IAS 1 Gearing Flashcards
Why is gearing important?
It indicates how risky a business is perceived to be based on its level of borrowing
If borrowing increases?
Risk a business is now liable to not only repay debt but meet any related interest commitments
An example of a high gearing but no risk?
If a business has high tangible non-current assets and higfh interest cover
What is gearing concerned with?
A company’s long-term capital structure
What is an example of net current assets?
Working capital (current assets - current liabilities
What must be financed by long-term capital?
Non-current assets
Net current assets
What represents long-term capital?
Issued share capital (usually ordinary shares plus other equity)
Long-term debt including redeemable preference shares
What happens with preference share capital?
Usually classified as non-current liability
What happens with preference dividends?
Finance costs in SPL
What is a company that is highly geared?
More than 50%, low gearing is below 50%
What if a highly geared company is becoming increasingly geared?
Likely has difficultly in future when it wants to borrow even more
What does gearing try to quantify?
The degree of risk involved in holding equity shares in a company
What is the issue of a highly geared company?
By definition there is a lot of debt
What does debt usually carry?
A fixed rate of interest, therefore there is a large amonut to be paid out from profits to holders of debt before arriving at residue available for holders of equity
The more highly geared the company for shareholders?
Greater the risk that anything is available to distribute by way of dividend to ordinary shareholders
