Need help coming up with a response to Marks concern in the case below:

Python Mining Inc. is a private owned company located in Montreal. It owns and operates a mine in Eastern Canada. The company was incorporated on January 2, 2018, and has a December 31 year end. The owners have chosen to report under IFRS. Most of their capital came from a single bond issue due January 2, 2028, (10-year, $200 million face value, 6% coupon, issued to yield 8%) on which interest is paid semi- annually, and through shares issued to the owners ($40 million). A 7% note payable for $40 million to a bank was also issued in 2018, due in May 2020. Retained earnings was $15 million as at December 31, 2018, and no dividends were paid in 2018.

You have recently joined ABC Accounting firm in Toronto. As requested by the owner of Python, the partner of the firm has asked you to review some of the accounting issues at Python. Adam Marks, the controller at Python is concerned about the loan covenants for one of the debt issue and he is wondering whether the financial results for the 2019 fiscal year will fall short of their requirements. The details of this covenant is listed below:

Starting from the fiscal year ended December 31, 2019, the following loan covenants need to be met:

The long-term debt-to-equity ratio must not exceed 4:1.

Times interest earned must exceed 2 times.

The draft 2019 earnings show an improvement from last year. Net income after tax was $16 million with $4 million of dividends having been declared and paid.

In reviewing the financial statements, you found the following items shown in the 2019 financial statements which could be a concern:

1. Adam mentions that, to simplify matters, he accounted for the bond interest using the straight 6% rate on the $200 million principal amount in 2019. The financial statements for 2018 were audited by your firm and the bond accounting to the end of that year was in accordance with IFRS.

2. The mine has a 30-year life starting in 2018. It was expected then that site restoration would cost $75 million and a separate property, plant, and equipment account for this ARO (asset retirement obligation) was set up. A 6% discount rate was used to value the related ARO. At the beginning of 2019, an external geo-technical evaluation showed that the eventual cost will be $90 million. Adam recorded the same amounts for 2019 as for 2018 for interest on the ARO and depreciation, and otherwise did not update any accounting for the ARO in 2019 nor did he include the impact if any from the ARO revaluation.