Asset/liability management

CONCEIVED and PRESENTED customized analytics designed to assess Asset Liability Management risk profiles, which led to increased sales of securities to banks, credit unions, and municipalities. 

Don t get confused here about the role of commercial banks. A bank can use a swap in its asset/liability management. Or, a bank can transact (buy and sell) swaps to clients to generate fee income. It is in the latter sense that we are discussing the role of a commercial bank in the swap market here. 

Its asset and liability management practices, notably regarding interest rate mismatches. 

Then there are the more recent, more sophisticated, and (we would say) more powerful arguments, which focus on liability risk management for governments. Given that asset management is all about risk and return, it is only natural that liability management should be all about risk and cost. 

For background and description of this valuation approach see Chapter 23, Bank Asset and Liability Management, Choudhry, M., (John Wiley Sons Asia Ltd, 2007). 

A typical management accountant s statement for changes in working capital and sources and applications of funds is shown in Table 9-34. This is based on the following relation an increase in apphcation of funds equals an increase in sources of funds. The relation can also be expressed as follows an increase in assets plus a decrease in habil-ities equals an increase in liabilities plus a decrease in assets. 

On a balance sheet, the sum of the total liabilities and the stockholders equity must equal the total assets, hence the term balance sheet. Comparing balance sheets for successive years, one can follow changes in various items that will indicate how well the company manages its assets and meets its obligations. 

The issue of common stock is the basic method of financing a company. Common stockholders take the ultimate risk in a business because they have no right to a return on their investment. However, they have the right to elect the directors of the company, who in turn are responsible for the management of the business. Stockholders are likely to vote the board of directors out if adequate dividends are not paid. Usually the liability of stockholders is limited to the nominal, or par, value of their stock, and hence they can lose only what they have aheady paid for the stock. If the liability is not hmited by law, the personal assets of the stockholders are at risk in the event of company bankruptcy in proportion to the amount of stock held. 

Numerous activities occur on a daily basis that can change assets (things that we own, e.g., a computer), liabilities (debts that we owe, e.g., notes payable), and the owner s equity (the worth of the owner, e.g., Amy Harris, capital). These changing events must be entered in accmmting records. Developing a set of financial records is the responsibility of the firm s owner, and a system should be developed that is compatible with the company s owner and managers who use this information. 

Solvency refers to an enterprise s ability to meet its long-term debt obligations on a continuing basis. All financial statement users are interested in the liquidity of a firm in addition to the obvious liquidity concerns of creditors and management. Will the firm be able to pay its short-term debts as they become due Can the firm cover its current liabilities with its current assets Does the firm have an efficient mix of current assets, e.g., cash and inventory Do owners and management properly use the current assets To effectively answer these and other financial questions, it is necessary to use the following financial tools. 

Table 9.11 calculates the current ratio for the Blue and Gold companies. Although both companies have 100,000 more of current assets than current liabilities (working capital), the current ratio varies substantially. The Blue company s management has twice as many assets to pay for the current... 

A wider method of evaluating a firm s efficiency is the rate of return on total assets. Because the accounting equation requires that total assets equal the sum of fofal liabilities and total stockholder s equity, this ratio provides a measure of fhe firm s efficiency at managing both stockholder and creditor investments ... 

To prepare, look at your hazard vulnerahilities, look through worst case scenario eyes, and look at your emergency plans. Ask what liabilities do you have in the community you serve and what assets are available. Think about your staff and their need to care for their families. Do your plans address families Think about an incident management system and what is necessary for prolonged events. Look at your plans—do they address your entire organization ... 

Many investors may erroneously take at face value the management s statements that the company acquired no liability for Bhopal and the company cites a number of issues and developments to back up this claim.53 However, Union Carbide remains a named accused in the criminal case in India, placing Dow Chemical assets in India at risk for potential attachment in the ongoing case. In addition, the Indian government is reportedly processing a request to sue Dow to engage in remediation of the site. 

A ledger. Table, 3.2, was set up containing the necessary accounts to record the transactions of January 1, 20XX. Again, the number of accounts in the ledger depends on the information required by management to make decisions. Initially, Delchem, Inc. requires only asset and liability accounts. However, as the firm grows, more accounts will be established as necessary to record the business transactions. 

The current ratio is defined as the current assets divided by the current liabilities. It is a measure of the company s overall ability to meet obligations from current assets. Today a comfortable level of between 1.5 and 2 is considered adequate. (Note Numbers presented in this section are typical as of 1999 but will vary depending on the company s style of management.)... 

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