Unformatted text preview: D12–6
The case describes a typical scenario that usually occurs while enforcing the debt covenant restrictions.
Many times such agreements or decrees explicitly specify how changes in the key performance indicators
will be treated due to an unanticipated change in the accounting standards. In the current case it is not
clear whether any such clause exists that deals with the effect of change in net worth due to an
unforeseen accounting standard.
From the perspective of an executive of Westinghouse, the company should not be forced to place the
$325 million in the escrow account due to the following reasons: (1) Westinghouse’s net worth dipped
below $1.9 billion due to a new method of accounting mandated by FASB. The decline was entirely due to
factors beyond Westinghouse’s control. (2) The new method of accounting merely creates an additional
expense and an additional liability on the books of the company. It does not impact the current cash flow
situation. Therefore, there is no change in the economic situation of West...
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