Hi guys, just a quick question, in qbank there is a question where it states in the answer that one of the reasons for manipulating earnings would be to negotiate better terms on a line of credit. I think I understand the reasoning but I’d like to hear your guys thoughts on it. Thanks
Simple this way. Better earnings = better chances that the borrower will pay back and the higher the chances of repayment by the borrower, the better bargining power he has to negotiate better credit terms (lower interest rate). Hope this helps
to add, generally to negotiate better terms with lending, a company has to meet certain covenants which include maintaining ratios below or above a certain threshold, this obviously gives management incentive to fudge numbers.
sorry guys i forgot to mention that the question suggested manipulating earnings lower would be better for renegotiating credit terms. I agree with your points though as thats how I initially answered the question
any thoughts given this extra info?
Lender doesn’t want borrower to default and borrower appears to be in distress via lower earnings. So the borrower will say to the lender “hey cut me some slack here because im in trouble and not making as much as i use to.” Kind of like cheating on your taxes lol
On seeing your lower earnings, lender will prefer to earn lower payments rather than letting ur company go bankrupt which the former might or might not recover the full payments?
revenant Wrote: ------------------------------------------------------- > On seeing your lower earnings, lender will prefer > to earn lower payments rather than letting ur > company go bankrupt which the former might or > might not recover the full payments? +1 By manipulating your earnings lower to show you are a stress company, your intention may be to renegotiate better terms on your existing debt. But for getting new credit, decreasing earnings would get your credit ratings lower and hence increasing cost of your new debt.
What does “+1” means in this forum?
+1 means agreement with what is quoted above it.
I see. Cool.