Metalwise plc (Metalwise is a company which purchases metals which it then processes into high-purity metals and alloys. Its shares are listed at the London Stock Exchange and it has a 31 December year-end. Metalwise plc uses International Financial Reporting Standards (IFRS) to prepare its financial statements.

Question 2 Fineness (16 marks)

1. Metalwise plc has approached SupCon plc as a potential new main supplier of metal. Before entering into a business relationship with new customers, SupCon checks their creditworthiness based on their financial accounting information. In the case of Metalwise, SupCon so far has only seen the draft financial statements for the year ended 31 December 2020, which do not provide sufficient information for the credit assessment. In particular, SupCons credit officer complains that Metalwises financial statements do not contain enough information to forecast cash flows. I want to see finer information.

Required:

Briefly explain the notion of fineness. In addition, explain, using specific examples, which type(s) of information would satisfy the credit officers request.

2. Assume that Metalwise satisfied the credit officers request from a) by providing finer information and that SupCon plc enters into a business relationship with Metalwise. The contract includes a covenant which states that if Metalwises payables as a percentage of total assets (i.e., trade and other payables / total assets) exceed 20%, SupCon has the right to immediately renegotiate the contract terms.

Required:

Comment on whether and, if so, how finer information can impact this ratio. You can refer to your answer in a). You are not required to compute the value of the ratio based on the draft financial statements.