Big Rock Brewery Inc., which is based in Calgary, Alberta, is a publicly listed company. The company’s products are sold across the country in nine provinces and three territories as well as being exported to Korea. One of the reporting requirements for financial instruments is that a company must disclose if it has a high concentration of receivables from certain customers or categories of customers, because this may increase the company’s level of credit risk as it depends greatly on the ability of those customers to pay their accounts. In accordance with this requirement, in its 2013 annual report, Big Rock disclosed the following:
Big Rock has a concentration of credit risk because a majority of its accounts receivable are from provincial liquor boards, under provincially regulated industry sale and payment terms. The Corporation is not exposed to significant credit risk as payment in full is typically collected by provincial liquor boards at the time of sale and receivables are with government agencies. While substantially all of Big Rock’s accounts receivable are from provincial government liquor authorities, the timing of receipts of large balances may vary significantly from period to period. The majority of product sold outside of Canada, which is included in GST and other receivables, is done so on a ‘Cash on Delivery’ basis with no credit risk.
Required:
How would this disclosure affect your assessment of Big Rock’s level of credit risk?