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Hi, I have seen some text I cannot completely understand:
“Long-term loans may also be backed by ‘security’ given by the business over specific assets. The value of these assets will be indicated in the statement of financial position”.I see such a sentence in the concept “Users of financial statements: Lender” on Kaplan textbook, it says the lenders focus on the solvency of the entity.
I think it means the long-term loans usually take mortgages such as land, machine,etc. which will be regarded as a more stable and fixed asset to pay for the loans. So it will be more reliable.
I don’t know if I understand it right and I’m not sure what the specific assets can be.
Your understanding is more or less correct. If someone gives a loan to a company then there is always a risk of the company going bankrupt and there might not be enough money in the company for the loan to be repaid.
So they might insist that the loan be secured on one of the non-current assets of the company. This means that if the company does go bankrupt then the lender can take the asset for themselves (and then sell it so as to get their money back).
I am surprised this is in the Kaplan book because it is not so relevant for Paper FA (it is much more relevant in later exams).
Thank you!
I have a following question.
About the “Security for loans”, on page 8 the textbook explains more about it.
It gives a new terminology named ” floating charges”. It’s useful when a limited liability company has no non-current assets but does have large and valuable inventories.
Does that mean a company can also use its own inventories as mortgage to repay for the loan? If so, how can we operate it? I think it’s not acceptable in general because the lender shouldn’t want to spend time and find a way of resaling the goods.
I do not have the textbook and so I cannot see what is written on Page 8 🙂
A floating charged is where the loan is secured on the assets in general rather than on any specific assets. It is not a mortgage (just as your previous question was nothing to do with mortgages). If the lender is not going to get repaid then they would rather get the inventories rather than get nothing at all, even if it meant time having to sell the goods.
Normally the lenders do not have to take any assets because normally the company will not have problems and they will get repaid OK.
Again, this is all of little relevance for Paper FA. Our lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
I get it. Now I have a feeling of these concepts. As it is beyond the Paper FA, I will not spend much time on it.
Thank you very much!
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