Analyzing Balance Sheets

How the balance sheet mixes historical cost, amortised cost and fair value; how intangible assets and goodwill are recognised, amortised and tested for impairment; how financial assets are classified and where their gains land; how long-term debt and deferred tax liabilities are reported; and how common-size balance sheets and liquidity and solvency ratios turn all of it into analysis.

1. 1. Measurement bases and intangible assetsIntangible assets reach the balance sheet only when they are identifiable and their cost can be measured, so purchased intangibles are capitalised while most home-grown ones are expensed, and the useful life decides whether they are amortised or only tested for impairment.Free14 min
2. 2. Goodwill: recognition, impairment and analysisGoodwill is the part of an acquisition price that cannot be pinned to identifiable net assets; it is never amortised, only tested for impairment, and analysts often strip it out to compare companies.Video · 6 min13 min
3. 3. Financial instruments: classification and measurementA financial asset is carried at amortised cost or at fair value, and when it is at fair value the unrealised gains go either to profit or loss or to other comprehensive income; the classification decides which.Video · 7 min14 min
4. 4. Non-current liabilities: long-term debt and deferred taxesLong-term borrowings usually sit at amortised cost, drifting from issue price to face value, while deferred tax liabilities record taxes postponed because taxable income ran below reported income.12 min
5. 5. Common-size balance sheetsDividing every balance sheet line by total assets strips out size, so the composition of assets and financing can be compared across companies and over time, revealing liquidity, solvency and strategy.13 min
6. 6. Liquidity and solvency ratios from the balance sheetLiquidity ratios set ever-narrower groups of liquid assets against current liabilities, solvency ratios measure how much of the business is financed by debt, and every ratio needs judgment about what it leaves out.13 min
7. 7. Integrated cases: a balance sheet ratio set against an industry benchmarkBalance sheet ratios are only informative against something: the same company a year earlier and an industry average; the skill is to map each line to the right ratio input, compute the set, and say which way each risk moved relative to both.15 min