Arctic Charm Corp. is a privately owned Canadian company. The company experienced poor operating results in the years 20X0 to 20X3, and, in 20X3, it reorganized and refinanced its operations. Creditors were asked to accept partial payment; shareholders invested additional capital. As part of the restructuring, Arctic Charm accepted covenants imposed by Spenser Venture Capital Corp. Violation of these debt covenants would trigger a demand for immediate repayment of longterm debt and almost certainly mean that the company would be placed in receivership or bankruptcy. The covenants included minimum working capital requirements, and an upper limit on the overall debt-to-equity ratio.
The 20X4 pretax operating results were acceptable. The company wishes to make the following two accounting changes before issuing its financial statements for 20X4:
a. Change from comprehensive tax allocation to the taxes payable method.
b. Change depreciation policies from declining-balance to straight-line. Capital assets are fairly new but have been depreciated for three to five years under declining-balance rates. The company would adjust all capital asset balances to the amounts that would have existed had straight-line depreciation always been used. The company believes that straight-line depreciation is more indicative of the equipment’s actual usage. The equipment is not subject to rapid technological obsolescence.

Arctic Charm’s CFO met with officials from Spenser to obtain their consent to these changes.  The officials accepted Arctic Charm’s proposed changes as being in compliance with ASPE as required by the loan agreement.

Required:
Describe the impact of these changes on the financial statements and debt covenants. Consider the appropriateness of these changes in your response.