Question No 5:
The Group Finance Director has left you the following memo:
MEMORANDUM
To: Senior Management Accountant
From: Felicity Bunyan, Group Finance Director
Subject: Debt covenant
As you know, we have significant bank borrowings. The bank has put a number of 'debt covenants' in place. These are conditions that must be met if we are to be allowed to carry on with the loan. If we breach any of those conditions, the bank has the right to demand immediate repayment of their loan and to take possession of the assets that we have pledged as security in the event that we cannot afford to repay.
One of those conditions is that our gearing ratio cannot exceed 37% when we measure debt as a percentage of total long term finance.
Our gearing ratios were as follows over the past few years:
2012 32%
2013 34%
2014 33%
We have a problem on the horizon. As you are aware, in order to maintain flexibility, Bild has used operating leases to finance the majority of its construction equipment. Most of these leases are over three or five years. Proposed changes to the rules relating to the accounting treatment of leases mean that we may have to recognise additional long term liabilities before the loans are due for repayment. Doing so will put us in technical default with respect to our debt covenant, pushing our gearing to around 40%. Please draft a paper for me that:
- Analyses our gearing position with respect to the nature of our business and its overall position.
- Suggests an approach that might be taken to negotiating a change to the loan conditions with the bank so that our technical default might be overlooked.
Question No 4:
The Group Finance Director has left you the following memo:
MEMORANDUM
To: Senior Management Accountant
From: Felicity Bunyan, Group Finance Director
Subject: Debt covenant
As you know, we have significant bank borrowings. The bank has put a number of 'debt covenants' in place. These are conditions that must be met if we are to be allowed to carry on with the loan. If we breach any of those conditions, the bank has the right to demand immediate repayment of their loan and to take possession of the assets that we have pledged as security in the event that we cannot afford to repay.
One of those conditions is that our gearing ratio cannot exceed 37% when we measure debt as a percentage of total long term finance.
Our gearing ratios were as follows over the past few years:
2012 32%
2013 34%
2014 33%
We have a problem on the horizon. As you are aware, in order to maintain flexibility, Bild has used operating leases to finance the majority of its construction equipment. Most of these leases are over three or five years. Proposed changes to the rules relating to the accounting treatment of leases mean that we may have to recognise additional long term liabilities before the loans are due for repayment. Doing so will put us in technical default with respect to our debt covenant, pushing our gearing to around 40%. Please draft a paper for me that:
- Analyses our gearing position with respect to the nature of our business and its overall position.
- Suggests an approach that might be taken to negotiating a change to the loan conditions with the bank so that our technical default might be overlooked.
Question No 3:
Mark Grassington, Managing Director of Bild Civil Engineering, has asked for your advice.
“We have been receiving from some of our larger complaints sub-contractors about our working relationships. They feel that time and effort are being wasted because we do not properly manage our relationship with them.
To put this in perspective, Bild Civil Engineering has seventeen major subcontractors on its list of preferred suppliers. Some are general builders who provide most of the major trades, from digging foundations to bricklaying and other trades. Others are more specialised and focus on drainage or other specific tasks. We find that the specialists are more expensive than the general builders, but they have greater expertise and so they may be used for difficult tasks, such as installing drainage in unstable soil.
The regional subsidiaries of Bild Civil Engineering usually contract for a project and then invite the subcontractors to tender for the work. Subcontractors have very little input into the contract specification itself. They also find it difficult to manage their commitments because they are often invited to tender for work by more than one Bild subsidiary at the same time, even though they would not have the capacity to accept all of the work if all of their tenders were successful.
There have been times when it has been difficult to find a subcontractor for a project because many of our preferred subcontractors would choose to work with our competitors rather than with us when they have a choice.
Could you give me some ideas that I can present to the next board meeting?
- Firstly, I have always been impressed by the balanced scorecard diagrams that you prepare for other aspects of the business. Could you outline a set of measures that could be developed into a balanced scorecard for managing the whole process of working with subcontractors? Please also provide a brief explanation for each measure.
- Secondly, advise the company regarding processes and controls that we could adopt to manage the whole process of the collaboration with
