Riley’s Roosters, Inc. (RRI) has a December 31 year-end. As of June 30, 2015, RR

Question

Riley’s Roosters, Inc. (RRI) has a December 31 year-end. As of June 30, 2015, RRI obtains a $100,000 loan from a bank for a new chicken coop facility. The loan is due in 24 months. In December 2015, RRI spends too much of its cash on its holiday party and incurs a debt covenant violation as of December 31, 2015. As a result of the violation, the loan becomes due within 30 days. At this time, RRI asks the bank to waive the violation. RRI tells the bank it will recoup some of the cash by selling the leftover holiday party favors on eBay. On January 5, 2016, the bank agrees to waive the violation. RRI issues its financial statements on January 25, 2016.

How should this loan be classified (current or non-current) on RRI’s balance sheet as of December 31, 2016 using US GAAP and IFRS? ANSWER:

Explanation / Answer

Originally, the loan period was for 24 years, means it was Non-Current liability, since its payment was more than 12 months. Loan not more than 12 month's period are treated as Cuurent Liability. Debt covenant violation & its subsequent waivel would impoact on its status as Non current liability, as follows.  

US GAAP: Allowed period for a lender to waive or modify a debt covenant violation to retain non-current classification under the US GAAP is the time period of the current & post fiscal year, but before issue of related financial statements.

In the instant case, RRI had made debt covenant violation id Dec2015, which was waivel on 05th Jan,2016, before issuance of Financial statements (25th Jan 2016), but after last day of the related fiscal year. Hence it should be classified as Non-current liability.

IFRS: As pe IFRS, the violated should be waived during the same fiscal year. In the instant case, RRI had made debt covenant violation id Dec2015, which was waivel on 05th Jan,2016, before issuance of Financial statements (25th Jan 2016), hence it sould be treated as current liability.   

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.