Accounting 101

ACCOUNTING 101

Director Independence

An independent director, in corporate governance, refers to a member of a Board of Directors who does not have a material relationship and/or interest with a company (“either directly or as a partner, shareholder, or officer of an organization that has a relationship with the company”) and is neither part of its Executive Team nor involved in the day-to-day operations of the company.

Director Capacity

A director would be deemed to have capacity if in all instances he/she acts in the best interest of the company in discharging his/her duties.

Capacity will further be evidenced by certain actions such as:

Not holding more than four (4) directorships in companies with an annual turnover of at least US$5 million.
Director has knowledge and experience in the role he/she fulfills as a member of a Board of Directors.
The Director participates and contribute to the decision making on behalf of the company.

Auditor Independence

The Auditor (meaning an audit firm) will be deemed independent if not in office as an auditor for a period exceeding 10 years.

While in office, the auditor be seen to be able to report independently without undue influence and/or pressure by management of the company. Independence requires integrity and an objective approach to the audit process. The concept requires the auditor to carry out his or her work freely and in an objective manner.

Shareholder Influence

Shareholding of at least 20% in the company would be deemed as having a significant influence in the direction of the company, and ability to influence certain decisions taken by the Board of Directors.

Minority shareholders can take legal action if they feel their rights are being unfairly prejudiced.

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Insolvent

Insolvency is the state of being unable to pay the debts, by a person or company, at maturity; those in a state of insolvency are said to be insolvent.

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Technical insolvent

If a company is technically insolvent that merely means that it has a negative net asset value; its liabilities are greater than its assets. Conversely, a company that is technically solvent but which is no longer profitable may well become insolvent.

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Liquidity

Liquidity refers to the ease with which an asset, or security, can be converted into ready cash without affecting its market price. Cash is the most liquid of assets while tangible items are less liquid. Current, quick, and cash ratios are most commonly used to measure liquidity.

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Covenants

A loan covenant is a condition in a commercial loan or bond issue that requires the borrower to fulfill certain conditions or which forbids the borrower from undertaking certain actions, or which possibly restricts certain activities to circumstances when other conditions are met. Generally, there are two types of covenants included in loan agreements: affirmative covenants and negative covenants.

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Off-balance sheet financing

Off-balance sheet financing is an accounting method whereby companies record certain assets or liabilities in a way that prevents them from appearing on their balance sheet. It is used to keep debt-to-equity and leverage ratios low, especially if the inclusion of a large expenditure would break negative debt covenants.

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Discounted cash forecasts (DCF)

DCF is a valuation method used to estimate the value of an investment based on its expected future cash flows. DCF analysis attempts to figure out the value of an investment today, based on projections of how much money it will generate in the future.

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Onerous contract

An onerous contract is an accounting term that refers to a contract that will cost a company more to fulfill than what the company will receive in return. The term is used in many countries worldwide, where international regulators have determined that such contracts must be accounted for on balance sheets.

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Gross profit

Gross profit is the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services. Gross profit will appear on a company's income statement and can be calculated by subtracting the cost of goods sold (COGS) from revenue (sales).

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Default

In interest bearing markets this is where a borrower is unable to pay interest, capital or both interest and capital on outstanding debt.

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Derivative

Is a security with a price that is dependent or derived from the price of an underlying security. Derivatives are most often used to gain exposure to a certain asset without purchasing that asset, or to hedge against negative price movements in the underlying asset.

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Diversification

Spreading the investment of a portfolio across a number of asset classes, generally to lower the overall risk of a portfolio by including assets with different risk and return characteristics.

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Dividend yield

The dividend yield of each company is the dividends per share divided by the price. For a Fund, this will be the weighted average dividend yield of all the underlying equity in the Fund.

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Non-current assets

Non-current assets are a company's long-term investments for which the full value will not be realized within the accounting year. Examples of non-current assets include investments, intellectual property, real estate, and equipment. Noncurrent assets appear on a company's balance sheet.

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Current assets

Current assets are all the assets of a company that are expected to be sold or used as a result of standard business operations over the next year. Current assets include cash, cash equivalents, accounts receivable, stock inventory, marketable securities, pre-paid liabilities, and other liquid assets.

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Non-current liabilities

Non-current liabilities include debentures, long-term loans, bonds payable, deferred tax liabilities, long-term lease obligations, and pension benefit obligations. The portion of a bond liability that will not be paid within the upcoming year is classified as a non-current liability.

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Dividends

A portion of a company’s earnings that have been declared and will be paid to shareholders.

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Futures contract

A legal agreement, generally made on the trading floor of a futures exchange, to buy or sell a particular commodity or financial instrument at a predetermined price at a specified time in the future.

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Net Asset Value (NAV)

The net asset value represents the total assets of an Entity less its total liabilities.

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Current liabilities

Current liabilities are a company's short-term financial obligations that are due within one year or within a normal operating cycle. An example of a current liability is money owed to suppliers in the form of accounts payable.

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Earnings per share (EPS)

EPS is calculated as a company's profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company's profitability. It is common for a company to report EPS that is adjusted for extraordinary items and potential share dilution.

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Headline earnings per share (HEPS)

Headline earnings are a measurement of a company's earnings based solely on operational and capital investment activities. It specifically excludes any income that may relate to staff reductions, sales of assets, or accounting write-downs.

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Diluted earnings per share (DEPS)

Diluted EPS is a performance metric used to assess a company's earnings per share (EPS) if all convertible securities were realized.

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Debt restructuring

Debt restructuring is a process that allows a private or public company - or a sovereign entity - facing cash flow problems and financial distress, to reduce and renegotiate its delinquent debts in order to improve or restore liquidity and rehabilitate so that it can continue its operations.