
B: Eastern Europe, South Korea, etc.
C: USA, Western Europe, Australia, etc.
D: Japan (till 2005)
E: USA (during 1960s-70s), UK (1960s)



Note:

Stagflation is described by a state of economy characterized by high Inflation, Low Demand, Excess Supply, High Unemployment, Slow output growth, Recession, High Interest rate, Tight Monetary policy, etc.


I have prepared this model with utmost accuracy based on my own understanding, there may exist few shortcomings. Criticism, Brickbats, Counter arguments are, as always, invited- It helps to improve further!

Corporate Financial Shenanigans

I was going through fine prints of prospectuses of couple of companies which came out with their IPOs during the great rush in 2004-2006. Everything was good, companies proposed good investment arguments, good business model in an environment which was never before…bla…bla.

Going deep into the filings, which sometimes frustrate you as to why you are going so deep…are we investing USD 100 mn? But still…ultimately we get paid for these frustrating things along with other few interesting things….!!! There I saw how the deal was structured wherein one private holding company was converting itself into a public company. It is one government company which actually bought few of the closely held other government companies at a very high premium and recognized goodwill in its balance sheet…i.e. balance sheet of the new public company… So, suppose USD 20mn asset was acquired at USD 50mn, and USD 30mn was booked as Goodwill under IAS 22/ IFRS 3 “Business Combination”.

Things were fine till then as USD 20mn was a book value and giving a PBV of 2.5x the actual consideration becomes USD 50mn. But what struck me that the same company after it got listed and became a public company, within the next 12 months from the date of acquisition, under the purview of IFRS 3*, it revalued and increased the fair book value of the acquired assets substantially; suppose from USD 20mn to USD 40mn in above example, (lets remove depreciation aspect to simplify the matter). The Goodwill was reduced by the increased value; i.e. USD 40mn-USD 20mn. So, Goodwill in the book after the revaluation got reduced from USD 30mn to USD 10mn. And thus the company saved the potential impairment of USD 20mn (of total USD 30mn), which would have otherwise hit its bottomline in the next couple of years.

This is not all…there is another finding which I drew under “reading between the lines” theory.

Suppose the government offloaded 50% stake through the above mentioned IPO. So, essentially, the higher acquisition premium of USD 30mn was 100% gain of the government and implied loss to the new public entity (now 50% owned by the government). So, in effect the government earned an accounting profit of USD 15mn by the transaction; i.e. gain of USD 30mn and loss of USD 15mn.

And to save the potential impairment cost, the now public listed company did the revaluation under IFRS 3*. So, another USD 20mn saved by the public company, and the government owning 50% of it, saved another USD 10mn.

So, a net accounting gain of USD 25mn (15+10)!!! Should we give honorary to the financial experts behind this deal?

* IFRS 3 allows a company to revalue its acquired assets within 12 months of the acquisition deal, and to re-adjust its goodwill accordingly.