Deep Harbour Limited (DHL) is a private company owned by Daniel Lalande. Lalande started the company in 20X1, and DHL has reported reasonably consistent growth in profits from fiscal 20X1 to 20X7. The company is in the plastic moulding business, making everything from toys to dashboards.

The year ended 30 November \(20 X 8\) has been challenging for DHL. The company invested \(\$ 8.2\) million in new injection moulding machinery in February 20X8. This meant a two-week scheduled production shutdown to allow for installation and training. The two weeks stretched to five weeks when last-minute replacement parts were delayed at the U.S. border. The machinery was fully operational in late March 20X8; however, additional costs were incurred.

DHL has used the taxes payable method using accounting standards for private enterprises to account for corporate income taxes, but now has to adopt comprehensive tax allocation for its bank. The Chartered Bank of Canada (CBC) provided a \(\$ 7\) million 10 -year term loan for the new equipment, but insisted that certain covenants be met with financial results measured using specific required policies. DHL has no differences from required accounting policies except for the tax accounting policy.
DHL must meet the following two balance sheet ratios under the terms of debt covenants:
1. The current ratio must exceed 1-to-1.
2. The total debt-to-equity ratio must be less than 4 -to-1 (all non-equity credit accounts included in the numerator).
If covenants are breached, the loan may be called for repayment with 30 business days' notice. In practical terms, it is likely that a breach would result in higher financing costs, now prime plus \(1 / 2 \%\). DHL has asked you, a public accountant, to review the financial statements and adjust the statement of financial position for the effects of the new income tax policy. DHL is aware that this policy will be applied retrospectively, and thus will affect comparative retained earnings statements.
For now, though, DHL would like the statement of financial implications quantified. Management understands that any change to deferred income tax changes the retained earnings balance.
DHL has also asked you to evaluate (and make changes for) any other accounting policies that might concern you. DHL has no wish to fall afoul of CBC's judgements in any credit review process.
Required:
Prepare a report that responds to the concerns raised.