Provision for depreciation and Provision of information: Difference between pages

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''Financial reporting - accounting practices - longer term tangible assets.''
A provision of information covenant requires the borrower to provide information to enable the lender to monitor the borrower’s credit risk.  


The accounting values of most tangible fixed assets, such as buildings, machinery, office equipment and vehicles are depreciated over their useful lifetime.  
Such information routinely includes copies of published financial information and circulars to shareholders. It is unlikely that treasurers will see any problem with this.




The asset is initially recorded in the balance sheet of the reporting entity at its original cost.
Ideally from a corporate borrower's perspective, the borrower would only provide published information, but weaker credits are unlikely to be able to negotiate this. Generally the level of information required increases as the credit quality of the borrower falls, and can include budgets, forecasts and management accounts.


In each reporting period, an appropriate amount of depreciation is charged to the income statement as an expense, and deducted from the carrying value of the asset in the balance sheet.
Problems may arise when the borrower is a quoted company and the information sought is unpublished and therefore possibly price sensitive, especially if the lender is a universal bank conducting both lending and share dealing activities. Even though most banks will have internal 'Chinese walls' (barriers designed to prevent transfer of confidential information between departments), treasurers may wish to obtain additional confidentiality undertakings bearing in mind regulatory requirements imposing a ‘continuing obligation’ of the avoidance of a false market.


The total deduction from the original cost, to arrive at the carrying amount, is known as the accumulated depreciation or the ''provision for depreciation''.


 
Where non-bank lenders are involved in bank type lending arrangements, this issue of confidentiality becomes more extreme. While banks have established procedures for keeping information separate from different areas, non-banks do not have this sophistication. One solution is to restrict information to certain lenders to only published data and indeed some presentations are managed in two parts to deal with this.
Land is not normally depreciated as its value is not generally considered to diminish over time.




== See also ==
== See also ==
* [[Balance sheet]]
* [[Covenant]]
* [[Book value]]
* [[Financial covenant]]
* [[Depreciation]]
* [[Negative pledge]]
* [[Financial reporting]]
* [[Non-financial covenant]]
* [[Fixed assets]]
* [[Net book value]]
* [[Reporting entity]]
* [[Tangible asset]]
* [[Total assets]]
 
[[Category:Accounting,_tax_and_regulation]]
[[Category:The_business_context]]
[[Category:Corporate_finance]]
[[Category:Investment]]

Revision as of 15:40, 1 August 2015

A provision of information covenant requires the borrower to provide information to enable the lender to monitor the borrower’s credit risk.

Such information routinely includes copies of published financial information and circulars to shareholders. It is unlikely that treasurers will see any problem with this.


Ideally from a corporate borrower's perspective, the borrower would only provide published information, but weaker credits are unlikely to be able to negotiate this. Generally the level of information required increases as the credit quality of the borrower falls, and can include budgets, forecasts and management accounts.

Problems may arise when the borrower is a quoted company and the information sought is unpublished and therefore possibly price sensitive, especially if the lender is a universal bank conducting both lending and share dealing activities. Even though most banks will have internal 'Chinese walls' (barriers designed to prevent transfer of confidential information between departments), treasurers may wish to obtain additional confidentiality undertakings bearing in mind regulatory requirements imposing a ‘continuing obligation’ of the avoidance of a false market.


Where non-bank lenders are involved in bank type lending arrangements, this issue of confidentiality becomes more extreme. While banks have established procedures for keeping information separate from different areas, non-banks do not have this sophistication. One solution is to restrict information to certain lenders to only published data and indeed some presentations are managed in two parts to deal with this.


See also