Пойгина Л.Б., Туринова Л.А. - English for Masters. Management Part 2 (1175657), страница 16
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Ownership of debt or equity may be carried in the long-term marketable securitiesaccount. From an analysis viewpoint, it would be desirable to know the extent of management's involvementin the investment. If a substantial block of assets appears in the marketable securities account, the analystshould be stimulated to question the possibility of external involvement, consolidation, orde facto affiliation.Ownership of from 20 percent up to 50 percent of the common stock of another company normallyrequires the equity method of accounting for the investment.
This method reflects the original amount ofinvestment in the affiliate in addition to the owner's accumulated share in the earnings or losses of the affiliatesince the investment was made. Any dividends that have been received are deducted from the investment.Thus, this account represents the net historical book value of the investment. Any earnings or40dividends will she', up as other income on the income statement. Unfortunately, accounting for an affiliate inthis manner can disguise how much the other firm can loose, because the investment cannot be reducedbelow zero.Since the most important issue is control or influence by management.
GAAP require consolidation ifmanagement controls the company or owns 50 percent or more of the company. Therefore, the analyst mustalways be alert to the possibility that management is using GAAP for its own best interests.V _____________________Deferred charges usually represent services that have already been performed and on which payment hasbeen made, carried in accounts payable, or accrued. However, even though there is Hi tie or no possibility ofre-fund, these expenditures have been capitalized and not yet expensed. This happens because GAAP'saccrual accounting wishes to match the outlay's expense to the future anticipated benefit.
An obviousexample would be a fee paid to a banker for committing to a three-year revolving loan. Such a commitmentwould provide value to the firm over the entire three years and perhaps should be expensed (charged againstincome) over the three years.The above examples show that the nature of deferred charges is different from that of prepaid expenses.For prepaid expenses, either the services have not been performed or the products have not been delivered.Prepaid expenses are more like a deposit, since cash lias been paid out against the benefits of future servicesor products. Moreover, prepaids are usually refundable if the service or product is not used, and carrying thevalue on the balance sheet evidences that.
This is clearly not the case in deferred expenses, where the outlayis irreversible and the service or product has been received. As a result, the company's balance sheetoverstates its assets and equity when these deferred expenses are incurred but not expensed.Some companies show their start-up expenses as deferred charges because they will result in future salesbenefits.
However, from a liquidation viewpoint, the value of start-up expenses is questionable.Developmental expenses related to real estate, such as architectural fees and surveys, are usually carried asdeferred charges. Whether this account represents value in liquidation or liquidity foi operations dependsupon the company's prior track record. If the firm has consistently performed, capitalizing developmentalexpenditures to better match them with the revenues produced is good practice. Such expenditures mayrepresent an intangible that could be sold to another firm.
Thus, an analyst should thoroughly investigate anysizable amount in the deferred charges account.VI ______________________________Intangibles is one of the most misunderstood raid maligned accounts on the balance sheet. It is standardprocedure to categorize the whole account as a nonentity on bank spreadsheets, with the resulting reductionof the net worth accounts creating a new one called tangible net worth. Deducting the intangibles from thebook net worth to produce tangible net worth compounds the problem of calculating net worth on the basisof assets at historical cost.
This procedure springs from an era when bunks financed primarily manufacturingfirms (hat owned substantial long-lived physical assets. Today, due to the rapid pace of technologicaladvancement, physical assets can lose their value more quickly than in the past. Meanwhile, intangible assets,covering everything from intellectual copyrights to a favorable long-term lease contract, can have significantvalue. Therefore, disregarding the intangibles account can obscure important information about thecompany, its operations, and its real value in liquidation.The failure of Cue Magazine illustrates how important intangibles can be.
When Cue Magazine, a "what'splaying around town" periodical, went into bankruptcy, its primary salable asset was an intangible-the coststhat it could incurred to acquire its subscribers. Because it felt that it catered to a similar audience. New YorkMagazine paid millions of dollars for Cue's subscription list so that it could enlarge its own list.
However, anintangible cannot appeal' on the balance sheet unless cash or other good and valuable consideration has beengiven. Thus, curiously enough, while it could not exist on Cue's balance sheet, it legitimately appeared onNew York's.To proceed in a proper evaluation, an analyst must find out what items are included in the intangiblesaccount, including patents, trademarks, or operating rights. Patents give a company the exclusive right tomanufacture a product.
The intangibles account reflects only the purchase price of the patent or the legal costof recording internally developed patents, although the value of a patent for a highly successful product willbe far greater than these costs. A trademark represents the registered name of a product or service. Trademarks can be bought and sold or used in exchange for royalty payments. Again, the balance sheet accountreflects only the purchase price or legal cost of recording the trademark, although the current value of atrademark may be far greater.41Operating rights, special rights granted by government regulatory agencies, are required in certainindustries.
For example, telephone companies, airlines, and television stations all must obtain operating rightsfor their areas of business. Because companies can sell or lease these rights, the rights often represent a fargreater value to a company than is shown on the balance sheet. The balance sheet value of this right may alsobe understated in terms of its liquidating value.Many service companies have a substantial part of their net worth tied up in intangibles, and routineremoval will not accomplish much toward the objective of determining what these assets will bring inliquidation.
Instead, the analyst should put forth at least an equal effort in evaluating these assets as inevaluating the physical kinds of inventory mentioned above.Another intangible that frequently shows up on balance sheets is called goodwill, an accounting term usedfor capitalizing acquisitions when the price paid to purchase another company exceeds the market value of itsphysical assets. Goodwill represents payment in consideration of the acquired company's establishedcustomer base, reputation, and future earnings potential.
Again, traditional credit theory discards thepossibility of evaluating such a figure.In theory, the amount a company pays in excess of book value when acquiring another firm should losevalue over time because the new owners will make their own imprint on the acquired firm. Therefore, СААРgenerally require amortisation, or gradual expensing over many years, of goodwill and other intangibles overno more than forty years. However, management be given leeway an- intangibles that are less than 10 percentof a company total assets.
The JR.S takes the opposite approach and does not pc/init expensing of goodwilluntil the actual asset acquired is sold again!Today's analyst will eliminate many favorable lending opportunities unless he or she makes the effort toevaluate intangibles.2. Scanning exerciseScan through the text to find information on four aspects:a)b)c)d)Amounts due from affiliates;Original historical cost of fixed assets;Tangible net worth;The nature of deferred charges is different from that of prepaid expenses.3. Vocabulary Study exerciseGlossarynoncurrenl assetsfixed assetsbook valueoriginal historical costliquidation valuemarket valuecost-effectiveness of the equipmentto near the end of someone's economic lifeto become technologically obsoletemarketability of a company's foxed assetsmulti-use fixed assetssingle-purpose foxed assetsdue from officers or partnerscurrent accounts receivabledue from affiliated concernsamounts due from affiliatesaffiliate statusequity method of accountingdeferred chargesprepaid expenses42start-up expensesfrom a liquidation viewpointintangiblestangible net worthpatentsa trademarkoperating rightsgoodwilla) find the following Russian word-combinations in text 5 and translate them into English:Внеоборотные активы, основные средства; отложенные платежи; кредиты управляющим компаниии филиалам; нематериальные активы; счет основных средств; оценки стоимости основных средств;быть основанной на первоначальной исторической стоимости активов; цена закупки, оплаченнаякомпанией; за вычетом допустимой амортизации на дату отчета; интересоваться стоимостью приликвидации; рыночная цена; зависеть от рентабельности оборудования; стать технологическиустаревшим из-за новых методов производства; товарность основных средств компании: определятьценность как имущественный залог; многоцелевые основные средства; специализированные основныесредства; нести большие затраты при подт отовкс здания к установке; затраты на улучшениеарендованного здания; служить превосходной отправной точкой; показаны как счета дебиторов вфинансовых отчетах; включаться в текущие счета дебиторов; суммы, причитающиеся отафилиированных лиц; статус двух компаний; метод собственных капиталов; показывать начальныерасходы как отложенные платежи; с точки зрения ликвидации; материальная чистая стоимость;вычитание нематериальных активов из балансовой чистой стоимости; долгосрочные физическиеактивы; игнорирование счета нематериальных активов; зарегистрированное название изделия илиуслуги; права на ведение деятельности; патенты; торговая марка; будущий потенциал дохода; оплатас учетом установившейся клиентской базы приобретенной компании.b) find the following English word-combinations in the text and translate them into Russian.The principal category of noncurrenl assets; the fixed-assets account; the valuation of fixed assets; toreport the value of fixed assets at book value; to be based on original historical cost; allowable depreciationto date; lo be concerned primarily with liquidation value; to dispose of the assets quickly; in the openmarket; under normal economic conditions; to depend on the cost-effectiveness of the equipment; to replacesomething with state-of-the-art equipment; a company with inefficient equipment; a decline in sales; todetermine the value as collateral; to accept a highly specialized piece of equipment; to increase the bookvalue of the building; costs of improving a leased building; general renovation; to be capitalized into thebalance sheet as fixed assets; leasehold improvements; to look to outside independent appraisers; to be anexcellent starting point; to be shown as accounts receivable of financial statements; to be spread in thenoncurrent asset category; the prospects for repayment; to claim the loan as income; to avoid additionalpersonal taxes; to purchase stock in the company through the use of a note; valid loans to company officers;as an offset to an equity account; the absence of pressure to pay such debts; to obtain financial statements onthe affiliate; extensive intercompany borrowings; to match the outlay's expense to the future anticipatedbenefit; to show start-up expenses as differed charges; to deduct the intangibles from the book net worth; toown substantial long-lived physical assets; to disregard the intangibles account; to obscure importantinformation about the company; to represent the registered name of a product or service; to give theexclusive right to manufacture a product: to use for capitalized acquisitions; to exceed the market value of itsphysical assets; the acquired company's established customer base; future earnings potential.4.
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