Section 2.8 Flashcards
what are current liabilities?
liabilities falling due within one year
What are the main types of current liabilities
- Loan capital with less than one year to redemption
- Bank loans with less than one year to repayment
- Payments received on an account
- Trade payables
- Bills of exchange payable plus commercial paper
- Accruals and deferred income
- Other trade payables, including taxation and social security
what are accruals?
amounts owing for services already partly received.
What is deferred income
money received by, or due to the company but not yeat earned
what are trade payables
other businesses or people owed money for goods or services supplied
what is a provision?
An amount charged against profit (i.e. treated as an expense) to record a reduction in the value of an asset - even if the exact fall in value is uncertain
what are the three types of provisions?
- Provision for doubtful debts
- Provisions for depreciation
- Provisions for unrealised profit on stock
what is a contingent liability?
Is a potential liability that had not come into existence by the time the balance sheet was compiled.
How does UK GAAP and IAS both deal with contingent liabilities?
Are regarded as not sufficiently predictable to warrant specific provision in the accounts.
However, a company has to reveal by way of a note to the accounts, or otherwise any charge on the assets of the company used to secure the liabilities of any other person; any arrears or cumulative dividends; and the legal nature and particulars of any other contingent liabilities
give e.g.’s of contingent liabilities
- potential liabilities on claims against the company e.g. by court action
- goods sold under warranty or guarantee
- guarantees given to banks
- bills of exchange discounted with bankers
What is the basic principle of IAS 19 the standard for DB pension costs?
the cost of providing employee benefits should be recognised in the period in which the employee earns the benefit, rather than when it is paid or payable.
The amount recognised on the balance sheet should be the present value of the DB obligation.
When will the balance sheet of the company show a liability?
In cases when the pension plan is in a net deficit position (plan assets less than the PV of expected future payments)
When will the balance sheet of the company show as an asset?
When the plan is in a net surplus position (plan assets are greater than expected future payments)
What are some of the main features of the IAS standard for DB pension costs?
- Pension scheme assets are measured using market values
- Pension scheme liabilities are measured using a projected unit method and discounted at an AA corporate bond rate
What is a post-balance sheet event?
events occurring between the balance sheet data and the date the accounts are approved by the board of directors.
What are the two types of post balance sheet event?
Adjusting events
Non-adjusting event
What is an adjusting event?
relate to the emergence of additional evidence of conditions existing at the balance sheet date, such as the insolvency of a debtor.
In these cases the accounts should be adjusted accordingly
What is a non-adjusting event?
Events arising after the balance sheet date but before the accounts are approved such as major acquisition or disposal.
These events should be disclosed if they are considered to be of such importance that non-disclosure would affect the ability of users of the accounts to make proper evaluations
What are the 4 main types of share and how do these rank in the event of liquidation?
- Preference shares
- Ordinary shares
- Deferred shares
- Warrants to subscribe for shares
what is a rights issue?
Issue of new shares offered to existing shareholders in proportion to their pre-issue holding normally at a discount to current market price.
what does a rights issue do?
Raises capital for a company
what is called up share capital?
Called up share capital is shares issued to investors under the understanding that the shares will be paid for at a later date or in installments. … Once a shareholder has paid the issuing entity the full amount owed for issued shares, these shares are considered to be called up, issued, and fully paid
what is authorised share capital
Refers to the maximum number of shares a company is legally allowed to issue or offer based on its corporate charter.
What is issued share capital?
Issued shares is a term of law and finance for the number of shares of a corporation which have been allocated and are subsequently held by shareholders.
What is paid up share capital
Paid-up capital is the amount of money a company has received from shareholders in exchange for shares of stock.
what can you not sell shares in the UK for
less than nominal value
What happens to the balance sheet after a rights issue?
Rise in value of share capital
Where shares are sold for stated nominal capital, all of the capital raised would be captured in a issued share capital.
Where shares are sold at a price above nominal value aka at premium then the additional capital is added to the share premium account
what is a scrip issue? / what is this also known as
aka bonus / capitalisation issue
is a free issue of new shares to existing shareholders made by capitalising reserves.
Is essentially a book keeping action with no new capital raised for the company
what happens to the balance sheet after a scrip issue?
capital is moved from the share premium account into the called up shared capital. Aka. Share premium account will decrease as much as the called up shared capital will increase.
how does a scrip issue effect the price of shares
normally will fall
How will the scrip issue affect EPS (earnings per share)
Number of shares has increased so earnings per share will be diluted
What is a stock split?
Increases the number of shares in a public company. The price is adjusted so that the before-and-after market capitalisation of the company remains the same and no dilution occurs.
Why may a stock split occur?
Reduce the share price if it has risen so much that it haas become very expensive for small investors to invest.
What does a stock split do to the price of a share?
Lowers the price
What does a stock split do to the balance sheet?
Not recorded. Just included in the footnotes to the account
Stock split will not be reflected on the balance sheet. A stock split is creating something new. Increasing the number of shares in issue will decrease the nominal value but there is no change to the share premium.
What is a share repurchase / buyback?
When a company buys shares from existing shareholders in the open market.
what is the effect of a share repurchase on the underlying value of a company?
should be neutral - because although the net assets of the firm have reduced (ie. cash spent on buying) the reduced number of shares in issue should counterbalance this
What do share repurchases mean for the shares?
Alternative to dividends in that the earnings per share increase even if profits remain the same.
How can reserves arise?
- accumulating profits
- Issuing shares a a premium (i.e. higher than nominal)
- Purchasing or repaying loan capital below its nominal value
- Acquiring assets at below their asset sheet value
- Upwardly revaluing assets e.g. land
How can reserves be reduced?
- Writing off goodwill
- Downwardly revaluing assets
- Losses
- Issues and redemption expenses
What are the three parts reserves must normally be divided into?
Share premium account
Revaluation reserve
Other reserves
What is the share premium account?
When shares are issued at a premium over their nominal value, this premium cannot be distributed to shareholders except on liquidation.
How can the share premium account be capitalised ?
The share premium reserve, however can be capitalised as in a scrip issue.
It can also be used to pay expenses associated with forming the company and issuing shares or debt capital
What is the revaluation reserve?
Any surplus (loss) on the revaluation of an asset, such as land or buildings should be credited (debited) on the revaluation reserve
What is other reserves?
This category incorporates all other types of reserves other than share premium or revaluation and includes reserves arising on the acquisition of another company and profits set aside for the redemption of preference shares
