Accounting Principles and Procedures

Question 1

Tell me about the trading valuations you have assisted with?

Answer 1

Determine Fair Maintainable Operating Profit (income less costs and operator remuneration) based on accounts and then x by market multiplier

Question 2

How did undertaking trading valuations inform your understanding of accounting principles and procedures?

Answer 2

I gained an understanding of the format of company accounts*

Question 3

What does FMT mean and when is it used?

Answer 3

Fair Maintainable Trade - level of trade that a reasonable efficient operator (disregarding the personal skill and reputation of the current owner) could expect to achieve in a property in good repair and suitably equipped.
In a trading valuation, it is used to derive the FMOP, which is then used to calculate MV with a multiplier derived from market evidence.

Question 4

What does FMOP mean?

Answer 4

Fair Maintainable Operating Profit - otherwise known as ‘adjusted net profit’, this is turnover less costs, working expenses and operator remuneration
A multiplier is then applied to this figure to derive MV

Question 5

What is EBITDA and when is it used?

Answer 5

Earnings Before Interest Tax Depreciation and Amortisation
Refers to the actual operating entity’s profit, may be different to the valuer’s estimated FMOP

Question 6

What section of the Red Book covers trading valuations?

Answer 6

VPGA 4

Question 7

What is an income statement?

Answer 7

A statement of a business’s oncome and expenditure transactions, prepared on an annual basis, also known as a ‘profit and loss account’

Question 8

What is a cash flow statement?

Answer 8

Shows all actual receipts and expenditure to include VAT.

Question 9

What accounts are not audited?

Answer 9

‘Management accounts’ prepared for internal use by a business

Question 10

Who prepares audited accounts?

Answer 10

Chartered or Certified Accountant

Question 11

What are consolidated accounts?

Answer 11

A number of individual subsidiary accounts for a company within a single set of accounts

Question 12

What is a balance sheet?

Answer 12

A statement of financial position - shows a business’s assets and liabilities at a given date, usually at the end of the financial year.

Question 13

Give examples of assets and liabilities you would see on a typical balance sheet?

Answer 13

Assets - cash, property, debtors, other investments
Liabilities - borrowings, loans, overdrafts, creditors

Question 14

How do you read a D&B credit report?

Answer 14

First part of the rating is tangible net worth - from 5A - H (Or NB - New Business, O - Undetermined, N - Negative), with 5A being a net worth of over £35m

Second part of the rating is risk indicator - from 1 - 4, with 1 being minimal risk, this considers factors such as high risk parents, failure events, auditors reports, fraud

Question 15

What should public limited accounts show?

Answer 15

Chairman’s statement, independent auditor’s report, income statement (profit and loss account), statement of financial position (balance sheet), corporate governance report, remuneration report, other statutory information

Question 16

What are management accounts?

Answer 16

Accounts prepared for internal use by a business and are not audited

Question 17

What is IFRS 16 and the impact of this?

Answer 17

Lease accounting standard - companies have to comply when using IFRS
- The full cost of leases have to be accounted for on the balance sheet as a liability
- Service charge payments would be accounted for separately
- Exemptions for leases of under 12 months

Question 18

What leases are exempt from being included in a balance sheet under IFRS 16?

Answer 18

Leases under 12 months

Question 19

What are LSH’s company objectives?

Answer 19

Short term - Profitability
Long term - Follow the planet mark framework for sustainability, growth of residential build to rent team

Question 20

How does your current team operate?

Answer 20

Individual fee targets and team target, allocate work based on expertise and capacity, strict compliance procedure based on checkers and counter-signatories.

Question 21

How do other teams at LSH operate?

Answer 21

Based on individual and group fee targets, split fees where necessary, referral fees for linking clients with other service lines.

Question 22

What current jobs, fees and objectives are discussed in your team meetings?

Answer 22

London commercial property team, primarily loan security work so mostly bank clients
Fees vary significantly by job and are agreed on an ad hoc basis based on the market, discuss these in the meetings to ensure some consistency across the team and appropriate sharing of work
Objectives - expansion of alternative and DRC valuation work

Question 23

What kind of company is Lambert Smith Hampton?

Answer 23

A private limited company - shares not publicly traded and maximum number of shareholders

Question 24

What accounts need auditing?

Answer 24

Accounts need auditing if two or more are met of -
- 10m turnover
- 5m assets
- 50 employees