Grosco Corporation (GC), a public company manufacturing farm equipment, was federally incorporated in 1926. Its common shares and bonds are widely held. The company's year-end is December 31.
The bond indentures contain the following covenants:
A: At the end of any quarter, if the debt-to-equity ratio exceeds 2.5:1, dividends may not be declared.
B: At the end of any quarter, if the debt-to-equity ratio exceeds 3:1, the bond principal becomes due and payable.
GC has experienced severe financial difficulties in the past four years and has sought refinancing in an effort to remain solvent. On May 1,2012, GC issued a new class of preferred shares bearing a cumulative annual dividend of 12% (payable quarterly). The shares are retractable (the shareholders can redeem them for cash) on demand commencing one year from the date of issuance. As a result of the share issuance, the debt-to-equity ratio reported by management decreased from 2.7:1 to 2.2:1. By the end of 2012, the ratio had increased to 2.4:1 because of increased bank borrowings.
It is now April 2013. You are the accountant in charge of the audit of GC. The 2012 financial statements have been drafted and the audit is near completion. The 2013 first-quarter financial statements have just been compiled by the company and reveal a debt-to-equity ratio of 2.8:1.
Required:
Discuss the accounting issue implied in the above fact pattern. Pay particular attention to the timing of events while applying the IFRS Framework.