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New Financing: Do Credit Agreements Pose Unique Accounting and Disclosure Challenges? Gunther International is the case under consideration that may help to identify the ways of how to report different transactions and events and make financial presentations in accordance with generally accepted accounting principles (GAAP). Gunther International and its activities are considered to be the subject of this case; financially, this company has a rocky road that has been already restructured in 1992. The department under discussion faced certain difficulties with discoveries and accounting issues and delayed the report. It turns out to be very important to explain everything and present reliable information in the 8-K filing. The source admits that “the Company continues to maintain a large installed base of customers using its products and believes that its products continue to be well received in the market place.” (Wallace, 2003)
In this case, certain attention is paid to a quite tenuous situation between Gunther International and the creditors. Such a situation is caused because of the reported error that led to “covenant violations on the line of credit held by Bank of Boston.” (Wallace, 2003) Gunther International decides to find some new financing and be able to pay off all the debts and bring the relationship with the Bank of Boston to its logical end. It is necessary that the Controller’s Office, accompanied by the Treasurer’s Department, craft some information in 8-K and release it as soon as possible. The problem is that there are several requirements to keep in mind: disclosure, interdisciplinary considerations, subsequent filings, and the aftermath. This is why to attract the attention of other creditors to the situation at Gunther’s, and it is crucially important to weigh all pros and cons and try to foresee possible results.
In this very case, it is necessary to answer several questions in order to achieve desirable results and take a good position in the chosen sphere of business. Of course, the major question is all about financing and possible challenges the company may meet while looking for new financing. Credit agreements are one of the first documents, which may create disclosure challenges for the firm. Gunther International should list several appropriate financial accounting research systems in order to have access to transactions and present relevant recommendations. The aftermath of the case demonstrates that Gunther International has achieved certain results and get new financing from other companies, and in 2001, it entered into a kind of recapitulation agreement with the Estate and some other stockholders. The net proceeds of the Rights Offering should be taken into consideration in order to repay all the notes payable (a stockholder, director, and Gunther Partners LLC), and then, this very net will be used only for “general working capital purposes.” (Wallace, 2003)
GAAP and the Analysis of the Case
Generally Accepted Accounting Principles are used as the standard framework of guidelines, which are used for financial accounting. Usually, GAAP presents the standards, rules, and different conventions, which the accountants should follow while recording transactions. There are several GAAP, which may be applicable to this very case; here are some of them:
- The principle of sincerity is one of the most interesting ones. The accountants should demonstrate their good faith in the financial status of the company.
- The principle of prudence should introduce reality as it is. In order to get new financing, it is necessary to analyze the situation of the company and present enough evidence concerning future abilities to return the money.
- The principle of continuity is also very important. The accountant of the company should be sure that the business will not be interrupted by someone or something.
- The last but not the least principle that can be used in this very case is the principle of non-compensation. It lies in the fact that the company should present all the necessary details concerning the financial information and, at the same time, not to wait for some compensation debts with assets.
“Diversity in GAAP allows accountants to choose from liberal or conservative accounting policies. The accounting policies of the company can be compared to the standards of accounting policies in the industry.” (Siegel and Shim, 2006) In this case, the information about the actions from 1992 is presented. With the help of such facts, it is easier to get more or less clear information about the possibilities of the company and its future potential.
In general, the politics chosen by Gunther International is quite rational. Because of some difficulties caused by the restructuring of a rocky road, Gunther International was not able to present all the necessary numbers in the report. They had a certain connection to the Bank of Boston, and now they are intended to find new financing, taking into consideration some General Accepted Accounting Principles. New financing and crediting surely pose certain accounting and disclosure challenges. However, if accountants are able to evaluate the situation and present strong facts about the abilities of the company, all these challenges will certainly be overcome, and the company will get the necessary financing.
Siegel, J. G. & Shim, J. K. (2006). Accounting Handbook. Barron’s Educational Series.
Wallace, W. A. (2003). Mastery of the Financial Accounting Research System (FARS) Throughcases. Wiley.