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Hello!
The question states that the covenant for the debt is that the int cover must be maintained at 3. In my calculations the int cover for PY= 1.39 and CY=1.45. I don’t understand why this isn’t part of either the business risks or the ROMM. Unless I’m wrong to assume that the fianance costs are the only deductions from the Profit from operations (since no other information has been given), could this be a possible liquidity risk under business risk and maaayybeee an indication of going concern uncertainty under ROMM?
Thank you.It’s covered in the answer as an aspect of inherent risk:
Pressure on results
The company is a listed entity and the shareholders will be looking for a return on their investment in the form of a dividend payment and there will be pressure for the company to show good financial performance; this is compounded by the company’s ambitious international expansion plans and the requirement to maintain adequate INTEREST COVER to continue to meet the bank’s covenant. Pressure to return a better performance creates an incentive for management bias which means that management may use earnings management techniques, or other methods of creative accounting, to create a healthier picture of financial performance than is actually the case. This creates an inherent risk of material misstatement, at the financial statement level.
Management bias could also have led to some of the accounting treatments suggested by the finance director, such as the early recognition of revenue from the premium delivery pass, which works to improve the company’s profit and total assets for the year.So this is RoMM at the FS level rather than assertion level.
This is what the examiner said about it in the examiner’s report:
Candidates were awarded professional scepticism marks for possible indicators of
management bias, such as the need to raise funds for expansion and the requirement
to maintain interest cover at 3 or higher.Okay… I guess I was looking for more definitive statements indicating that the covenant has already breached and thus the implications of this, but I guess stating this might also give me marks.
Thank you so very much, for this answer and for all other answers in the forum that have cleared so many of my doubts.
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