时间证明Chapter 03 - Analyzing Financing Activities
43.
43. In order to facilitate their understanding and analysis, reserves and provisions can be
redivided into a number of major categories.
The first category is most correctly described as comprising provisions for obligations that have a high probability of occurrence, but which are in dispute or are uncertain in amount. As is the case with many financial statement descriptions, neither the title nor the location in the financial statement can be relied upon as a rule-of-thumb guide to the nature of an account. The best key to analysis is a thorough understanding of the business and the financial transactions that give rise to the account. The following are representative items in this group: provisions for product guarantees, service guarantees, and warranties that are established in recognition of future costs that are certain to arise although presently impossible to measure. Another type of obligation that must be provided for is the liability for ―unredeemed coupons‖ such as trading stamps. To the company issuing these coupons, there is no doubt about the liability to redeem them for merchandise or cash. The only uncertainty concerns the number of coupons that will be presented for redemption. Consequently, a provision is established for these types of items by a charge to income at the time products covered by guarantees (or
related to these coupons) are sold—the amount is established on the basis of experience or on the basis of any other reliable factor.
The second category comprises reserves for expenses and losses, which by experience or estimates are very likely to occur in the future and that should properly be provided for by current charges to operations. One group within this category is comprised of reserves for operating costs such as maintenance, repairs, painting, or overhauls. Thus, for example, since overhauls can be expected to be required at regularly recurring intervals, they are provided for ratably by charges to operations to avoid charging the entire cost to the year in which the actual overhaul takes place.
A third category comprises provisions for future losses stemming from decisions or actions already taken. Included in this group are reserves for relocations, replacement, modernization, and discontinued operations.
A fourth category includes reserves for contingencies. For example, reserves for self-insurance are designed to provide the accumulation against which specific types of losses, not covered by insurance, can be charged. Although the term self-insurance contradicts the very concept of insurance, which is based on the spreading of risks among many business units, it nevertheless is a practice that has a good number of adherents. Other contingencies provided against by means of reserves are those arising from foreign operations and exchange losses due to official or de facto devaluations.
A fifth group of future costs that must be provided for is that of employee compensation. These costs, in turn, give rise to provisions for vacation pay, deferred compensation, incentive compensation, supplemental unemployment benefits, bonus plans, welfare plans, and severance pay. The related category of estimated liabilities includes provisions for claims arising out of pending or existing litigation.
3-21
Chapter 03 - Analyzing Financing Activities
Of importance to the analyst is the adequacy of the reserves and provisions that are often established on the basis of prior experience or on the basis of other estimates. Concern with adequacy of amount is a prime factor in the analysis of all reserves and provisions, whatever their purpose. Reserves and provisions appearing above the equity section are almost invariably created by means of charges to income. They are designed to assign charges to the income statement based on when they are incurred rather than when they are paid in cash.
44. Reserves for future losses represent a category of accounts that require particular
scrutiny. While conservatism in accounting calls for recognition of losses as they can be determined or clearly foreseen, companies tend, particularly in loss years, to over-provide for losses not yet incurred. Such ―losses not yet incurred‖ often involve disposal of assets, relocations, and plant closings. Overprovision shifts expected future losses to the present period, which likely already shows adverse results.
One problem with such reserves is that once established there is no further accounting for the expenses and losses that are charged against them. Only in certain financial statements required to be filed with the SEC (such as Form 10-K) are details of changes in reserves required. Recent requirements have, however, tightened the disclosure rules in this area.
3-22
Chapter 03 - Analyzing Financing Activities
The reason why over-provisions of reserves occur is that the income statement effects are often accorded more importance than the residual balance sheet effects. While a provision for future expenses and losses establishes a reserve account that is analytically in the \the important purpose of creating a cushion that can absorb future expenses and losses. This shields the all-important income statement from them and their related volatility. The analyst should endeavor to ascertain that provisions for future losses reflect losses that can reasonably be expected to have already occurred rather than be used as a means of artificially benefiting future income by adding excessive provisions to present adverse results. 45. An ever increasing variety of items and descriptions are included in the \
credits\they either represent deferred income yet to be earned or serve as income-smoothing devices. A lack of agreement among accountants as to the exact nature of these items or the proper manner of their presentation compounds the confusion confronting the analyst. Thus, regardless of category or presentation, the key to their analysis lies in an understanding of the circumstances and the financial transactions that brought them about.
At one end of the spectrum we find those items that have characteristics of liabilities. Here we can find items such as advances or billings on uncompleted contracts, unearned royalties and deposits, and customer service prepayments. The outstanding characteristics of these items is their liability aspects even though, as in the case of advances of royalties, they may, after certain conditions are fulfilled, find their way into the company's income stream. Advances on uncompleted contracts represent primarily methods of financing the work in progress while deposits of rent received represent, as do customer service prepayments, security for performance of an agreement. At the other end of the spectrum are deferred credits that exhibit many qualities similar to equity. The key to effective analysis is the ability to identify those items most like liabilities from those most like equity.
46. The accounting for the equity section as well as its presentation, classification, and
note disclosure have certain basic objectives. The most important of these are:
a. To classify and distinguish among the major sources of owner capital contributed
to the entity.
b. To set forth the priorities of the various classes of stockholders and the manner in
which they rank in partial or final liquidation.
c. To set forth the legal restrictions to which the distribution of capital funds are
subject to for whatever reason.
d. To disclose the contractual, legal, managerial, and financial restrictions that the
distribution of current and retained earnings is subject to.
The accounting principles that apply to the equity section do not have a marked effect on income determination and, as a consequence, do not hold many pitfalls for the analyst. From the analyst's point of view, the most significant information here relates to the composition of the capital accounts and to the restrictions that they are subject to.
3-23
Chapter 03 - Analyzing Financing Activities
The composition of equity capital is important because of provisions affecting the residual rights of common equity. Such provisions include dividend participation rights, and the great variety of options and conditions that are characteristic of the complex securities frequently issued under merger agreements, most of which tend to dilute common equity. Analysis of restrictions imposed on the distribution of retained earnings by loan or other agreements will usually shed light on a company's freedom of action in such areas as dividend distributions and the required levels of working capital. Such restrictions also shed light on the company's bargaining strength and standing in credit markets. Moreover, a careful analysis of restrictive covenants will enable the analyst to assess how far a company is from being in default of these provisions.
47. Preferred stock often carries features that make it preferred in liquidation and
preferred as to dividends. Also, it is often entitled to par value in liquidation and can be entitled to a premium. On the other hand, the rights of preferred stock to dividends are generally fixed—although they can be cumulative, which means that preferred shareholders are entitled to arrearages of dividends before common stockholders receive any dividends. These features of preferred stock as well as the fixed nature of the dividend give preferred stock some of the earmarks of debt with the important difference that preferred stockholders are not generally entitled to demand redemption of their shares. However, there are preferred stock issues that have set redemption dates and require sinking funds to be established for that purpose—these issuances are essentially debt.
Characteristics of preferred stock that make them more akin to common stock are dividend participation rights, voting rights, and rights of conversion into common stock.
48. Accounting standards state (APB 10): ―Companies at times issue preferred (or other
senior) stock which has a preference in involuntary liquidation considerably in excess of the par or stated value of the shares. The relationship between this preference in liquidation and the par or stated value of the shares may be of major significance to the users of the financial statements of those companies and the Board believes it highly desirable that it be prominently disclosed. Accordingly, the Board recommends that, in these cases, the liquidation preference of the stock be disclosed in the equity section of the balance sheet in the aggregate, either parenthetically or in short rather than on a per share basis or by disclosure in notes.\
Such disclosure is particularly important since the discrepancy between the par and liquidation value of preferred stock can be very significant.
49. This question is answered in a SEC release titled Pro Rata Distribution to
Shareholders:
Several instances have come to the attention of the Commission in which registrants have made pro rata stock distributions that were misleading. These situations arise particularly when a registrant makes distributions at a time when its retained earnings or its current earnings are substantially less than the fair value of the shares distributed. Under present generally accepted accounting rules, if the ratio of distribution is less than 25 percent of shares of the same class outstanding, the fair value of the shares issued must be transferred from retained earnings to other capital accounts. Failure to make this transfer in connection with a distribution or making a
3-24
Chapter 03 - Analyzing Financing Activities
distribution in the absence of retained or current earnings is evidence of a misleading practice. Distributions of over 25 percent (which do not normally call for transfers of fair value) may also lend themselves to such an interpretation if they appear to be part of a program of recurring distribution designed to mislead shareholders.
3-25
