How Do Restrictions Affect Net Assets?
Original post by Alexis Lawrence of Demand Media
The net assets of a company refers to the amount that a company is worth after factoring in expenses and debt. Restrictions are the stipulations placed on a company by a creditor in regard to the use of borrowed money. Restrictions affect the net assets of a company by limiting the amount that a company is worth in regard to stock.
When a company borrows money from a creditor, that creditor may place restrictions on the company. These restrictions dictate if stock dividends may be given out, or a dollar amount of stock dividends that may be distributed, before they get paid back in full. If a creditor places restrictions on a company, the company cannot consider the borrowed money as part of their assets for purposes of stock. It also may be responsible for making a payment to the creditor before distributing any dividends at all.
Since any money owed to a creditor is considered a debt and subtracted from all assets to figure the net assets of the company, restrictions do not affect net assets. The net assets remain the same, regardless of restrictions, since any money owed to the creditor has already been factored in. The restrictions do, however, have an effect on the net assets, or net worth, of the company as they pertain to stock.
Restrictions and Stock
When a company pays out stock dividends to investors, they do so based on the stockholders' equity in the company. This amount is the same as the net worth, or net assets, of the company. So, if a company has a stock plan to distribute 5 percent of its earnings per share to stockholders, and the company earns $100 per share, they would pay out $5 per share to shareholders. If a creditor places restrictions on the company, however, it may be permitted to pay only $3 per share to stockholders and put the rest of that profit toward paying off debt.
If a creditor has placed restrictions on a company, the only way for the company, and the stockholders, to get out from under the restrictions is to pay the debt in full or use the borrowed money toward its original purpose. If a company borrows money to build a new office, for instance, once that office has been built, the restrictions on dividends generally becomes void. Some creditors may also choose not to restrict the funds that they provide to a company. In this case, the company can use that money however they wish, including for the payment of stock dividends.
- College of Southern Nevada: Corporations - Retained Earnings and the Income Statement
- Catholic University of America; Classification of Net Asset Policy; March 2011
- University of Cincinnati -- College of Law; General Notes to Financial Statements; April 2009
- University of Akron; Legal Capital Restrictions on Stock Distributions; Craig A. Peterson and Norman W. Hawker
About the Author
Alexis Lawrence is a freelance writer, filmmaker and photographer with extensive experience in digital video, book publishing and graphic design. An avid traveler, Lawrence has visited at least 10 cities on each inhabitable continent. She has attended several universities and holds a Bachelor of Science in English.