Stelco Inc. is a Canadian steel manufacturing company. In 2004, the company filed for bankruptcy protection, citing the following reasons for declining profits and viability problems:
1. Costs have risen dramatically for inputs such as natural gas and electricity and raw materials, such as coal, coke, and scrap.
2. The cost of employee future benefits—pensions and health care—are also increasing due to improved pension benefits negotiated in contracts with unionized employees, increasing health care costs, lower returns on pension plan assets, and the effect of lower interest rates on the discount factors that are used to determine the Corporation’s liabilities under the pension and other benefit plans.
3. Global steelmaking overcapacity has created downward pressure on selling prices due to significant and continued import penetration of the Canadian market by steel products offered, in management’s opinion, at unfairly low prices over the last several years.
4. The appreciation in the value of the Canadian dollar during 2003 further negatively affected selling prices. Selling prices strengthened in the early part of 2004, due in part to increased demand, particularly in China. However, the Corporation believes that these price increases are not sustainable and therefore are not expected to be sufficient to offset growing cost issues.
5. Several North American steel producers have emerged from court-supervised bankruptcy protection with a cost structure that is more competitive than that of the Corporation. The Corporation cannot compete effectively in this new environment unless it takes steps to reduce its liabilities and lower its overall costs.
6. In addition, the Corporation requires additional funding to complete strategically critical capital projects at its Hamilton and Lake Erie business units. The Corporation is unable to raise additional funds to complete these projects.
The protection afforded by the Companies’ Creditors Arrangement Act (CCAA) was challenged by the United Steelworkers of America (USWA). The president of USWA Local 1005 was quoted in the newspapers as saying, “We are not going to allow them to blackmail us by using CCAA as a way to convince us to give up our wages and benefits. It amounts to legalized corruption. In my opinion, the CCAA process is an abuse of power.” The USWA challenged the courts as to whether Stelco should be protected by CCAA.
Stelco’s assets had a book value of $2.74 billion and liabilities of $2.09 billion in the bankruptcy documents. The following is an excerpt from the 2003 financial statements:
Instructions
Adopt the role of the company and analyze the financial reporting issues. (Although the company would have been following pre-2011 PE GAAP, use IFRS to analyze the financial reporting issues for purposes of this case).