Accounting Principles and Procedures Flashcards
What are the key financial statements that all companies must provide?
- Profit and loss account
- Balance sheet
- Cash flow statement
What is the difference between management and financial accounts?
- 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
What are audited accounts?
Prepared by chartered or certified accountants
What is the difference between a profit and loss account and a balance sheet?
- 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
Can you give examples of assets and liabilities?
- Assets: cash, property, investments held
- Liabilities: loans, overdrafts, leases
What is a cashflow statement?
- 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
What is the UK GAAP?
UK General Accepted Accounting Principles – how accounts should be prepared
What are capital allowances?
Tax relief on certain items brought for business (tools, etc.)
What is insolvency?
The inability to pay debts. Liabilities exceed assets
What is Companies House?
Agency that incorporates and dissolves limited companies
What does HMRC stand for?
Her Majesties Revenue and Customs
What is a covenant?
Financial strength of a tenant
Why assess a tenants covenant?
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
How would you assess a tenants covenant?
- 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).
What is a D&B Report?
- Accounting benchmark which gives indication of covenant strength by scoring with numbers and letters
- Number – financial strength
- Letter – risk profile
What would you look for in a companies account to assess whether a potential tenant could afford the proposed rents?
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.
What do you look at when reviewing accounts?
- Turnover
- Profit before tax
- Net worth
What are the contents of public limited company accounts?
- Chairman’s statement
- Independent auditor’s report
- Income statement (profit and loss account)
- Statement of financial position (balance sheet)
- Corporate governance report
- Remuneration report
What important accountancy change has there been which has impacted on how occupiers regard their property liabilities?
- 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
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?
- 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
How do you review the amount of rent deposit that might be required?
Review accounts and take a judgement – advise client to seek professional advice from an accountant
