Accounting Principles and Procedures

Question 1

• What do you know about the IFRS?

Answer 1

• Set of accounting standards governing the reporting of finances
• Listed companies must comply

IFRS 13 – Fair Value Measurement
- Defines ‘Fair Value’:
o Estimated amount an asset would exchange for
o Market participants
o Orderly transaction

• IFRS 16 – Lease Accounting Standard
  o Operating leases must be put onto balance sheet as a liability
  o Leases of 12 months or shorter are exempt

Question 2

• What do you know about GAAP?

Answer 2

• Regulatory body providing guidance for preparing accounts
• Mandatory for Non-Listed companies
• Balance sheet and P+L accounts and make available to HMRC
• UK GAAP dictates what these documents include (see below¬)

Question 3

• How many years audited accounts do you need and why?

Answer 3

You are required to gather 3 years accounts to represent the established trading history of the property and business.

Audited accounts are required, rather than management accounts which are for internal purposes.

This helps in providing an FMT and FMOP by analysing these accounts.

Question 4

• How can accounts comply with financial accounting standards?

Answer 4

• Must be audited
• Include Profit and Loss accounts detailing incomes and expenditures providing profit

Question 5

• What information do you receive through Credit Safe reports?

Answer 5

• Provides:
• Risk Score out of 100 (higher is better)
• Credit and Contract Limit
• Company information including contact details
• Key Financials including turnover and pre-tax profit

Question 6

• How do you obtain Credit Safe reports?

Answer 6

Contact the Finance Director at the firm who was access to the Creditsafe systems. As far as I am aware it is a case of searching for the name and checking before purchasing for a small fee.

Question 7

• How do you assess the strength of a company?

Answer 7

• Acquire a Credit Safe report to assess the company’s covenant strength.
• Also seek comparable evidence
• Market research

Question 8

• Why is covenant strenght important to an investment valuation?

Answer 8

Assessing the strength of the tenants business for an investment valuation.
Have a consideration towards the income and performance of the business, which ultimately affects the value once capitalised by a yield or multiplier.

Question 9

• What would you do if the company has a poor financial strength?

Answer 9

• Reflect in the yield - gathered from comparable evidence and increased to reflect higher risk
• Potentially make more assumptions regarding break clauses
• In extreme cases, the vacant possession value may be more valuable or loan security could be advised on this basis

Question 10

• What are the different types of accounts?

Answer 10

• Audited Accounts – including:
   Independent Auditors Report
   Profit and Loss Account
   Balance Sheet (shows assets and liabilities for company usually at end of financial year)
• Management accounts are internal accounts and unaudited

Question 11

What is the difference between a Profit and Loss Account and a Balance Sheet?

Answer 11

• Profit and Loss account (income statement) shows sales/turnover with outgoings to produce Gross and Net Profit
• Balance Sheets (financial position) show the assets and liabilities of the business

Question 12

Can you tell me about the role of an auditor?

Answer 12

Auditors inspect organisations’ financial accounts to ensure they’re correct and comply with the law