Corporate Accounting: Yellow Brick Road Debt Covenant Analysis Report

This report provides an analysis of the debt covenants of Yellow Brick Road Holdings Limited (YBR). The report examines the impact of continuous impairment of intangible assets on key financial ratios, including the percentage of intangibles to total assets, financial leverage, the debt-to-equity ratio, and fixed asset turnover. The analysis uses balance sheet data from 2014 to 2018 to calculate these ratios and assess the company's compliance with debt covenants. The report concludes that, based on the provided data and the company's adherence to IAS 36 for impairment testing, the impairment of intangible assets has not negatively impacted the debt covenants. However, the report acknowledges that future impairments could potentially affect debt covenants, but provision for impairment loss as per IAS 36 must be made regardless of the impact on debt covenants. The report includes references to relevant academic literature on the subject.

Running head: CORPORATE ACCOUNTING
Corporate Accounting
Name of the Student:
Name of the University:
Authors Note:

1
CORPORATE ACCOUNTING
Contents
Debt covenant:.................................................................................................................................2
Ratio analysis:..................................................................................................................................5
Observation:.....................................................................................................................................6
References:......................................................................................................................................7

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CORPORATE ACCOUNTING
Debt covenant:
Debt covenants can be defined as agreement between a creditor and a company that
requires the latter to maintain threshold limits for certain financial ratios to ensure that the risk of
default in repayment of debt is minimum. The company is expected to not breach the threshold
limit for such ratios to continue availing the benefits of borrowing facility under the agreement.
Breaching such threshold limits in financial ratios would indicate a significant change in the vital
component of the company and its ability to repay the loan.
In case of Yellow Brick Road Holding Limited (YBR) the impact of continuous impairment of
intangible assets on the financial ratios shall be assessed before commenting on the company’s
compliance with debt covenants. The balance sheet below contains the amount of intangible
assets along with other assets and liabilities over the last five years. Using the data below let us
first calculate certain financial ratios over these five years period to assess the changes in these
financial ratios before commenting on the impact on debt covenant of the organization.
BALANCE SHEET OF YELLOW BRICK ROAD HOLDINGS LTD
(ALL AMOUNTS ARE IN AUD
MILLIONS)
2014-
06
2015-
06
2016-
06
2017-
06
2018-
06
Assets
Cash 1
2.00
1
1.00 7.00 5.00 5.00
Accounts Receivables 5 7 7 8

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CORPORATE ACCOUNTING
8.00 8.00 2.00 5.00 1.00
Investments
- - - - -
Equipment
1.00 1.00 1.00 1.00 1.00
Goodwill
8.00
2
8.00
2
4.00
2
4.00
2
4.00
Other intangible assets
1.00
1
1.00
1
2.00
1
1.00
1
2.00
Other assets 2
0.00
175
.00
191
.00
222
.00
259
.00
Assets Total 5
0.00
285
.00
307
.00
338
.00
382
.00
Liabilities and equity
Borrowing short term
1.00 - 1.00
Accounts Payables
8.00
5
2.00
7
2.00
7
2.00
7
5.00
Long-term debt
4.00 5.00 7.00 8.00 7.00

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CORPORATE ACCOUNTING
Deferred taxes
4.00 2.00 3.00 3.00
Other liabilities 1
1.00
144
.00
153
.00
181
.00
222
.00
Total liabilities 2
4.00
205
.00
235
.00
265
.00
309
.00
Equity
Common stock 5
2.00
109
.00
110
.00
110
.00
110
.00
Other Equity
1.00 1.00 2.00 2.00 2.00
Retained earnings (28.
00)
(30.
00)
(40.
00)
(39.
00)
(39.
00)
Accumulated other comprehensive
income - - - - -
Total equity 2
5.00
8
0.00
7
2.00
7
3.00
7
3.00
Total liabilities and equity 5
0.00
285
.00
307
.00
338
.00
382
.00

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CORPORATE ACCOUNTING
Ratio analysis:
Percentage of intangibles to total assets of the company:
Intangible assets % of total assets 2014-06 2015-06 2016-06 2017-06 2018-06
Intangibles 18.12 13.71 11.66 10.26 9.24
It is clear that the over the years the percentage of intangibles to total assets have reduced
significantly indicating the increase amount of amortization and impairment of intangible assets.
However, considering the policy of the company to follow the IAS 36 for impairment testing on
all intangible assets, it is right in its accounting treatment and provide for impairment loss as and
when the same is required as per the standard.
Liquidity and solvency ratios:
2014-06 2015-06 2016-06 2017-06 2018-06
Financial Leverage 1.97 3.56 4.28 4.61 5.23
Debt to Equity ratio 0.15 0.06 0.1 0.11 0.1
Improvement in financial leverage as well as debt to equity position is pretty clear from the
above ratios. Thus, there is no negative impact on debt covenant due to the continuous
impairment of intangibles by the company (Kimouche, 2016).
Efficiency ratios:

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CORPORATE ACCOUNTING
2014-06 2015-06 2016-06 2017-06 2018-06
Fixed Assets Turnover 46.71 237.22 299.57 314.13 341.15
Further fixed asset turnover ratio shows the huge improvement in efficiency of the company to
use its fixed assets in generating revenue for the company.
Observation:
Thus, considering that the company is following IAS 36 for impairment testing of
intangibles there is nothing wrong in providing for impairment on intangibles as per the standard
and till now there has been no impact on the debt covenant. However, in future there could be
impact on debt covenant but if an asset is impaired then the provision for impairment loss as per
IAS 3336 has to be made in the books of accounts even if the debt covenant is impacted
(Sudarsanam, 2018).

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CORPORATE ACCOUNTING
References:
Kimouche, B. (2016). (IAS 36) (Evaluation of the 'Impairment of Assets' According to IAS
36). SSRN Electronic Journal, 2(2), pp.17-33.
Sudarsanam, P. (2018). Determinants of Financial Ratio Covenants and Pricing of Debt in
Private Debt Contracts: The UK Evidence. SSRN Electronic Journal, 4(3), pp.14-42.