Page 298 - FR Integrated Workbook 2018-19

Chapter 21

3.4 Gearing: reasons for movement

Increased gearing

 issue of loan notes or preference shares treated as liability

 assets acquired using lease

 trading losses causing reduction in retained earnings

 excessive dividends reducing retained earnings

Reduced gearing

 repayment of loan notes or preference shares treated as liability

 redemption of convertible debt instruments

 trading profits increasing retained earnings

 revaluation of non-current assets, increasing revaluation surplus

3.5 Interest cover: calculation

Profit before interests

Finance costs

 Indicates how many times interest costs could be paid from current profit level

 Used by lenders to assess risk of default

 Lenders may insist on maintenance of minimum interest cover as part of loan
agreement

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