Accounting Principles and Procedures

Question 1

What are the key financial statements that all companies must provide?

Answer 1

• Profit and loss account
• Balance sheet
• Cash flow statement

Question 2

What is the difference between management and financial accounts?

Answer 2

• Management accounts are for the internal use of a business and are not audited
  o Cashflow often includes management accounts
• Financial accounts are the company accounts required by law

Question 3

What are audited accounts?

Answer 3

Prepared by chartered or certified accountants

Question 4

What is the difference between a profit and loss account and a balance sheet?

Answer 4

• Profit and loss account: summary of the business’s income and expenditure transactions prepared usually on an annual basis
• Balance sheet: statement of a business’s financial position showing its assets and liabilities at a given date, usually end of financial year

Question 5

Can you give examples of assets and liabilities?

Answer 5

• Assets: cash, property, investments held
• Liabilities: loans, overdrafts, leases

Question 6

What is a cashflow statement?

Answer 6

• Summary of the actual or anticipated ingoing and outgoing of cash in a firm over the accounting period
• It is broken down into operating, investing and financing activities
• It measures the short term ability of a firm to pay off its bills
• Shows all the actual receipts and expenditure to include VAT

Question 7

What is the UK GAAP?

Answer 7

UK General Accepted Accounting Principles – how accounts should be prepared

Question 8

What are capital allowances?

Answer 8

Tax relief on certain items brought for business (tools, etc.)

Question 9

What is insolvency?

Answer 9

The inability to pay debts. Liabilities exceed assets

Question 10

What is Companies House?

Answer 10

Agency that incorporates and dissolves limited companies

Question 11

What does HMRC stand for?

Answer 11

Her Majesties Revenue and Customs

Question 12

What is a covenant?

Answer 12

Financial strength of a tenant

Question 13

Why assess a tenants covenant?

Answer 13

Financial strength of a tenant could be more risky and have an effect on the security of income. Higher the risk will have an effect on value of the property

Question 14

How would you assess a tenants covenant?

Answer 14

• 3 years trading accounts
• Dun & Bradsheet (D&B) report (credit checks)
• Experian Credit Rating report

Once I have confirmed that these reports are authenticated by a qualified financial advisor, I report back to my client with my professional onion on the tenant’s covenant strength and I provide advice on whether any further measures are needed (i.e., if a rent deposit / guarantor is required).

Question 15

What is a D&B Report?

Answer 15

• Accounting benchmark which gives indication of covenant strength by scoring with numbers and letters
• Number – financial strength
• Letter – risk profile

Question 16

What would you look for in a companies account to assess whether a potential tenant could afford the proposed rents?

Answer 16

The profits test – you would look at the companies last 3 years of accounts and if their net profit of each of those 3 years exceeds the proposed annual rent by more than 3 times, then they satisfy that profits test.

Question 17

What do you look at when reviewing accounts?

Answer 17

• Turnover
• Profit before tax
• Net worth

Question 18

What are the contents of public limited company accounts?

Answer 18

• Chairman’s statement
• Independent auditor’s report
• Income statement (profit and loss account)
• Statement of financial position (balance sheet)
• Corporate governance report
• Remuneration report

Question 19

What important accountancy change has there been which has impacted on how occupiers regard their property liabilities?

Answer 19

• International Financial Reporting Standards (IFRS) 16 is a new accountancy change which has impacted how occupiers regard their property liabilities
• All companies will have to comply from Jan 2019 when using IFRS
• Occupiers obligation to show full cost of leases on the balance sheet as a liability, though SC is accounted for separately
• Exemptions for leases that 12 months or shorter

Question 20

In recent years, the average length of a commercial property lease has reduced significantly, what are some of the factors that contribute to reduced lease lengths?

Answer 20

• Tenants demand greater flexibility
• The way that leases are presented on balance sheets has changed in recent times due to IFRS 16
  o you used to have a leasehold showing a year’s rent on your balance as a liability but IFRS 16 has changed that to show the liability being for the length of the lease
• SDLT is calculated on lettings which factors in the length of lease so the longer the lease, the more SDLT implication there is

Question 21

How do you review the amount of rent deposit that might be required?

Answer 21

Review accounts and take a judgement – advise client to seek professional advice from an accountant