Gearing and Provision: Difference between pages

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imported>Doug Williamson
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imported>Doug Williamson
(Add tax anti-avoidance provision example.)
 
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1. <br />
1. ''Accounting''.  
<i>Financial gearing</i> measures the relative amount of debt in a firm's capital structure.<br />
Gearing is sometimes also known as <i>leverage</i>.


A form of liability where there is uncertainty as to the amount and timing of final settlement.


Gearing and leverage ratios can be calculated in several different ways, so consistency of approach is important.
Relevant accounting standards include IAS 37 and Section 21 of FRS 102.




Two essential bases to define are:
2. ''Accounting''.


A reduction in the carrying amount, or net book value, of an asset to recognise an estimated reduction in value.


i. The use of book or market values.<br />
Examples include bad debt provisions and provisions for depreciation.
ii. The use of Debt divided by Equity (D/E) or of Debt divided by Debt plus Equity = D / (D+E).




<span style="color:#4B0082">'''Example'''</span>
3. ''Law''.


<i>Gearing</i><br />
A significant individual part of a law, for example a tax anti-avoidance provision.
Assume the values of debt and equity are equal, say USD 1m each.<br />
D/E = 1/1 = 100%.<br />
This is usually known as 'gearing'.




<i>Leverage</i><br />
4. ''Contract law''.  
Using the other calculation with the same inputs (D = 1 and E = 1):<br />
D / (D+E) = 1/2 = 50%.<br />
This is usually known as 'leverage'.


A significant individual part of a contract, for example a clause or a term in a contract.


<b>Adjustments to D and E figures</b><br />
With respect to the Debt figure, practice varies in including or excluding certain items such as cash, short term borrowings, leases, pensions and other provisions.<br />
Practitioners may also adjust the Equity figure, for example to exclude intangible assets.


== See also ==
* [[Accrual]]
* [[Anti-avoidance provision]]
* [[Bad debt provision]]
* [[Book reserve]]
* [[Call provision]]
* [[Depreciation]]
* [[FRS 102]]
* [[General provision]]
* [[IAS 37]]
* [[Liabilities]]
* [[Make whole provision]]
* [[Term]]
* [[Zero rate provision]]


2. <br />
[[Category:Compliance_and_audit]]
<i>Operational gearing</i> relates to the operating costs of a business, and measures the relative proportions of fixed and variable operating costs.
 
 
3. <br />
'Gearing up' refers to increasing the levels of financial or operation gearing - or both - within an organisation.<br />
The intention of gearing up is to improve expected net results.  <br />
A consequence of gearing up is normally to increase risk.
 
 
Many financial disasters have been a consequence of gearing up (or leveraging) excessively in this way in earlier periods.
 
 
==See also==
 
* [[Debt equity ratio]]
* [[Debt to equity ratio]]
* [[Intangible assets]]
* [[Leverage]]
* [[Leveraged]]
* [[Leveraged takeover]]
* [[Levered]]
* [[MCT]]
* [[Off-balance sheet finance]]
* [[Ungeared]]
* [[Ungeared cash flow]]
 
 
===Other links===
[http://www.treasurers.org/node/8012 Masterclass: Measuring financial risk, The Treasurer, July 2012]
 
[[Category:Corporate_finance]]

Revision as of 20:32, 3 February 2018

1. Accounting.

A form of liability where there is uncertainty as to the amount and timing of final settlement.

Relevant accounting standards include IAS 37 and Section 21 of FRS 102.


2. Accounting.

A reduction in the carrying amount, or net book value, of an asset to recognise an estimated reduction in value.

Examples include bad debt provisions and provisions for depreciation.


3. Law.

A significant individual part of a law, for example a tax anti-avoidance provision.


4. Contract law.

A significant individual part of a contract, for example a clause or a term in a contract.


See also

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