Financial statements for Calgary energy services companies

The statements are an input to a covenant calculation

Most credit agreements for an established services company contain financial covenants: a minimum current ratio, a maximum ratio of funded debt to earnings before interest, tax, depreciation and amortization, a minimum debt service coverage, sometimes a tangible net worth floor. Each is calculated from the year-end statements using definitions written into the agreement.

Those definitions rarely match the statement captions exactly. What the agreement counts as funded debt, whether shareholder loans are excluded, whether earnings are adjusted for non-recurring items — all of it is specified in the document and none of it is obvious from the statements alone. Preparing a year end without reading the covenant definitions means finding out about a breach from the lender.

Classification decisions that move a ratio

A current ratio depends entirely on where the line between current and long-term is drawn, and several of those calls involve judgement. The portion of a term loan due within twelve months is current. A demand facility is generally current in full regardless of how long it has actually been outstanding. A shareholder loan that has been left in the business for years is current unless there is a written agreement postponing it.

None of those decisions changes the business by a dollar, and any of them can change whether a covenant is met. That is not an argument for choosing the convenient answer — it is an argument for making the calls correctly and early, and for knowing where the ratio sits before the statements are finalized rather than after they are submitted.

A soft year, and what it does to the balance sheet

When activity falls, three things happen to a services balance sheet at once. Receivables age as customers slow their own payments. Equipment sits idle, still carrying its book value and still attracting depreciation. And the earnings figure that sits in the denominator of a leverage ratio shrinks, so leverage worsens even with debt unchanged.

Where assets are no longer expected to generate what their carrying value implies, a write-down has to be considered rather than deferred. That is an unwelcome entry in a bad year, and it is also the entry that keeps the statements honest. A balance sheet carrying stranded assets at full value through a downturn is the kind of thing that costs credibility exactly when credibility is needed.

Revenue that arrives in bursts

Services work is often concentrated into short, intense periods — a drilling program, a turnaround, a seasonal window when ground conditions allow access. Revenue and the costs that support it therefore need to be matched into the correct period rather than following the invoice date, which frequently lags the work by weeks.

The specific traps are work completed near the year-end date and billed afterwards, which has to be accrued; and mobilization or standby amounts received before work begins, which are obligations until performed. Both are cut-off issues, both are easy to get wrong, and both distort the year that a covenant is being tested against.

Compilation, review, audit — and what the agreement requires

A CSRS 4200 compilation engagement presents information management supplies. It provides no assurance: nothing is verified, no opinion is expressed, and it is neither a review nor an audit. That distinction is more consequential here than in most industries, because covenant compliance is being asserted on the strength of these figures.

Many credit agreements for mid-sized services companies specify the level of statements required, and specify it precisely — review-engagement statements within a stated number of days after year end is a common formulation, audited statements above a certain facility size. The obligation is contractual and applies whether or not it has been enforced previously. Read the reporting covenant, not just the financial covenants, before deciding what kind of year end to commission.

Alberta corporate tax and the year end

Alberta administers its own corporate income tax rather than having it collected federally, which means an Alberta corporation files a provincial return in addition to the federal T2. Both are built from the same statements, and preparing the statements and the returns as one exercise avoids reconciling separate versions of the same year.

The current Alberta corporate rates and filing requirements are set out on the Alberta tax facts page. The corporate tax hub covers the federal side and the deadlines that follow a fiscal year end.

Working remotely from Abbotsford

EverStone is a sole practitioner CPA firm with one office, in Abbotsford, British Columbia, and no Calgary presence. Calgary engagements are delivered entirely remotely through secure document exchange, video meetings and electronic signature, and there is one hour of time difference.

This suits incorporated oilfield and industrial services companies, equipment and rental operators, engineering and technical consultancies, and the transport businesses that serve them. Related pages: the Calgary small-business CPA page, Calgary energy services accounting, and Calgary professional corporations.

Covenant headroom is easier to manage quarterly than to discover annually. See fractional CFO support for Calgary energy services companies for downturn planning and capital discipline.