Пойгина Л.Б., Туринова Л.А. - English for Masters. Management Part 2 (1175657), страница 20
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Paying in advance would use up cash, but also would be reflectedon the balance sheet, while the contingency is not.♦ In a joint venture, a parent company, but less-than- 50-percent owner, may provide an earningsmaintenance agreement for creditors, but avoid the appearance of any notation on its own balancesheet, since these agreements are considered contingent.51The analytical problem is that contingent liabilities are not placed on the balance sheet because no specificamount can be feasibly estimated.
Nevertheless, careful reading of any contingency footnotes is stillimportant. Moreover, credit analysts must stay abreast of news events concerning their borrowers, theirborrower's customers and suppliers, the relevant industries, and any pending government regulations orpublic policy issues that might affect a borrower. If a nonofficial estimate of the liability can be obtained, itprobably should be viewed cautiously.10 days of delivery, the "spreading nonlien" takes precedence. If such a negative pledge al ready existswith another institution, then the analyst should be aware that these assets would not be available to pledgeand would be valuable only to the general creditor pool m a bankruptcy.III ___________________________Subordinated debt is a junior liability (usually held by company officers or affiliated companies) that canonly be repaid when specified debt obligations — the terms of the subordination agreement — have been met.Entrepreneurs frequently lend funds to their companies, rather than finance solely with equity, because fortax purposes subordinated debt pays interest, which firms can deduct as an expense.
In contrast, no deductionmay be taken for dividends paid to common stockholders. From the bank's point of view, these liabilitiesare the equivalent of equity. For example, a bank may extend a loan to a company only on the condition thatany debt held by the owner or other stockholders be subordinated to the bank debt. If debt is subordinated tothe bank, the bank should hold the original agreement and notes and thoroughly understand their terms.On the other hand, the company may have publicly issued convertible subordinated debt: naturally, havingphysical possession of the debentures, as noted above, would not be practical.
Since the intention of theinvestor in convertible subordinated debt may be to eventually convert the debt obligation to stock if the firmdoes well, the concept just established in regard to having to repay the value of debt is abandoned. In the casewhere the subordinated debt holders may be presumed to intend to convert their debt to stock, the bank maywish to treat the debt as equity.
This would be particularly likely if the stock price rises above the conversionprice on the debt.While the holders of this security w i l l be junior to the bank that is a senior lender, subordinateddebentures have certain entitlements to interest payments. Therefore, the analyst may want to look at whetherthese entitlements would have a deleterious effect on cash flow.For most cases, this aspect of subordinated debt forces analysts to retain the debt character of this accountbecause it is entitled to interest payments — and conceivably principal payments — no matter what theprofits are.IV _____________________________Contingent liabilities can pose a significant threat to the viability of a company's operation.
A primeexample of contingent liabilities causing problems is the potentially ruinous asbestos liability faced by JohnsManville Corporation. After the company filed for protection under the bankruptcy statutes, its shareholderslost their investment in favor of plaintiffs in asbestos legal suits. The fact that the creditors were relativelyprotected by this bankruptcy agreement demonstrates that senior creditors have an advantage.Another category of contingent liabilities in-' eludes contracts undertakings, such as guarantees,contractual commitments, and letters of credit.
In the ordinary course of business, these are frequentlyreferred to as executory agreements or contracts. (Operating lease agreements are a special case of this typeof contract and were discussed above.) It is clear that these legal commitments can bankrupt a firm; here aresome examples:♦ For a construction firm, legal commitments could arise from a simple error in estimating costs on aparticular job.♦ For an importer, the signing of a letter of credit to import materials commits payment whether theproducts shipped were the correct ones, were salable, or were otherwise usable.♦ To enable a supplier to obtain credit, large purchasers occasionally guarantee the obligations of thesmaller supplier to assist the latter to obtain needed working capital.
Paying in advance woulduse up cash, but also would be reflected on the balance sheet, while the contingency is not.♦ In a joint venture, a parent company, but less-than- 50-percent owner, may provide an earningsmaintenance agreement for creditors, but avoid the appearance of any notation on its own balancesheet, since these agreements are considered contingent.52The analytical problem is that contingent liabilities are not placed on the balance sheet because nospecific amount can be feasibly estimated.
Nevertheless, careful reading of any contingency footnotes is stillimportant. Moreover, credit analysts must stay abreast of news events concerning their borrowers, th eirborrower's customers and suppliers, the relevant industries, and any pending government regulations or publicpolicy issues that might affect a borrower If a nonofficial estimate of the liability can be obtained, it probablyshould be viewed cautiously.V ______________A business's equity reserves represent a liability that will become due sometime in the future. Althoughthey, like contingent liabilities, are not a formal debt currently owed to a creditor, their cost has beenestimated by some method approved by GAAP and recognized on the balance sheet as a liability that willtheoretically become due sometime in the future. For example, losses on bad accounts receivable that havenot vet been recognized are estimated into a bad-debt reserve.
Expensing through the income statementcreates and adds to the reserve; when the cost is actually realized, the reserve should be large enough thatadditional expensing will not be required and current income will not be distorted.Another example of using reserves, one that is currently newsworthy, is for corporations to discontinueoperations or offer substantial severance payments to encourage reduction of their staff.
A reserve fordiscontinued operations can be created if a manufacturer plans to discontinue a product line, especially itequipment and other assets are unusable in its other processes and the company has to liquidate theequipment for less than its book value. This liquidation may create a loss in an amount that the company canreasonably estimate and recognize in advance. The company can expense the difference between the bookvalue of the equipment and the actual selling price through the income statement and create the reserve.When it actually liquidates the asset, the company charges any loss to the reserve rather than to itsincome statement. Although the reserve does not represent a liability actually owed, the fixed assets must bespread so that they are reduced in value by at least the reserve amount.
The fixed assets are then worth lessthan accounting book value for collateral purposes. In the case of severance reserves, the outlay will have toactually be paid in cash, but the reserve should be present for only a short time.2. Scanning exerciseScan through the text to find information on 4 aspects:a)b)c)d)A negative pledge;A bullet loan;Amortization (repayment of a position of the debt before maturity);A business's equity reserves3. Vocabulary Study exerciseGlossarylong-term liabilitieslong-term debtintermediate-term debtvariety of long-term amortization termsa bullet loanpublicly issued bondsa portion of the debt before maturityamortization schedulean independent schedule of the principal repaymentsconversion of current assets to casha company's long-term burdenterms and conditions of repaymentdclault provisionsin the covenantslong-term covenants and security53a waiver of the restrictiona secured loanin case of default on the loancurrent lendingthe asset's pledged statusa negative pledgeactually pledging collateralto be recovered under Uniform Commercial Codegeneral creditor pool in a bankruptcysubordinated debtspecified debt obligationsthe terms of subordination agreementto deduct as an expensefrom the bank's point of viewequivalent of equityto extend a loan to a companypublicly issued convertible subordinated debtphysical possession of the debenturesto be junior to the banka deleterious effect an cash flowcontingent liabilitiesviability of a company's operationlegal suitscontracts undertakingguaranteescontractual commitmentletter of creditexecutory agreementsa businesses equity reservesbad accounts receivablea reserve for discontinued operationsa) find the follow inn Russian word-combinations in Text 7 and translate them into English:Долгосрочный долг; обязательства с погашениями; финансировать постоянные увеличений уровнейтоварных запасов; среднесрочный долг; разнообразие применяемых сроков долгосрочнойамортизации; простое определение даты полного погашения, долг-ядро; погашать всё сразу;выпущенные на рынок облигации; финансовое состояние фирмы: акционерная фирма с высшимрейтингом: трафик амортизации; независимый график выплат основной суммы; учтённый долг;лежать в пределах нормальных ожидаемых потоков чистых денежных средств компании;преобразование текущих активов в деньги; бремя долгосрочных обязательсчи компании; кредиты вобороте; особые условия и гарантии долгосрочных долгов; кредитное соглашение; условия неплатежа:оговорить ограничения па фирму; кредитное соглашение; требовал ь поддержание некоторыхкоэффициентов; с целью получения отказа от ограничения; необеспеченный долг; гарантированныйкредит; в случае неплатежа по кредиту; являться стороной получения залога; в совместномсоглашении залога; статус заложенного актива; отрицательный залог; фактически имущественныйзалог, получение оiдельного освобождения от кредитора: зарегистрировать по ЕдиномуКоммерческому Кодексу; наложить обременение: «распространение необременения»; общий пулкредиторов при банкротстве; подчиненный долг; младшие обязательства; соглашение о подчинении;финансировать исключительно через собственные капиталы; вычитать как расходы; являтьсяэквивалентом собственных капиталов; иметь первоначальное соглашение; конвертируемыйподчиненный долг; конвертировать долговое обязательство в акции; держатели подчиненного долга;некоторые права в отношении выплаты процентов; условные обязательства; угроза жизнеспособностикомпании; юридические обязательства; простая ошибка в оценке штрат; резервы собственныхкапиталов; подлежать оплате когда-нибудь в будущем; убытки по плохим счетам дебиторов; резервна прекращение производства.54b) find the following English word-combinations in the text and translate them into Russian.To allow permanent increases in inventory levels; buying back a firm's stock off the market; to be moreindicative of debt capacity; to determine the final maturity date; to come due all at once; to be required by thereported debt; to be within the company's normal cash flow expectations; to be shown only for five years intothe future; to be analyzed in relation to the future net cash flow; outstanding loans; to incur long-term debt; toenter into a loan agreement; such provision as...; from incurring the proposed debt: to meet certain rationrequirements; to maintain required ratios; in a joint security agreement; to be noted on the spreadsheet; tosigh a lending agreement covenant; to stipulate; to pledge someone's assets to any other party; withoutrequiring individual releases from the lender; to assume the covenant; to take lien on; to file on directlyfinanced assets; within 10 days of delivery; to finance solely with equity; to pay interest to be paid tocommon stockholders; to be subordinated to the bank debt; to hold the original agreement; to have publiclyissued convertible subordinated debt; the intention of the investor in...; to convert the debt obligation to stock;to treat the debt as equity; to rise above the conversion price of the debt; to have certain entitlements; to interestpayments; to file for protection; under the bankruptcy status; to be protected by bankruptcy agreement; asimple error in estimating costs on; to become due sometime in the future; a formal debt currently owed to acreditor; to be estimated into a bad-debt reserve; expensing through the income statement.4.
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