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Best Practice

Internationally renowned finance leaders, experts and educators distil and summarize the most important aspects of finance best practice. Each Best Practice essay has an Executive Summary for quick reference, outlining the main points. The Making It Happen feature illustrates practical applications, and where relevant authors have provided illustrative case studies and definitions.

  • Advantages of Finance Best Practice Networks
    by Hans-Dieter Scheuermann
    The Best Practice Network for Finance and HR is a network for senior executives and best practice leaders at the senior executive level—spanning nations and industries. The goal is to facilitate networking, and allow the business leaders of large customers to exchange experiences and their use of best practices. The Best Practice Network for Finance and HR injects ideas and concepts into a cross-company network of professionals to identify best...
  • Asset Liability Management for Pension Funds
    by Ruud Kleynen
    The management of a pension fund has to make decisions about its strategic asset allocation, its contributions policy, and its indexing policy in a context of acceptable financial risk. It has to meet the return requirements necessary to improve benefit payments on the one hand, and to stay in line with the solvency requirements of the regulator on the other. But what is an acceptable contributions and indexing policy, and how is an acceptable...
  • Bank Asset–Liability Management and Liquidity Risk Management
    by Moorad Choudhry
    Risk management in banking is summarized in essence by asset–liability management (ALM). This reflects the nature of the products that banks offer to their customers, and the risk exposures that these products generate. In banks the three main strands of risk exposure are credit risk, interest rate (and foreign exchange) risk, and liquidity risk. ALM practice is concerned with managing these risks. Interest rate risk exists in two strands. The...
  • Capital Budgeting: The Dominance of Net Present Value
    by Harold Bierman, Jr
    A capital budgeting decision is characterized by costs and benefits that are spread out over several time periods. This leads to a requirement that the time value of money be considered in order to evaluate the alternatives correctly. Although to make decisions we must consider risks as well as time value, I restrict the discussion to situations in which the costs and benefits are known with certainty. There are sufficient difficulties in just...
  • Capital Structure: Perspectives
    by John C. Groth
    Capital has three forms: human, tangible, and financial. In this article, we focus on how financing choices influence the cost of financial capital and company value. Capital structure focuses on the sources of financial capital. The choice of structure affects firm value in some economies.1The seminal works of Nobel laureate Franco Modigliani conceived important relationships and issues in capital structure. Subsequently, researchers have...
  • Corporate Finance for SMEs
    by Terry Carroll
    The term “corporate finance” is widely, and sometimes loosely, used in business. In accounting firms it typically relates to a department or function that primarily deals with:mergers, acquisitions, and disposals (M&A); raising finance (early stage through to mature businesses); flotations; management buyouts and buy-ins; business valuations; due diligence; succession planning and exit strategies. These might represent the practical application...
  • Fair Value Accounting: SFAS 157 and IAS 39
    by Kevin Ow Yong
    Recent initiatives by both the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) have increased the use of fair value accounting for financial reporting across many jurisdictions around the world. There are many issues surrounding fair value accounting. This article outlines the main measurement issues contained in the fair value accounting standard used by the FASB (SFAS 157), and that used...
  • How to Manage Pension Costs
    by Edmund Truell
    A huge increase in life expectancy is one of the great achievements of the human race over the past two centuries. Increased longevity has transformed both individuals’ lives and their societies, with the most marked changes taking place in the developed world. Actual increases in life expectancy have been far more substantial than previously projected, with the result that governments, businesses, financial markets, and individuals must...
  • Managing Capital Budgets for Small and Medium-Sized Companies
    by Neil Seitz
    Capital budgeting irrevocably shapes the direction of a business, and our collective capital budgeting decisions “determine the kind of society that we and our children will live in—not just this year but many years from now as well.”1 Investment of revenue from their oil industry by Gulf countries is “profoundly reshaping global capitalism.”2 Decisions of such magnitude must be made correctly.All corporate finance books, including books by the...
  • Managing Retirement Costs
    by Beverly Goldberg
    The industrialized nations of the world are getting grayer. In the United States some 76 million individuals, known as the baby boomers, were born between World War II and 1964, wheareas the generation that followed numbered only 66 million. One-fifth of current workers in the United States will reach retirement age by 2020, and some industrialized nations, such as Japan, are graying even faster. This means that the number of people in the...
  • Pension Schemes: A Unique and Unintended Basket of Risks on the Balance Sheet
    by Amarendra Swarup
    The only function of economic forecasting, the late American economist J. K. Galbraith once noted, was to make astrology look respectable. And, knowingly or not, it’s a belief that’s endemic in the corporate world.The overriding concern is to find the hidden value in companies—whether in their balance sheet or in their intellectual property—and extract it in the most efficient way possible. Every financial and operational risk is carefully...
  • Pricing Framework for Banks’ Internal Funds: A Best-Practice Methodology
    by Moorad Choudhry
    In the immediate aftermath of the 2008 financial market crash, bank regulators moved to implement a stricter regime of supervision, which emphasized inter alia a more controlled approach to banks’ liquidity risk management. Features of the new requirements included:increased self-sufficiency in funding;a more diversified funding base;longer average tenor of liabilities;a “liquidity buffer” of high-quality, low-risk government securities.These...
  • The Value and Management of Intellectual Property, Intangible Assets, and Goodwill
    by Kelvin King
    The role of IPR in business is insufficiently understood. It is probably undervalued, undermanaged or underexploited, and there is little coordination between the different professionals dealing with an organization’s IPR. You probably need to have a better understanding about intellectual capital and its ownership, acquisition, and use. You probably need a practical source of knowledge and guidance about intellectual property and other...
  • Using Structured Products to Manage Liabilities
    by Shane Edwards
    Only a decade ago, the use of structured products (SPs) was largely confined to sophisticated institutions that used them for risk management purposes. Now SPs are embraced across the client spectrum and are owned by millions—from retail individuals investing in capital-protected equity products, to global corporations that tailor SPs to meet their often complex and highly specific liability management needs.In the liability management arena,...
  • Valuing Pension Fund Liabilities on the Balance Sheet
    by Steven Lowe
    With a pension plan, companies agree to provide certain benefits to their employees, by specifying either a defined contribution (where a fixed contribution is made to the plan each year by the employer, with no promises as to the future benefits that will be delivered by the plan) or a defined benefit (where the employer undertakes to pay a certain benefit to the employee at some point in the future). Under the latter, the employer has to put...

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