Where there are debt covenants in place to restrict the level of debt to assets then management may be motivated to:
A) avoid revaluations because an increase in asset values increases depreciation and therefore reduces profit.
B) undertake revaluations where the expectation is that asset values have fallen.
C) avoid revaluations because of their effect on the cash flows of the business and therefore its ability to pay interest under the debt covenant.
D) undertake revaluations where the expectation is that asset values are rising.

Question

Quizplus · Accepted Answer

Debt covenants often restrict the level of debt relative to the assets of a company. If management expects asset values to rise, undertaking revaluations can increase the reported value of assets, improving the debt to assets ratio and making the company appear financially healthier in relation to its covenants.

Where There Are Debt Covenants in Place to Restrict the Level