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Corporate Reorganisation and Capital Reconstruction Schemes (part 2) – ACCA (AFM) lectures

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  1. Hello sir, can you please help me understand why are we not considering the additional finance cost for the added borrowings? The question says that “Finance cost will be $6.5m per year” – Should that not affect the retained earning when we are preparing the SOFP for proposed refinancing?

    • Actually, I understand this now – the question says – “The P/L for the year ended 30 June 2016 is not affected by the proposed investment” so we don’t need to worry about the finance costs for 2016.

      • You will probably be able to find it by searching on Google, however we cannot provide a link here because the question is copyright of the ACCA (and websites that do have it are breaking the law).

        It will certainly be in your Revision Kit, and it is essential that you have a Revision Kit from one of the ACCA Approved Publishers.

  4. Dear Mr. Moffat

    With regard to part (a) of the Question on Flufftort Co, the ratio of equity to long term liabilities comes down to 1.285, (rounded 1.29) which does not meet the requirement of the covenant on the bank loan and as such, it should have led the company to effect immediate payment of the bank loan of $30 million. In the same line of thought, why does the bank loan of $30 million still appear on the Statement of Financial Position as at 30 June 2016?

    • These are proposed schemes of restructuring in order to keep the company viable, and the question is asking for the projected SOFP’s for each of the schemes.

      Any of the proposed schemes are subject to the finance providers agreeing to it, and that is the subject of part (b) of the question (which is carrying more than half the marks). As the examiner’s answer to part (b) does state, the covenant is broken, but it is only broken marginally, and although the bank may be concerned, they may be prepared to accept it.
      Do read the last paragraph before ‘conclusion’ of the answer to part (b).

  5. Hi sir, regarding to the sample answer provided for question (b), I don’t really understand about this (as follows):

    [Extract from sample answer: Purchase of Gupte VC’s shares
    In the worst case scenario, Gupte VC will demand repayment of its investment in a year’s time. The calculations in (a) show the financial position in a year’s time, assuming that there is no net investment in non-current assets or working capital, the purchase of shares is financed solely out of cash reserves and the shares are cancelled. Repayment by this method would mean that the limits set out in the covenant would be breached (45/35 = 1·29) and the bank could demand immediate repayment of the loan.

    The directors can avoid this by buying some of Gupte VC’s shares themselves, but this represents money which is not being put into the business. In addition, the amount of shares which the directors would have to purchase would be greater if results, and therefore reserves, were worse than expected.]

    On the last paragraph, what does it mean by amount of shares would have to purchase would be greater??

    Thank you.

    • If the results are worse than expected, then the total equity (share capital + reserves) will be lower than expected. Therefore to bring the equity to non-current liabilities ratio up to the required level will mean they would have to put even more money in and buy even more shares.

      • Hi Mr Moffat,

        For the provided solution for part b evaluating question, in the fourth paragraph under heading “Financing the investment”, the examiner says:
        The calculations in (a) show that the cash associated with the refinancing would be enough to finance the initial investment. …. However, financing for the subsequent investment required would have to come from surplus cash flows.

        From (a), we concluded that the cash reserve would be 5 million. But where did the context of the question lead the examiner say this amount would be enough to finance the initial investment? I can’t find anything regarding the initial investment amount in the question.

        Thank you.

  6. Good Day,

    The Overdraft of $5, the additional $5m added to the Current Liabilities?
    is the reason why the Overdraft charge was not added to the Profit or loss statement because the amount was not given.? and do you need to evaluate that the O/D charge will reduce the profit, or do we just ignore it?

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