Solvency and Liquidity and Corporate Governance

Question 1

Definition of solvency test

Answer 1

• Section 4 of the Companies Act
• means that assets, fairly valued, must exceed or in the very least equal the fair value of liabilities - resulting in a net assest position
• if at any point the liabilities are greater than fair value of its assets, the test is not met.

Question 2

Liquidity

Answer 2

Refers to the company’s ability to pay off its short-term debt obligations. Calculation of a liquidity ratio is done by comparing a company’s most liquid assets, those that can be easily converted to cash with its short term obligations

Question 3

When will company meet its liquidity test

Answer 3

If it appears that the company will be able to meet its obligations towards creditors as they become due for a period of 12 months

Question 4

When and why must the solvency and liquidity test be applied and passed?

Answer 4

Prior to a company taking certain transactions.
Part of fulfilling purpose of Section 7 of Companies Act - ensuring enterprise efficiency and promoting efficient and responsible management of companies

Question 5

importance of the test

Answer 5

Designed to help directors with wise financial-related decision-making

Question 6

scope of application of solvency and financial test

Answer 6

• when company wishes to provide financial assistance for subscription of its securities
• company intends to grant loans/financial assistance to directors and others contemplated in s45
• company wishes to acquire its own shares

Question 7

King IV proposals on board committees

Answer 7

proposes that board committees be established to assist the directors by giving detailed attention to important areas.

Question 8

The important committees

Answer 8

• Remuneration
• Nomination
• Risk Management
• Audit committee

Question 9

Function of remuneration committee

Answer 9

make recommendations to the board on specific remuneration packages for each of the directors

Question 10

Nomination Committee Function

Answer 10

• to assist the board in the formal and transparent procedures leading to board appointments as well as appointment of company secretary

Question 11

Risk management Committee

Answer 11

• assists the board in reviewing the risk management process and any significant risks facing the company

Question 12

Stakeholders and shareholders

Answer 12

• Shareholders are stakeholders in the company but stakeholders encompass mote than simply shareholders. Potential shareholders, employees, trade unions, customers and suppliers are also stakeholders

Question 13

Should non-financial information be included in a company’s annual financial statements

Answer 13

• King IV provides that non-financial information should be included in a company’s annual financial statements and that broader stakeholder interests should be addressed
• Annual financial statements report on social and environmental issues
• King IV recommends company not only report on profit but also on planet and people

Question 14

Impact solvency and liquidity test has on preparation and maintenance of company’s financial statements and records

Answer 14

any information to be considered when considering solvency and liquidity test must be based on accounting records that satisfy requirements of section 28 and on financial statements that satisfy requirements of section 29

Question 15

Section 28

Answer 15

Accurate and complete records must be kept enabling a company to satisfy its obligations with regard to the preparation of its financial statements

Question 16

Section 29

Answer 16

Emphasizes need for the fair presentation of a company’s affairs and the need to comply with IFRS

Question 17

Investors and information they may require from company

Answer 17

● need to know about financial situation of the company to assess the certainty and amount of future dividends
● assess risk of losing their capital
● probabilities of growth in their investment in the company

Question 18

Employees and trade unions

Answer 18

● require information to assess the risk of liquidation of the company and to determine the ability of a company to generate cash flow to pay salaries, retirement benefits

Question 19

Lenders

Answer 19

● require information to assess the probabilities of being repaid capital that they have lent to the company and assess risk of making further advances to the company

Question 20

Suppliers and traders

Answer 20

● require information to determine ability of the company to generate cash flow to pay its suppliers and to determine terms of business between the company and its suppliers

Question 21

Customers

Answer 21

● need to assess whether there is a risk to future supplies from the company

Question 22

Government/SARS

Answer 22

● require information to assess the tax liabilities of the company and to regulate its activities

Question 23

General public

Answer 23

● needs to assess the environmental issues connected with the company and the company’s contribution to the national economy

Question 24

Investment analysts

Answer 24

● need to assess the financial performance of the company to advise actual and potential investors

Question 25

Does King IV Code apply to all public companies

Answer 25

● Not law
● listed companies required to apply its provisions because JSE listing requirements require such companies to do so
● companies not listed can voluntarily apply the code or such parts they choose are beneficial, relevant and cost effective

Question 26

Triple-bottom-line reporting approach

Answer 26

provides that a company should include in its financial statements information regarding the economic, social and environmental aspects of a company’s activities.