Evaluation of creditability and risk minimisation
The effect of accounting for intangibles
The recent history knows numerous examples of creditor?s inability to evaluate financial solvency of the client correctly. Creditors? risks do not only concern individual relations between the two parties but the economy in general. The standard loan-giving procedure considers evaluation based on a number of financial ratios. Using the standard method a company that in reality is creditable may sometimes be counted as insolvent by the bank ? due to the structure of the balance sheet, for instance. On the other hand, good financial ratios would not always provide assurance about the company?s capability to pay back the loan. Each of the situations would create risk for the creditor. The structure of the balance sheet brings with it a number of financial ratios, one of which is liquidity of the balance sheet. Some assets, such as intangible assets for example, may often be seen as illiquid. Therefore, an evaluation method based on the balance sheet (which often excludes intangibles from the calculations) is not always efficient. This is also because nowadays the number of ?intangible? companies is increasing, the economy in general is becoming more research-oriented and therefore alternative evaluation techniques should be applied. Banks, in other words should adapt themselves to the new environment. Among such techniques can be named e.g. taking a closer look at the company, it?s activity, the assets and bookkeeping procedures which may provide additional information to the creditor and even influence the decision making process. Such procedures may provide more credible and reliable information, uncover hidden risks, and help to predict potential bankruptcy or, on the other hand, destroy suspicions about the client?s insolvency. The results of the research provide information on whether the banks are facing evaluation problems, the creditor?s attitude to accounting for intangibles and sufficiency of information on intangibles. In this respect the question whether banks are prepared to perform the client?s field research or internal auditing procedures is answered. The empirical research is based on four interviews with credit managers in Sweden, Finland and Russia. The general outcome of the study shows that alternative measures are applied when this is considered necessary. In Finland and Sweden auditing is often relied upon for evaluating the clients? activity and credibility of its? financial statements. On the other hand, field-research is a more common practice among Russian creditors.