Financial Reporting, Read by a Lender

The syllabus teaches when revenue is recognised: at a point in time or over time, as principal or as agent, with estimates for variable amounts. The desk reads the same rules for one thing — whether the revenue is cash yet. Revenue recognised over time lives in estimates; revenue booked gross by an agent overstates the business; revenue that arrives before the cash arrives is working capital the bank will be asked to fund.

OVER TIME, SIGNAL OR NOISE → · PRINCIPAL OR AGENT → · A CHANGED MODEL →

Management presents an adjusted figure; the desk tests every add-back against the history. A restructuring cost that has appeared three years running is a cost of running the business. A settlement with no precedent can come out, with the papers. The sum that results is what the ratios are run on, and it is often a third below the figure in the presentation.

WORK IT · THE NUMBER → · ADJUSTED EBITDA, DEFINED → · ISSUE 07 · THREE FOOTNOTES →

The standard puts most leases on the balance sheet; a lender always did, because a lease that cannot be cancelled is a fixed charge paid before the bank. The adjustment runs both ways — the liability into debt, the rent back into earnings — and a covenant may freeze the old treatment, so a reader has to know which version of the business each number describes.

LEASE-ADJUSTED LEVERAGE, WORKED → · LEASE CAPITALISATION, THE FIRST QUESTION →

A provision released is profit no customer paid for; a contingent liability disclosed is a debt that may arrive; an impairment is the balance sheet admitting what the cash flow already knew. The desk reads each movement for what it says about the year rather than for whether the accounting was permitted — which it usually was.

A RELEASE, SIGNAL OR NOISE → · A CONTINGENT LIABILITY → · A WRITE-DOWN, THE FIRST QUESTION →

Costing methods move the margin without moving the stock, and a change of method in a year the margin needed help is read as such. The lender's interest is in the stock itself — how long it sits, what it would fetch, how much of it is last season's — because the stock is often the security and always the working capital.

INVENTORY COSTING, SIGNAL OR NOISE → · ISSUE 06 · THE STOCK THAT DID NOT CLEAR →

Group accounts add the subsidiaries together; the bank lends to one company at a time. Cash in a subsidiary the parent does not control, or in a jurisdiction it cannot repatriate from, is not cash available to service the parent's debt, and a lender to a holding company stands structurally behind every lender to its subsidiaries.

WHERE THE CASH SITS → · STRUCTURAL SUBORDINATION →

A bond held at amortised cost shows no loss when rates rise; the same bond sold tomorrow crystallises one. The distinction is the syllabus's, and it is also the reason a bank reading another bank's balance sheet asks what the held-to-maturity book would fetch today — the question underneath every modern bank run.

AMORTISED COST AGAINST FAIR VALUE → · DURATION AND VALUE, WORKED →

Translation moves the group accounts and no cash; transaction moves the cash that services the debt. The lender's interest is in the second and in the mismatch underneath it — revenue in one currency, costs in another — and in whether the hedging policy was written before the rate moved.

TRANSACTION EXPOSURE, WORKED → · TRANSLATION IN GROUP ACCOUNTS → · A FORWARD, FOR AN EXPORTER →

A loan the lender could call is current, in many frameworks, unless the lender had waived the breach at the balance date — which is why the bank's phone rings in the middle of December. The desk reads that call as a request to change the shape of the accounts, and reads the breach before it reads the calendar.

THE WAIVER, SIGNAL OR NOISE → · THE BANK IN YOUR AUDIT FILE → · LOAN COVENANTS EXPLAINED →

Audit and assurance, for how far the numbers can be trusted; financial management, for the cost of debt, appraisal and hedging; and the bridge page that walks all of it in the order a loan asks its questions.