What Is an Asset-Liability Committee?

An asset-liability committee (ALCO), also known as surplus management, is a supervisory group that coordinates the management of assets and liabilities with a goal of earning adequate returns. By managing a company’s assets and liabilities, executives are able to influence net earnings, which may translate into increased stock prices.

Understanding Asset-Liability Committees (ALCO)

An ALCO at the board or management level provides important management information systems (MIS) and oversight for effectively evaluating on- and off-balance-sheet risk for an institution. Members incorporate interest rate risk and liquidity consideration into a bank’s operating model.

One of the ALCO’s goals is ensuring adequate liquidity while managing the bank’s spread between the interest income and interest expense. Members also consider investments and operational risk.

ALCO meetings should be conducted at least quarterly. Member responsibilities typically include managing market risk tolerances, establishing appropriate MIS, and reviewing and approving the bank’s liquidity and funds management policy at least annually.

Members also develop and maintain a contingency funding plan, review immediate funding needs and sources, and determine liquidity risk exposures to adverse scenarios with varying probability and severity.

Special Considerations

An ALCO’s strategies, policies, and procedures should relate to the board’s goals, objectives, and risk tolerances for operating standards. Strategies should articulate liquidity risk tolerances and address the extent to which central elements of funds management are centralized or delegated in the institution.

Strategies should also communicate how much emphasis is placed on using asset liquidity, liabilities, and operating cash flows for meeting daily and contingent funding needs.

Example of an Asset-Liability Committee

Alfa Bank’s ALCO is appointed by a resolution of the bank’s executive board and includes seven or more members with the right to vote for a one-year period. The ALCO is headed by the ALCO chair appointed by the bank’s executive board. ALCO members without the right to vote are appointed upon presentation to the ALCO chair by order of the bank executive board from among bank specialists and managers for a one-year period.

The bank’s ALCO meetings are typically held every two weeks. Additional meetings may be scheduled as needed. The ALCO has the authority to resolve matters submitted for consideration if more than half of the members with the right to vote are present at the committee meeting. A resolution is passed when more than half the members with the right to vote are present and vote in favor of the resolution. ALCO’s resolutions are binding on all bank employees.

What Is the Additional Child Tax Credit?

The additional child tax credit was the refundable portion of the child tax credit. It could be claimed by families who owed the IRS less than their qualified child tax credit amount. Since the child tax credit was non-refundable, the additional child tax credit refunded the unused portion of the child tax credit to the taxpayer. This provision was eliminated from 2018 to 2025 by the Tax Cuts and Jobs Act (TCJA).

However, under the TCJA, the child tax credit includes some provisions for refundable credits. In addition, on March 11, 2021, President Biden’s American Rescue Plan was voted into law and made child tax credits fully refundable in 2021.

Understanding the Additional Child Tax Credit

A tax credit is a benefit given to eligible taxpayers to help reduce their tax liabilities. If Susan’s tax bill is $5,550 but she qualifies for a $2,500 tax credit, she will only have to pay $3,050. Some tax credits are refundable, meaning that if the tax credit amounts to more than what is owed as tax, the individual will receive a refund. If Susan’s tax credit is actually $6,050 and is refundable, she will be given a check for $6,050 – $5,550 = $500.

Depending on what tax group a taxpayer falls in, they may be eligible to claim a tax credit. For example, taxpayers with children may qualify for the child tax credit which helps to offset the costs of raising kids.

For the 2022 through 2025 tax year, the child tax credit allows eligible tax filers to reduce their tax liability by up to $2,000 per child. To be eligible for the child tax credit, the child or dependent must:

• Be 16 years or younger by the end of the tax year
• Be a U.S. citizen, national, or resident alien
• Have lived with the taxpayer for more than half of the tax year
• Be claimed as a dependent on the federal tax return
• Not have provided more than half of their own financial support
• Have a Social Security number

Child Tax Credit vs. Additional Child Tax Credit

Previously, the child tax credit was non-refundable, which means the credit could reduce a taxpayer’s bill to zero, but any excess from the credit would not be refunded. Families who wanted to keep the unused portion of the child tax credit could go the route of another available tax credit called the additional child tax credit.

This credit was a refundable tax credit that families could qualify for if they already qualified for the non-refundable child tax credit. The additional child tax credit was ideal for families who owed less than the child tax credit and wanted to receive a refund for the surplus credit.

While the additional child tax credit was eliminated in 2018 under the Tax Cuts and Jobs Act (TCJA), up to $1,400 of the $2,000 child tax credit can be refundable for each qualifying child if certain conditions are met. For example, a taxpayer needs to earn more than $2,500 for the tax year to qualify for any refund. To claim a refund, filers must complete Schedule 8812.

The American Rescue Plan created major changes to the child tax credit for 2021. The maximum credit rose to $3,000 (children up to 17) or $3,600 (children younger than six). Qualifying families started receiving monthly checks (half of the full credit) in July 2021. The credit also became fully refundable in 2021, and families may claim the second half of the credit on their 2021 tax return. This child-related tax benefit begins to phase out for individual filers with children who earn more than $75,000 and joint filers earning more than $150,000.

Example of the Additional Child Tax Credit

Before the TCJA, the IRS allowed families with an annual income of more than $3,000 to claim a refund using the additional child tax credit. The tax credit depended on how much the taxpayer earned and was calculated by taking 15% of the taxpayer’s taxable earned income over $3,000 up to the maximum amount of the credit, which was then $1,000 per child. The total amount above $3,000 (subject to annual adjustments for inflation) was refundable.

For example, a taxpayer with two dependents qualifies for the child tax credit. Their earned income is $28,000, which means income over $3,000 is $25,000. Since 15% x $25,000 = $3,750 is greater than the maximum credit of $2,000 for two kids, they would have received the full portion of any unused credit.

So if the taxpayer received an $800 child tax credit, they would be refunded a $1,200 Additional child tax credit. However, if the taxable earned income was $12,000 instead, 15% of this amount over $3,000 is 15% x $9,000 = $1,350. Because the refundable portion of the credit cannot exceed 15% of earned income above $3,000, the taxpayer would receive a maximum refund of $1,350, not $2,000.

Taxpayers who were residents of Puerto Rico with income below $3,000 were eligible if they had at least three qualifying dependents and paid Social Security tax in excess of the amount of their earned-income credit for the year.

What Is Additional Paid-in Capital (APIC)?

Additional paid-in capital (APIC) is an accounting term referring to money an investor pays above and beyond the par value price of a stock.

Often referred to as “contributed capital in excess of par,” APIC occurs when an investor buys newly-issued shares directly from a company during its initial public offering (IPO) stage. APIC, which is itemized under the shareholder equity (SE) section of a balance sheet, is viewed as a profit opportunity for companies as it results in them receiving excess cash from stockholders.

How Additional Paid-in Capital (APIC) Works

During its IPO, a firm is entitled to set any price for its stock that it sees fit. Meanwhile, investors may elect to pay any amount above this declared par value of a share price, which generates the APIC.

Let us assume that during its IPO phase the XYZ Widget Company issues one million shares of stock, with a par value of $1 per share, and that investors bid on shares for $2, $4, and $10 above the par value. Let us further assume that those shares ultimately sell for $11, consequently making the company $11 million. In this instance, the APIC is $10 million ($11 million minus the par value of $1 million). Therefore, the company’s balance sheet itemizes $1 million as “paid-in capital,” and $10 million as “additional paid-in capital.”

Once a stock trades in the secondary market, an investor may pay whatever the market will bear. When investors buy shares directly from a given company, that corporation receives and retains the funds as paid-in capital. But after that time, when investors buy shares in the open market, the generated funds go directly into the pockets of the investors selling off their positions.

Special Considerations

APIC is generally booked in the SE section of the balance sheet. When a company issues stock, there are two entries that take place in the equity section: common stock and APIC. The total cash generated by the IPO is recorded as a debit in the equity section, and the common stock and APIC are recorded as credits.

The APIC formula is:

APIC = (Issue Price – Par Value) x Number of Shares Acquired by Investors.

Par Value

Due to the fact that APIC represents money paid to the company above the par value of a security, it is essential to understand what par actually means. Simply put, “par” signifies the value a company assigns to stock at the time of its IPO, before there is even a market for the security. Issuers traditionally set stock par values deliberately low—in some cases as little as a penny per share—in order to preemptively avoid any potential legal liability, which might occur if the stock dips below its par value.

Market Value

Market value is the actual price a financial instrument is worth at any given time. The stock market determines the real value of a stock, which shifts continuously as shares are bought and sold throughout the trading day. Thus, investors make money on the changing value of a stock over time, based on company performance and investor sentiment.

Additional Paid-in Capital vs. Paid-in Capital

Paid-in capital, or contributed capital, is the full amount of cash or other assets that shareholders have given a company in exchange for stock. Paid-in capital includes the par value of both common and preferred stock plus any amount paid in excess.

Additional paid-in capital, as the name implies, includes only the amount paid in excess of the par value of stock issued during a company’s IPO.

Both of these items are included next to one another in the SE section of the balance sheet.

Benefits of Additional Paid-in Capital

For common stock, paid-in capital consists of a stock’s par value and APIC, the latter of which may provide a substantial portion of a company’s equity capital, before retained earnings begin to accumulate. This capital provides a layer of defense against potential losses, in the event that retained earnings begin to show a deficit. 

Another huge advantage for a company issuing shares is that it does not raise the fixed cost of the company. The company doesn’t have to make any payment to the investor; even dividends are not required. Furthermore, investors do not have any claim on the company’s existing assets.

After issuing stock to shareholders, the company is free to use the funds generated any way it chooses, whether that means paying off loans, purchasing an asset, or any other action that may benefit the company.

Correction—March 29, 2022: A previous version of this article inaccurately represented where APIC appears on the balance sheet.

What Is an Audit?

The term audit usually refers to a financial statement audit. A financial audit is an objective examination and evaluation of the financial statements of an organization to make sure that the financial records are a fair and accurate representation of the transactions they claim to represent. The audit can be conducted internally by employees of the organization or externally by an outside Certified Public Accountant (CPA) firm.

Understanding Audits

Almost all companies receive a yearly audit of their financial statements, such as the income statement, balance sheet, and cash flow statement. Lenders often require the results of an external audit annually as part of their debt covenants. For some companies, audits are a legal requirement due to the compelling incentives to intentionally misstate financial information in an attempt to commit fraud. As a result of the Sarbanes-Oxley Act (SOX) of 2002, publicly traded companies must also receive an evaluation of the effectiveness of their internal controls.

Standards for external audits performed in the United States, called the generally accepted auditing standards (GAAS), are set out by Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants (AICPA). Additional rules for the audits of publicly traded companies are made by the Public Company Accounting Oversight Board (PCAOB), which was established as a result of SOX in 2002. A separate set of international standards, called the International Standards on Auditing (ISA), were set up by the International Auditing and Assurance Standards Board (IAASB).

Types of Audits

External Audits

Audits performed by outside parties can be extremely helpful in removing any bias in reviewing the state of a company’s financials. Financial audits seek to identify if there are any material misstatements in the financial statements. An unqualified, or clean, auditor’s opinion provides financial statement users with confidence that the financials are both accurate and complete. External audits, therefore, allow stakeholders to make better, more informed decisions related to the company being audited.

External auditors follow a set of standards different from that of the company or organization hiring them to do the work. The biggest difference between an internal and external audit is the concept of independence of the external auditor. When audits are performed by third parties, the resulting auditor’s opinion expressed on items being audited (a company’s financials, internal controls, or a system) can be candid and honest without it affecting daily work relationships within the company.

Internal Audits

Internal auditors are employed by the company or organization for whom they are performing an audit, and the resulting audit report is given directly to management and the board of directors. Consultant auditors, while not employed internally, use the standards of the company they are auditing as opposed to a separate set of standards. These types of auditors are used when an organization doesn’t have the in-house resources to audit certain parts of their own operations.

The results of the internal audit are used to make managerial changes and improvements to internal controls. The purpose of an internal audit is to ensure compliance with laws and regulations and to help maintain accurate and timely financial reporting and data collection. It also provides a benefit to management by identifying flaws in internal control or financial reporting prior to its review by external auditors.

Internal Revenue Service (IRS) Audits

The Internal Revenue Service (IRS) also routinely performs audits to verify the accuracy of a taxpayer’s return and specific transactions. When the IRS audits a person or company, it usually carries a negative connotation and is seen as evidence of some type of wrongdoing by the taxpayer. However, being selected for an audit is not necessarily indicative of any wrongdoing.

IRS audit selection is usually made by random statistical formulas that analyze a taxpayer’s return and compare it to similar returns. A taxpayer may also be selected for an audit if they have any dealings with another person or company who was found to have tax errors on their audit.

There are three possible IRS audit outcomes available: no change to the tax return, a change that is accepted by the taxpayer, or a change that the taxpayer disagrees with. If the change is accepted, the taxpayer may owe additional taxes or penalties. If the taxpayer disagrees, there is a process to follow that may include mediation or an appeal.