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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Debtholders receive note contracts, one for each note, that describe the payments promised by the issuer of the debt. In addition, the issuing corporation frequently enters a supplementary agreement, called a note indenture, with a trustee who represents the debtholders. The provisions or covenants of the indenture may place restrictions on the issuer for the benefit of the debtholders. For example, an indenture may require that the issuer’s debt to equity ratio never rise above a specified level or that periodic payments be made to the trustee who administers a “sinking fund" to provide for the retirement of debt.

Consider Roswell Manufacturing’s debt indenture, which requires that Roswell’s debt to equity ratio never exceed 2:1. If Roswell violates this requirement, the debt indenture specifies very costly penalties, and if the violation continues, the entire debt issue must be retired at a disadvantageous price and refinanced. In recent years, Roswell’s ratio has averaged about 1.5:1 ($15 million in total liabilities and $10 million in total stockholders’ equity). However, Roswell has an opportunity to purchase one of its major competitors, Ashland Products. The acquisition will require $4.5 million in additional liabilities, but it will double Roswell’s net income. Roswell does not believe that a stock issue is feasible in the current environment. The Financial Accounting Standards Board issued a new standard concerning accounting for post employment benefits, which is strongly supported by the Securities and Exchange Commission. Implementation of the new standard will add about S2 million to Roswell’s long-term liabilities. Roswell’s CEO. Martha Cooper, has written a strong letter of objection to the FASB. The FASB received similar letters from over 300 companies.

Required;

2. If you were a member of the FASB and met Martha Cooper at a professional meeting, how would you respond to her objection?

To determine

Introduction:

Post employment benefits are the benefits that are provided to an employee after the end of his/her working tenure or post retirement benefits.

To state:

Response to the objection towards new standard.

Explanation

Every company should value its employee. They are the precious resource a company can ever have. They can make the company and they can also destroy the company. Hence, a company shall never lose onto its valuable employees.

Companies may not be able to promise a lifetime job but they provide the employees post employment benefits. These are granted to the employees once they leave the job. This is highly beneficial and appealing technique for the employees. Though, it’s not beneficial for the employer.

An employer finds this scheme unattractive, as it gives the employees guarantee or security beyond the employment tenure but until then it increases the liability of the employer.

Increased liability may affect your liability but if you have productive and hardworking employees they’ll make the decision worth it...

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