Posted by & filed under Accounting Careers, Financial Accounting.

Description: The federal government might well be asking the question “where are they?” when it comes to large Canadian companies seeking government assistance in this Corona world. In order to assist in the economic troubles associated with the virus, the government created the Large Employer Emergency Financing Facility (LEEFF) . But so far only about a dozen companies have even bothered to apply, with a minuscule total of two companies having actually received the loans.

Date:  October 15, 2020

Source:  thestar.com

 Link: https://www.thestar.com/news/canada/2020/10/22/just-two-companies-have-been-approved-for-ottawas-emergency-covid-19-loans-where-are-the-rest.html?source=newsletter&utm_content=a01&utm_source=ts_nl&utm_medium=email&utm_email=760BE779956395955CFBBA5C497D22A3&utm_campaign=sbj_34244

Discussion points:

1) Are you surprised by the low uptake on the LEEFF? Why do you think the participation is so low?

2) If you were an accountant working for this program, what recommendations would you make to help improve the results?

3) The story tells us that Air Canada did not respond to The Star‘s request for a response on this story. On page 4-18 of Wiley’s Financial Accounting: Tools for Business Decision-Making, we can read about how Air Canada accounts for cash it receives from ticket sales prior to the time of the actual flight. What do you think might be going on with this number on the financial statements during the Covid times?

4 Responses to “Where Are They?”

  1. Alexander Bennett, Diana Akilian, Esperance Balewula, Gabrielle Baker

    1. The low uptake of LEEFF is surprising to us. Due to so many massive companies reporting such major losses through this year due to COVID, we expected more companies to be taking the opportunity for financial relief when offered from the government. After going through the article, we now understand LEEFF to be a last resort loan, which many companies don’t want to admit the tough financial situations they are in. The loan only has had a dozen applicants, and only two have been accepted five months after LEEFF was put into action. Deputy Prime Minister, Chrystia Freeland, did state that it is a form of significant liquidity support that is available for all Canadian companies to apply for, although participation in LEEFF is incredibly low.
    2. As accountants, we see that many companies are facing massive economic losses during this period. In order to recover the economy to its prior point, support from the government is needed. Highly accessible, low/no interest loans could substantially help many businesses get back on their feet and to attempt to function prior to COVID. By using some of this money to establish new boundaries with spending in order to set up new guidelines so that if a COVID situation happens again, the financial impacts aren’t as extreme and crippling for businesses no matter the size. These loans would have to be repaid, but the low interest allows companies to get themselves operating at a profit again without the stress of massive loan interest. Also, the imports and exports to countries that aren’t as strongly affected by COVID to focus on short-term profit isn’t helping the Canadian economy and is doing more harm in the long run which should be minimized to focus on recovering our economy first.
    3. Air Canada, like other airlines, find themselves in an interesting position in COVID. Airlines operate largely on unearned revenue and refund liabilities, so when the impacts of COVID hit, they had a massive amount of unearned revenue they had to do something with. For the business, they would want to keep the money and distribute credit for future flights to keep customers in the company, but refunding them would help with customer trust and be more likely to be long-term customers after that so it’s about finding the balance. Customers would much rather just have their money back, especially for people doing a family trip, for example. Their financial loss from not getting the money back from those tickets would be much higher than just a flight for one person from Moncton to Toronto. So, the airlines either have to refund customers and be operating nowhere near their expected income, or potentially lose many long-term customers by doing a company credit system. With the end of the calendar year upcoming, we don’t think Air Canada’s books will be looking anywhere near as strong as years before, but they had a solid refund system in place with consumers so that they hopefully can bring these customers back in 2021 to have them making big profits again.

    Reply
  2. Weiting Li, Xiaoming Li, Wenting Zhang, Naikang Chen

    1) Are you surprised by the low uptake on the LEEFF? Why do you think the participation is so low?
    – The low uptake on the LEEFF is not surprising as the LEEFF, even sounds enticing and helpful, is a loan with high interest rate and lots of restrictions. The participation is low because it is not designed for a large number of companies to get and, as strategist from BMO Capital Market said, it should not be.
    2) If you were an accountant working for this program, what recommendations would you make to help improve the results?
    – If we were accountants, we might propose methods like providing low interest loan, loan guarantees or direct assistance from the government to improve the current situations.
    3) The story tells us that Air Canada did not respond to The Star‘s request for a response on this story. On page 4-18 of Wiley’s Financial Accounting: Tools for Business Decision-Making, we can read about how Air Canada accounts for cash it receives from ticket sales prior to the time of the actual flight. What do you think might be going on with this number on the financial statements during the Covid times?
    – During the Covid time, the deferred revenue should go up as air Canada should have sold a lot of tickets even if they are not sure about whether the plane can take off. As deferred revenue increase, liability on the financial statement should increase and asset should remain the same.

    Reply
  3. Roland Harpe, Justin Vogels, Chloe Viola

    1) Indeed, we found it surprising that more companies have not opted for the LEEFF considering the significant losses reported by most large businesses across Canada. There is definitely a demand for emergency financing, however, the general consensus seems to be that the long-term costs outweigh the short-term benefits. The program offers a large loan with high interest rates, ignoring the fact that there are many private lenders offering more attractive terms. Taking on a large loan commitment could prove dangerous for companies who are uncertain over their future finances and ability to pay it off.

    2) The first change we would make is to lower the rate of interest on the loan. High interest rates are scary in uncertain times like these, and could be a gamble especially if there is no guarantee that the low will help business. In order to provide concrete results, we would offer more attractive terms that would allow companies to repay it in 4-5 years after they have fully recovered. Additionally, the government could offer additional benefits and guarantees for those who have opted for the program. Hopefully, the tax revenue generated from the companies growth and success over those years would repay a portion of the investment.

    3) With increasing debt and liabilities, Air Canada finds itself in a dilemma in terms of how to deal with their unearned revenue. During COVID, their financial statements would most likely show a significant amount of deferred revenue and their refund liabilities would be increasing too. The airline is faced with the issue of choosing whether to claim some of its deferred revenue, or refund its customers in order to promote brand loyalty in the long run.

    Reply
  4. Katherine Anne Hanscom, Shaobo Gong, Anna Hardie

    1) As defined by the government of Canada, “LEEFF is a program instituted by the Government of Canada to provide short-term liquidity assistance in the form of interest-bearing term loans to large Canadian employers who have been affected by the COVID-19 outbreak.”(Government of Canada, 2020) We are not overly surprised by the lack of significant uptake on LEEFF because it was designed to be a last resort, emergency credit option for Canada’s largest employers. According to BMO Capital Markets, macro strategist and Canadian rates expert Benjamin Reitzes, LEEFF is not an attractive method of funding. LEEFF is an unpopular funding method in comparison to private firms because of its high interest rates, restrictions on capital, prohibitions on dividends, certain executive compensation restrictions, and the issuing of an option for common shares totalling 15% (Government of Canada, 2020). As there is a significant amount of funding still available, companies like Porter Airlines who have had to halt their entire operations are said to be considering the option. We discussed that the program is intended to have a low uptake rate and is designed solely for emergency use due to the higher costs and disadvantages of borrowing through LEEFF.

    2) We have a few recommendations. First, we advise companies not to borrow through LEEFF unless absolutely necessary. Second, if LEEFF is a necessary service to utilize, we advise companies to borrow smaller amounts (60 million minimum) from it as the high interest on borrowing may yield long-term debt. Moreover, the company becomes more vulnerable to becoming under public scrutiny for being more state-run through taxpayers money. This is especially true if the company is in the market for addictive or environmentally unfriendly goods such as oil and casinos. As mentioned in the Toronto Star article, economists predict “that companies in the airline and oil and gas sector may be among the first to apply for the program.”

    3) Air Canada operates on a deferred revenue basis which means that the sales are accounted for before the service is consumed. It is worth noting that a separate article from september 1st states that over 8000 complaints have been lodged since mid-march of this year (CBC, 2020). Air Canada has the most complaints outside of any US airline. Initially, Air Canada, in an attempt to hold onto liquidity, offered a 2 year credit instead of a proper cash refund. Due to uncertainty, most customers do not feel this is fair as they do not feel comfortable flying now or in the near future. This deferred revenue would allow Air Canada to operate without incoming revenue or used services. It would cause the numbers seen during the pandemic to be somewhat false as the service was paid for but not consumed and may not be consumed for 2 years. We think that Deferred Revenues will continue to be credited for the two years while cash increases. This would increase both Assets and Liabilities by equal amounts. Investors who note this may be skeptical or uncertain as to how Air Canada will manage the increase in Cash while also taking into account the large burden of Deferred Revenue in the long-term

    Sources: https://www.cdev.gc.ca/leeff-factsheet/ , https://www.thestar.com/business/2020/05/11/doubtful-whether-many-companies-will-apply-for-governments-new-financing-program-for-big-businesses-economists-say.html , https://www.cbc.ca/news/business/cta-airline-complaints-covid-19-1.5707829

    Reply

Leave a Reply

Your email address will not be published.