In
June 2012, the board of directors for Holtzman Enterprises Inc. authorized the
sale of $10 million of corporate bonds. Michelle Collins, treasurer for
Holtzman Enterprises Inc., is concerned about the date when the bonds are
issued. The company really needs the cash, but she is worried that if the bonds
are issued before the company’s year-end (December 31, 2012), the additional
liability will have an adverse effect on several important ratios. In July, she
explains to company president Kenneth Holtzman that if they delay issuing the
bonds until after December 31, the bonds will not affect the ratios until
December 31, 2013. They will have to report the issuance as a subsequent event,
which requires only footnote disclosure. Collins predicts that with expected
improved financial performance in 2012, the ratios should be better.
Instructions
Adopt
the role of Michelle Collins and discuss any issues.
Overview
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Company has authorized the issue of bonds which will
affect f/s ratios once the bonds are issued.
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Treasurer concerned about the ratios which might
negatively affect the share price.
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Users of financial statements will want transparency.
Assume GAAP is a constraint (wither ASPE or IFRS).
Analysis and
Recommendations
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The issue is whether to delay the issuance of the
bonds until the following year.
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Should a company delay transactions just because they
do not like the impact on the financial statements?
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Technically no. If the company has done an analysis
from an economic or strategic perspective and has decided that they need the
money now, the financial reporting should not be a factor.
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Accounting should be neutral.
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On the other hand, if they do not really need the
money, then there is no real loss to the company to defer the issue.
Recommendations:
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In summary, must look at the cost to the company of
deferral of the issue (economic costs and other costs).
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If there are real costs, then must not delay.
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Must weigh the costs of deferral with the costs of
showing more debt on the balance sheet.
