Academic journal article Journal of Financial Management & Analysis

Are Balance Sheets Meaningful and Trustworthy?

Academic journal article Journal of Financial Management & Analysis

Are Balance Sheets Meaningful and Trustworthy?

Article excerpt

The effect is best explained by a hypothetical numerical example. Bank X has exposure in Country A of £ one million (face value), and has made a provision of 40 per cent against its exposure in Country. A due to difficulties in getting the debt serviced and/or perceived risk that the principal may not be paid back. The Inland Revenue however has only accepted (for tax purposes) provisioning of 15 per cent, as the Inland Revenue accepted the provision for risk of loss of principal but not for future reduced or delayed payment of interest. In the initial situation, therefore, the bank's shareholders have accepted loan-loss provisioning of £400,000 while the Inland Revenue had for tax purposes only accepted £150,000.

Bank X decides to donate 10 per cent of its exposure in Country A to UNICEF within the scheme of 'Debt for Child Development1. The face value of the debt being donated is thus £100,000, and its balance sheet value is 60,000. …

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