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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition

CHAPTER 23

OTHER MEASUREMENT AND DISCLOSUREISSUES

ASSIGNMENT CLASSIFICATION TABLE

TopicsBrief

Exercises Exercises Probe!s"ri#i$%

Assi%$!e$#s

1. isclosure from a!usiness"ers"ecti#e.

1 1 1, $, %

&. 'ull disclosure"rinci"le.

&, (, ) &, (, ), $,*, %, +

&

(. Accounting "olicynotes.

1, &, (, ),$, +

). egment re"orting-di#ersified firms.

$, *, %, + & 1, *, 1

$. Interim re"orting. , 1/ &, (

*. 0elated"artytransactions.

11, 1&,1(, 1), 1$

(, ) &

%. u!se2uent e#ents. 1*, 1% $, * &, (, ), $,%, 1/

+. Auditors3 re"ort. 1+

. 'inancial statementanalysis.

1, &/ %, + 11 $

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ASSIGNMENT CHARACTERISTICS TABLE

I#e! Descrip#io$Le&e of Diffic'#(

Ti!e)!i$'#es*

E&(1 Illegal acts and accounting "olicy notes. Moderate 1$&/E&(& egmented re"orting. Moderate

$1/E&(( 0elated "arty transaction. Moderate &/&$E&() 0elated "arty transaction. Moderate &/&$E&($ 4oststatement of financial "osition e#ents. Moderate 1/1$E&(* 4oststatement of financial "osition e#ents. Moderate 1$&/E&(% 4ercentage analysis. Moderate &/(/E&(+ 0atio analysis. Moderate &/(/

4&(1 egmented re"orting. Moderate &$(/4&(& 5eneral disclosures. Moderate (/)/4&(( u!se2uent e#ents. Com"le6 )/$/4&() isclosures re2uired in #arious situations. Moderate &/&$4&($ isclosures re2uired in #arious situations. Moderate &/&$4&(* egment re"orting7theory. im"le &/&$4&(% isclosures, conditional and contingent

lia!ilities.im"le &$(/

4&(+ 5eneral disclosures, in#entories, "ro"erty,"lant, and e2ui"ment.

im"le 1/&/

4&( egment re"orting. Moderate (/($4&(1/ u!se2uent e#ents. Moderate &/&$

4&(11 0atio analysis and "ro8ections. Moderate ($)$

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SOLUTIONS TO BRIEF E+ERCISES

BRIEF E+ERCISE 23,-

F' .iscos're is esse$#i/ #o #0e proper f'$c#io$i$% of c/pi#/!/r1e#s bec/'se #0e i$for!/#io$ pro&i.e. i$ fi$/$ci/ s#/#e!e$#s/$. #0e /cco!p/$(i$% $o#es #o fi$/$ci/ s#/#e!e$#s is 'se. b(i$&es#ors i$ !/1i$% #0eir i$&es#i$% .ecisio$s I$&es#ors re( o$ #0isi$for!/#io$ #o co!p/re #0e perfor!/$ce of si!i/r co!p/$ies /$.#o /ssess #0e re/#i&e ris1s /$. re#'r$s of .iffere$# i$&es#!e$#s F'.iscos're of / !/#eri/ i$for!/#io$ 0eps #o e$s're #0/# i$&es#orsc/$ !/1e #0eir i$&es#i$% .ecisio$s b/se. o$ f/i#0f'(represe$#/#i&e i$for!/#io$

Pri&/#e co!p/$ies %e$er/( 0/&e feer .iscos're re4'ire!e$#sbec/'se !/$( pri&/#e e$#i#ies 0/&e ess co!pex b'si$ess#r/$s/c#io$s /$. s#/1e0o.ers of pri&/#e co!p/$ies )s'c0 /ss0/re0o.ers* #e$. #o 0/&e %re/#er /ccess #o i$for!/#io$ /bo'# #0ee$#i#( O&er/5 i$cre/se. .iscos're re4'ire!e$#s for p'bicco!p/$ies 0eps #o e$s're #0/# eco$o!ic reso'rces /re /oc/#e.efficie$#( /$. 0eps #o e$s're #0e proper f'$c#io$i$% of c/pi#/!/r1e#s

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BRIEF E+ERCISE 23,2

)/* T0e i$cre/se. i1ei0oo. #0/# #0e co!p/$( i s'ffer / cos#(s#ri1e re4'ires $o .iscos're i$ #0e fi$/$ci/ s#/#e!e$#s T0e

possibii#( of / s#ri1e is /$ i$0ere$# ris1 of !/$( b'si$essesI#5 /o$% i#0 #0e ris1s of /r5 recessio$5 e#c5 is i$ #0e c/#e%or(of %e$er/ $es /$. repor#i$% o$ s'c0 / %e$er/ co$#i$%e$c(is be(o$. #0e scope of fi$/$ci/ repor#i$%

)b* A $o#e s0o'. pro&i.e / .escrip#io$ of #0e .isco$#i$'e.oper/#io$ i$ or.er #0/# #0e fi$/$ci/ s#/#e!e$# 'ser 0/s so!e'$.ers#/$.i$% of #0e $/#'re of #0is i#e! /$. i#s effec# o$fi$/$ci/ perfor!/$ce /$. posi#io$

)c* G/i$ co$#i$%e$cies /$. co$#i$%e$# /sse#s /re $o# recor.e. i$#0e /cco'$#s Hoe&er5 co$#i$%e$# /sse#s 0ic0 !/(!/#eri/( /ffec# / co!p/$(6s fi$/$ci/ posi#io$ s0o'. be.iscose. 0ere /$ i$fo of eco$o!ic be$efi#s is prob/be I$!os# si#'/#io$s5 /$ /sse# o'. $o# be reco%$i7e. '$#i #0ec/i! se##e!e$# occ'rs5 /# 0ic0 #i!e #0e re/#e. /sse# is $oo$%er / co$#i$%e$# /sse#5 /$. i#s reco%$i#io$ is /ppropri/#e

BRIEF E+ERCISE 23,3

T0e re/.er s0o'. reco%$i7e #0/# #0e fir! 0/s /$ obi%/#io$ for e/se p/(!e$#s of /pproxi!/#e( 895:--5;;; for e/c0 of #0e $ex##0ree (e/rs I$ cer#/i$ si#'/#io$s5 #0is i$for!/#io$ is &er( i!por#/$#i$ .e#er!i$i$%< )-* #0e /bii#( of #0e fir! #o 'se /..i#io$/ e/sefi$/$ci$%5 /$. )2* #0e $/#'re of !/#'ri$% co!!i#!e$#s /$. #0e/!o'$# of c/s0 expe$.i#'re i$&o&e. Off,b//$ce,s0ee# fi$/$ci$% isco!!o$ /$. #0e i$&es#or s0o'. be co%$i7/$# #0/# #0e co!p/$(0/s / co!!i#!e$# e&e$ #0o'%0 i# is $o# refec#e. i$ #0e i/bii#(sec#io$ of #0e s#/#e!e$# of fi$/$ci/ posi#io$ T0e re$#/ i$co!e

fro! #0e s'be/ses /so pro&i.es 'sef' i$for!/#io$ co$cer$i$% #0eco!p/$(6s /bii#( #o %e$er/#e re&e$'es /$. #o co&er5 i$ p/r#5 #0ec/s0 fo co!!i#!e$#5 i$ #0e #0ree (e/r perio.

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BRIEF E+ERCISE 23,=

T0e re/.er s0o'. reco%$i7e #0/# #0ere /re .i'#i&e sec'ri#ieso'#s#/$.i$% b'# #0e o&er/ i!p/c# o$ e/r$i$%s per s0/re !'s# beco!p/re. #o rece$# /$. c'rre$# EPS #o be !e/$i$%f' I$ /..i#io$5#0e p'rc0/se of s0/res e$/be. #0e co!p/$( #o i$cre/se i#se/r$i$%s per s0/re T0e i!por#/$# poi$# co$cer$i$% #0is $o#e is #0/#5/pp/re$#(5 $o si%$ific/$# .i'#io$ of prese$# s0/re0o.ers6 i$#eres#si occ'r if co$&ersio$ occ'rs

BRIEF E+ERCISE 23,9

It should be emphasized that because a company discloses its

segmented results, this does not relieve the necessity for providingconsolidated results as well. Sometimes individuals becomeconfused because they believe that using segmented reportingmeans that consolidated statements should not be presented. Thereis a need to provide both types of information. The consolidatedresults provide information on overall financial position andprofitability, while the segmented results provide information on thespecific details that comprise the overall results. Segmentedinformation is needed in part because (a) sales and earnings ofindividual segments are needed to forecast consolidated profitsbecause of the differences among segments in growth rate, risk,and profitability, and (b) segmented reports disclose the nature of acompany’s businesses and the relative size of the components,which aids in evaluating the company’s investment worth.

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BRIEF E+ERCISE 23,>

To#/ re&e$'es< 8>;; ? 8>9; ? 829; ? 83:9 ? 8229 ? 82;; ? 8:;; @ 835;;;

Re&e$'e #0res0o.< 835;;; + -; @ 83;;T0erefore5 G/!!/5 e$$e.(5 Re. Moo$5 /$. N'0$ !ee# #0is #es#/$. /re repor#/be se%!e$#s '$.er IFRS

No#e #0/# #0e re&e$'e e!po(e. i$ #0is c/c'/#io$ i$c'.es bo#0s/es #o ex#er$/ c's#o!ers /$. i$#erse%!e$# s/es or #r/$sfers5 $o#co$soi./#e. re&e$'e

Se%!e$#e. repor#i$% is $o# re4'ire. '$.er ASPE

BRIEF E+ERCISE 23,:

Oper/#i$% profi#s< 8; ? 829 ? 89; ? 83= ? 8-;; @ 82Oper/#i$% profi#s #0res0o.< 82 + -; @ 82

T0erefore5 G/!!/5 e$$e.( )oss*5 Re. Moo$5 Ts'i5 /$. N'0$ !ee##0is #es# /$. /re repor#/be se%!e$#s '$.er IFRS

BRIEF E+ERCISE 23,

Se%!e$# /sse#s< 89;; ? 899; ? 8=;; ? 8=;; ? 82;; ? 8-9; ? 8=:9 @ 825>:9Se%!e$# /sse#s #0res0o.< 825>:9 + -; @ 82>:9T0erefore5 G/!!/5 e$$e.(5 RGD5 Re. Moo$5 /$. N'0$ !ee# #0is#es# /$. /re repor#/be se%!e$#s '$.er IFRS

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BRIEF E+ERCISE 23,

The accounting problems related to the presentation of interim datainclude:

(a)Changes in accounting.(b)The difficulty of allocating costs, such as income tax,

pensions, etc., to the proper quarter.

(c)Presentation of earnings per share (EPS) figures.

(d)Seasonality.

(e)Auditor’s involvement in interim reports.

BRIEF E+ERCISE 23,-;

Se/so$/i#( /ffec#s i$#eri! repor#s 0e$ i.e f'c#'/#io$s i$ profi#socc'r bec/'se off,se/so$ s/es .o $o# /bsorb #0e co!p/$(6s fixe.cos#s T0ese cos#s of#e$ #e$. #o re!/i$ f/ir( co$s#/$# re%/r.ess of s/es or pro.'c#io$

Re&e$'es /$. expe$ses !'s# be reco%$i7e. /$. /ccr'e. 0e$#0e( /re e/r$e. or i$c'rre. /ccor.i$% #o IFRS Co!p/$ies c/$ o$(.efer reco%$i#io$ of cos#s or re&e$'es 0e$ i# is /ppropri/#e #o .oso Deferr/ of cos#s is $o# /ppropri/#e '$ess #0e cos#s !ee# #0e

.efi$i#io$ of /$ /sse# )No#e< ASPE .oes $o# co$#/i$ /$( %'i./$cefor repor#i$% se%!e$#e. i$for!/#io$ or i$#eri! repor#i$%*

I# is .iffic'# #o co!pe#e( o&erco!e #0e probe! of se/so$/i#(5 b'#.iscos're /s #o #0e $/#'re of #0e se/so$/i#( f/c#ors #0/# f/ce #0eb'si$ess /$. #0e p/##er$ of re&e$'es /$. expe$ses )i$c'.i$%co!p/r/#i&e ./#/* !/( 0ep 'sers of #0e fi$/$ci/ s#/#e!e$#s #o'$.ers#/$. 0e#0er se/so$/i#( is /$ /.&erse iss'e i$ /$(p/r#ic'/r c/se

T0e effec#s of se/so$/i#( o'. be #0e s/!e for co!p/$iesfooi$% IFRS /$. ASPE5 excep# #0/# #0e e&e of .iscos're o'.be e$0/$ce. i$ #0e c/se of #0ose 'si$% IFRS

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BRIEF E+ERCISE 23,--

)/*L/$. 3;5;;;

C/s0 3;5;;;

T0is is / re/#e. p/r#( #r/$s/c#io$ T0e #r/$s/c#io$ is co$si.ere. $o##o be i$ #0e $or!/ co'rse of oper/#io$s of #0e co!p/$( Si$ce #0e/$. is /c4'ire. fro! #0e co!p/$( presi.e$# )/ss'!i$% #0epresi.e$# is $o# / si%$ific/$# s0/re0o.er* #0ere is / c0/$%e i$o$ers0ip of #0e /$. As e5 #0e /!o'$# of #0e exc0/$%e iss'ppor#e. b( /$ i$.epe$.e$# /ppr/is/ T0e #r/$s/c#io$ is #0erefore!e/s're. /# #0e exc0/$%e /!o'$#

Disclosure of the transaction would include a description of therelationship, a description of the transaction and amount,measurement basis and any amounts due to the companypresident.

Hoe&er5 if #0e presi.e$# is / si%$ific/$# s0/re0o.er5 /$. especi/(if #0e presi.e$# 0o.s / co$#roi$% i$#eres# /$. #0is is / $o$,c/s0#r/$s/c#io$5 / .iffere$# co$c'sio$ !/( be re/c0e. /s #o 0o #0e#r/$s/c#io$ s0o'. be &/'e. /s #0ere is $o be$efici/ c0/$%e i$o$ers0ip i$ #0e /sse#s

)b*T0e !/or .iffere$ce be#ee$ ASPE /$. IFRS is #0/# IFRS .oes $o#!/$./#e re!e/s're!e$# of / re/#e. p/r#( #r/$s/c#io$

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BRIEF E+ERCISE 23,-2

T0is is / re/#e. p/r#( #r/$s/c#io$ si$ce #0e s/!e i$.i&i.'/ o$s#0e #o co!p/$ies Si$ce #0e #r/$s/c#io$ is $o# i$ #0e $or!/

co'rse of b'si$ess5 #0ere is $o co!!erci/ s'bs#/$ce5 /$. #0ere is$o be$efici/ c0/$%e i$ o$ers0ip i$ #0e /sse#s5 #0e #r/$s/c#io$o'. be recor.e. /# #0e c/rr(i$% /!o'$#s of #0e /sse#s i$&o&e.

Fibreri%0# Corp

Co!p'#er Sof#/re Cos#s )$e* -95-;;Co!p'#er Sof#/re Cos#s )o.* --5;;;Co$#rib'#e. S'rp's =5-;;

Fre.eric1 CorpCo!p'#er Sof#/re Cos#s )$e* --5;;;Re#/i$e. E/r$i$%s =5-;;

Co!p'#er Sof#/re Cos#s )o.* -95-;;

U$.er ASPE5 cer#/i$ re/#e.,p/r#( #r/$s/c#io$s !'s# be re!e/s're.#o #0e c/rr(i$% /!o'$# of #0e '$.er(i$% /sse#s or ser&ices #0/#ere exc0/$%e. T0is is #0e c/se if #0e #r/$s/c#io$ is $o# i$ #0e$or!/ co'rse of b'si$ess5 #0ere is $o s'bs#/$#i&e c0/$%e i$o$ers0ip5 /$.or #0e exc0/$%e /!o'$# is $o# s'ppor#e. b(i$.epe$.e$# e&i.e$ce Tr/$s/c#io$s #0/# /re i$ #0e $or!/ co'rse of b'si$ess #0/# 0/&e $o co!!erci/ s'bs#/$ce !'s# /so bere!e/s're.5 /$. 0ere #0e #r/$s/c#io$ is /so / $o$,!o$e#/r(#r/$s/c#io$5 $o %/i$ or oss s0o'. be reco%$i7e. No#e 0oe&er5#0/# IFRS .oes $o# !/$./#e re!e/s're!e$# of re/#e.,p/r#(#r/$s/c#io$s

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T0is #r/$s/c#io$ is / $o$,!o$e#/r( exc0/$%e Si$ce #0e sof#/rep/c1/%es perfor! .iffere$# f'$c#io$s #0e #r/$s/c#io$ o'. beco$si.ere. #o 0/&e co!!erci/ s'bs#/$ce T0e #r/$s/c#io$ o'.#0erefore be !e/s're. /# #0e exc0/$%e /!o'$#

Fibreri%0# Corp

Co!p'#er Sof#/re Cos#s )$e* 2;5;;Co!p'#er Sof#/re Cos#s )o.* --5;;;G/i$ 5;;

Fre.eric1 Corp

Co!p'#er Sof#/re Cos#s )$e* 2;5;;Co!p'#er Sof#/re Cos#s )o.* -95-;;G/i$ 95:;;

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BRIEF E+ERCISE 23,-=

If #0e s0/re0o.er o$e. o$( =;5 #0ere is / pres'!p#io$ #0/##0ere 0/s bee$ / s'bs#/$#i&e c0/$%e i$ o$ers0ip A c0/$%e i$o$ers0ip is co$si.ere. s'bs#/$#i&e 0ere /$ '$re/#e. p/r#( 0/s%/i$e. or %i&e$ 'p 2; i$#eres# i$ #0e i#e! exc0/$%e. I$ #0e c/seof / s'bs#/$#i&e c0/$%e i$ o$ers0ip5 #0e #r/$s/c#io$ o'. berecor.e. i$ #0e s/!e /( /s i$ BE23,-3

Fibreri%0# Corp

Co!p'#er Sof#/re Cos#s )$e* 2;5;;Co!p'#er Sof#/re Cos#s )o.* --5;;;G/i$ 5;;

Fre.eric1 CorpCo!p'#er Sof#/re Cos#s )$e* 2;5;;

Co!p'#er Sof#/re Cos#s )o.* -95-;;G/i$ 95:;;


Cr'#o$ /$. Bi%eo /re re/#e. p/r#ies Tr/$s/c#io$s be#ee$

re/#e. p/r#ies /re .iscose. #o i$s're #0/# #0e 'sers of #0e fi$/$ci/s#/#e!e$#s '$.ers#/$. #0e b/sic $/#'re of so!e of #0e #r/$s/c#io$sBec/'se i# is of#e$ .iffic'# #o sep/r/#e #0e eco$o!ic s'bs#/$cefro! #0e e%/ for! i$ re/#e. p/r#( #r/$s/c#io$s5 .iscos're is 'se.ex#e$si&e( i$ #0is /re/ P'rc0/se of / s'bs#/$#i/ boc1 of #0eco!p/$(6s co!!o$ s0/res b( Bi%eo5 co'pe. i#0 #0e 'se of /Bi%eo /ffii/#e #o /c# /s foo. bro1er5 s'%%es#s #0/# .iscos're is$ee.e.


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BRIEF E+ERCISE 23,->

)/* IFRS

)-* T0e foo. oss )8;5;;;* is /$ e&e$# #0/# pro&i.es i$for!/#io$/bo'# co$.i#io$s #0/# .i. $o# exis# /# #0e s#/#e!e$# of fi$/$ci/posi#io$ ./#e b'# /re s'bse4'e$# #o #0/# ./#e I# .oes $o#re4'ire /.'s#!e$# of #0e fi$/$ci/ s#/#e!e$#s

)2* U$.er IFRS5 #0e s'bse4'e$# perio. e$.s 0e$ #0e fi$/$ci/s#/#e!e$#s /re /'#0ori7e. for iss'e Bec/'se #0e i/bii#( /sse##e. before #0e fi$/$ci/ s#/#e!e$#s /re /'#0ori7e. for iss'e5#0e fi$/$ci/ s#/#e!e$#s s0o'. i$c'.e /.'s#!e$# of #0ei/bii#( As / res'#5 $e# i$co!e i .ecre/se b( 89;5;;; T0e

se##e!e$# of #0e i/bii#( is #0e #(pe of s'bse4'e$# e&e$# #0/#pro&i.es /..i#io$/ e&i.e$ce /bo'# co$.i#io$s #0/# exis#e. /##0e s#/#e!e$# of fi$/$ci/ posi#io$ ./#e5 so #0e fi$/$ci/s#/#e!e$#s s0o'. be /.'s#e. /ccor.i$%(

)b* ASPE

)-* T0e foo. oss o'. $o# re4'ire /.'s#!e$# of #0e fi$/$ci/s#/#e!e$#s5 for #0e s/!e re/so$s /s s#/#e. /bo&e

)2* U$.er ASPE5 #0e s'bse4'e$# e&e$# perio. %e$er/( e$.s0e$ #0e fi$/$ci/ s#/#e!e$#s /re co!pe#e T0e ./#e is / !/##er of '.%e!e$#5 #/1i$% i$#o /cco'$# !/$/%e!e$# s#r'c#'re /$.proce.'res fooe. i$ co!pe#i$% #0e s#/#e!e$#s If i# is '.%e.#0/# #0e s#/#e!e$#s ere co!pe#e o$ M/rc0 -;5 2;-95 #0ese##e!e$# of #0e i/bii#( o'. $o# re4'ire /.'s#!e$# of #0efi$/$ci/ s#/#e!e$#s Hoe&er5 if i# is '.%e. #0/# #0e s#/#e!e$#s/re co!pe#e o$ M/rc0 -:5 2;-9 )#0e ./#e #0e s#/#e!e$#s /re/'#0ori7e. for iss'e*5 $e# i$co!e i .ecre/se b( 89;5;;; /s /

res'# of #0e /.'s#!e$# of #0e i/bii#(

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BRIEF E+ERCISE 23,-:

S'bse4'e$# e&e$#s /re of #o #(pes<)-* T0ose #0/# pro&i.e /..i#io$/ e&i.e$ce /bo'# co$.i#io$s

#0/# exis#e. /# #0e s#/#e!e$# of fi$/$ci/ posi#io$ ./#e5/ffec# #0e es#i!/#es 'se. i$ prep/ri$% fi$/$ci/ s#/#e!e$#s5/$. #0erefore5 res'# i$ $ee.e. /.'s#!e$#s

)2* T0ose #0/# pro&i.e e&i.e$ce /bo'# co$.i#io$s #0/# .i. $o#exis# /# #0e s#/#e!e$# of fi$/$ci/ posi#io$ ./#e b'# /roses'bse4'e$# #o #0/# ./#e /$. .o $o# re4'ire /.'s#!e$# of #0e fi$/$ci/ s#/#e!e$#s b'# 0ose effec#s !/( besi%$ific/$# e$o'%0 #o be .iscose. i#0 /ppropri/#e fi%'resor es#i!/#es s0o$

)/* Prob/b( /.'s# #0e fi$/$ci/ s#/#e!e$#s .irec#(

)b* Discos're)c* Discos're).* Discos're)e* Nei#0er /.'s#!e$# $or .iscos're $ecess/r()f* Nei#0er /.'s#!e$# $or .iscos're $ecess/r()%* Prob/b( /.'s# #0e fi$/$ci/ s#/#e!e$#s .irec#()0* Nei#0er /.'s#!e$# $or .iscos're $ecess/r(

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BRIEF E+ERCISE 23,-

T0e /'.i#or expresses / ce/$ or '$4'/ifie. opi$io$ 0e$ #0ecie$#6s fi$/$ci/ s#/#e!e$#s prese$# f/ir( #0e cie$#6s fi$/$ci/posi#io$ /$. res'#s of oper/#io$s o$ #0e b/sis of /$ ex/!i$/#io$!/.e i$ /ccor./$ce i#0 C/$/.i/$ A'.i#i$% S#/$./r.s )%e$er/(/ccep#e. /'.i#i$% s#/$./r.s*5 /$. #0e s#/#e!e$#s /re i$ co$for!i#(i#0 %e$er/( /ccep#e. /cco'$#i$% pri$cipes )IFRS or ASPE* /$.i$c'.e / i$for!/#i&e .iscos'res $ecess/r( #o !/1e #0es#/#e!e$#s $o# !ise/.i$% T0e /'.i#or expresses / 4'/ifie.opi$io$ 0e$ 0es0e !'s# #/1e excep#io$ #o #0e prese$#/#io$ of o$eor !ore co!po$e$#s of #0e fi$/$ci/ s#/#e!e$#s b'# #0e excep#io$or excep#io$s /re $o# serio's e$o'%0 #o $e%/#e 0is0er expressio$of /$ opi$io$ or #o express /$ /.&erse opi$io$

BRIEF E+ERCISE 23,-

Perce$#/%e )co!!o$,si7e* &er#ic/ /$/(sis is /s foos<

2;-= 2;-3 2;-2Ne# s/es -;; -;; -;;Cos# of %oo.s so. :; :; >9Gross profi# 3; 3; 39

Sei$%5 %e$er/ /$./.!i$is#r/#i&e expe$ses 29 2; ->Profi# before #/x 9 -; -

T0e co!p/$(6s profi# before #/x is .eci$i$% i$ 2;-3 .'e #o 0i%0er cos# of %oo.s so. /s / perce$#/%e of $e# s/es )co!p/re. #o 2;-2*T0e profi# before #/x is /so .eci$i$% i$ 2;-3 /$. 2;-= .'e #o #0ei$cre/si$% sei$%5 %e$er/5 /$. /.!i$is#r/#i&e expe$ses /s /perce$#/%e of $e# s/es A#0o'%0 #0e co!p/$(6s %ross profi#

s#/bii7e. i$ 2;-=5 #0e co!p/$(6s expe$ses re/#i&e #o $e# s/es /rei$cre/si$%5 res'#i$% i$ .eci$i$% profi# before #/x

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BRIEF E+ERCISE 23,2;

Referri$% #o #0e CICA Rese/rc0 S#'.( .isc'sse. i$ c0/p#er 235so!e i!i#/#io$s of #0e fi$/$ci/ s#/#e!e$# /$/(sis .o$e i$ BE 23,- /re /s foos<

- U$cer#/i$#( /bo'# #0e $/#'re /$. roe of #0e fi$/$ci/s#/#e!e$#s For ex/!pe5 #0e co!posi#io$ of sei$%5 %e$er/5/$. /.!i$is#r/#i&e expe$ses is '$cer#/i$5 /$. i# is '$cer#/i$0e#0er #0e i$co!e s#/#e!e$#s 0/&e bee$ /'.i#e. T0is !/(e/. 'sers #o !isi$#erpre# /$.or p/ce i$/ppropri/#e rei/$ceo$ #0e i$for!/#io$

2 U$cer#/i$#( /bo'# #0e $/#'re of b'si$ess oper/#io$s por#r/(e.

For ex/!pe5 #0e co!p/$(6s #(pe of b'si$ess /c#i&i#ies /$. #0eeco$o!ic e$&iro$!e$# #0/# #0e co!p/$( oper/#es i$ /re'$1$o$

3 U$cer#/i$#( .'e #o i!i#/#io$s of fi$/$ci/ s#/#e!e$#!e/s're!e$#s /$. .iscos'res T0e !e/s're!e$#s i$ #0ei$co!e s#/#e!e$#s /re $o# e '$.ers#oo.5 bec/'se #0ere /re$o /..i#io$/ .iscos'res /bo'# #0e /cco'$#i$% poicies /$.pr/c#ices fooe.

= U$cer#/i$#( /bo'# !/$/%e!e$#6s !o#i&es /$. i$#e$#io$sM/$/%e!e$#6s c0oices i$ .e#er!i$i$% #0e /cco'$#i$% poicies/$. !e#0o.s !/( be !o#i&/#e. b( / $ee. #o !/xi!i7ebo$'ses o&er #i!e5 for ex/!pe

O#0er i!por#/$# i!i#/#io$s of fi$/$ci/ s#/#e!e$# /$/(sis i$c'.e#0/# es#i!/#e. i#e!s )s'c0 /s .epreci/#io$ expe$se /$. b/. .eb#expe$se 0ic0 !/( be i$c'.e. i$ sei$%5 %e$er/5 /$./.!i$is#r/#i&e expe$ses* /re si%$ific/$#5 /$. #0/# /c0ie&i$%co!p/r/bii#( i#0 o#0er co!p/$ies i$ #0e s/!e i$.'s#r( !/( be

.iffic'#

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SOLUTIONS TO E+ERCISES

E+ERCISE 23,- )-9,2; !i$'#es*

)/* So!e ex/!pes of ie%/ /c#s )#0e &io/#io$ of /s /$.re%'/#io$s* !/( i$c'.e<• p/(i$% bribes or 1ic1b/c1s #o sec're b'si$ess for #0e

e$#i#(• cri!i$/ /c#i&i#ies co!!i##e. b( #0e co!p/$( or i#s

e!po(ees o$ be0/f of #0e co!p/$(• &io/#io$s of /s /$. re%'/#io$s #0/# e$#er i$#o #0e

.e#er!i$/#io$ of fi$/$ci/ s#/#e!e$# /!o'$#s or

.iscos'res5 s'c0 /s #0e #/x /s• &io/#io$s of /s /$. re%'/#io$s #0/# 0/&e / f'$./!e$#/

effec# o$ #0e e$#i#(6s i$.'s#r( /$. i#s oper/#io$s5 s'c0 /s&io/#i$% po'#io$ co$#ro /$. e$&iro$!e$#/ /s for /c0e!ic/ co!p/$(

)b* Ge$er/(5 ie%/ /c#s5 if .e#ec#e. b( /'#0ori#ies5 /re i1e( #o%i&e rise #o cri!i$/ pe$/#ies of#e$ i$c'.i$% so!e for! of fi$/$ci/ i/bii#( As / res'#5 0e$ /$ ie%/ /c# occ'rs /$. /$/cco'$#/$# or /'.i#or f/is #o .e#ec# i#5 / !/#eri/ i/bii#( !/(be o!i##e. fro! #0e fi$/$ci/ s#/#e!e$#s )/s5 /r%'/b(5 /ie%/ /c#s /re !/#eri/* A$o#0er possibii#( is #0/# #0epo#e$#i/ i/bii#( f/is #o s/#isf( #0e re4'ire!e$#s of /ccr'/5 i$0ic0 c/se $o#e .iscos're of #0e co$#i$%e$c( i i$correc#(be o!i##e. fro! #0e fi$/$ci/ s#/#e!e$#s I$ /..i#io$5 re&e$'es/$. expe$ses .eri&e. fro! /$ ie%/ /c#5 if !/#eri/ i$ re/#io$#o #0e fi$/$ci/ s#/#e!e$#s5 s0o'. be .iscose.

)c* F/c#ors #0/# co'. i$.ic/#e #0/# #0e i$0ere$# ris1 of &io/#io$ of /s /$. re%'/#io$s is %re/#er #0/$ $or!/ i$c'.e #0efooi$%<• &io/#io$s of /s /$. re%'/#io$s b( #0e e$#i#( i$ #0ec'rre$# or pre&io's (e/rs• rece$#5 e,p'bici7e. &io/#io$s of /s /$. re%'/#io$s b(

o#0er co!p/$ies i$ #0e i$.'s#r(• /s /$. re%'/#io$s #0/# /re $e or '$'s'/( co!pex• /c1 of experie$ce o$ #0e p/r# of !/$/%e!e$# i$

i$#erpre#i$% or /pp(i$% specific /s /$. re%'/#io$s

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• /c#i&e !o$i#ori$% b( re%'/#ors or o#0er %ro'ps

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E+ERCISE 23,2 )9,-; !i$'#es*

)/* Re&e$'e #es#< -; + 835;;; @ 835;;Se%!e$#s A )8-=;5;;;*5 B )8=;5;;;* /$. D )8-;5;;;* !ee# #0is#es#

)b* Oper/#i$% profi# #es#<

-; + )8295;;; ? 85;;; ? 89;;* @ 83539;Se%!e$#s A )8295;;;*5 B )85;;;*5 /$. C )895;;; /bso'#e/!o'$#* !ee# #0is #es#

)c* I.e$#ifi/be /sse#s #es#< -; + 839-5;;; @ 8395-;;Se%!e$#s A )82=;5;;;*5 C )83>5;;;* /$. D )8=5;;;* !ee# #0is#es#

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E+ERCISE 23,3 )2;,29 !i$'#es*

)/*M/ffi$ Corp<B'i.i$%s )$e#*:;;Re#/i$e. E/r$i$%s-;;Co$#rib'#e. S'rp's2;;

C/s0 -5;;;

T0e #r/$s/c#io$ is $o# i$ #0e $or!/ co'rse of oper/#io$s for #0e #oco!p/$ies /$. #0ere is /r%'/b( $o !/#eri/ c0/$%e i$ #0eo$ers0ip i$#eres# i$ #0e b'i.i$% T0e #r/$s/c#io$ o'. #0ereforebe !e/s're. /# i#s c/rr(i$% /!o'$#

T0e /.'s#!e$# #o co$#rib'#e. s'rp's re#/i$e. e/r$i$%s isco$si.ere. #o be / c/pi#/ p/(!e$# b( M/ffi$ Corp /$. / c/pi#/receip# b( Gre( I$c

Gre( I$c<C/s0-5;;;

Co$#rib'#e. S'rp's 3;;B'i.i$%s )$e#* :;;

)b*

C/s0-5-;;G/i$ o$ S/e of B'i.i$%s =;;B'i.i$%s )$e#* :;;

A %/i$ of 8=;; o$ s/e of #0e b'i.i$% is reco%$i7e. /s i$co!e b(M/ffi$ Corp I# is $o# /ppropri/#e #o re&erse #0e ori%i$/ .ebi# of 83;;!/.e #o e4'i#( /$. reco%$i7e / %/i$ i$ Gre( I$c $o #0/# M/ffi$Corp 0/s so. #0e b'i.i$%

)c* If M/ffi$ co'. p'rc0/se #0e b'i.i$% /# /$ /!o'$# ess #0/$ #0ec/rr(i$% /!o'$# o$ Gre(6s fi$/$ci/ s#/#e!e$#s5 co$si.er/#io$s0o'. be %i&e$ #o 0e#0er #0e &/'e of #0e b'i.i$% is i!p/ire. /$.s0o'. be ri##e$ .o$ i$ Gre(6s boo1s prior #o #r/$sfer /# #0ere.'ce. c/rr(i$% /!o'$#


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E+ERCISE 23,3 )Co$#i$'e.*

).*

M/ffi$ Corp<

B'i.i$%s )$e#*-5;;;C/s0 -5;;;

T0e #r/$s/c#io$ is i$ #0e $or!/ co'rse of oper/#io$s for #0e #oco!p/$ies /$. #0ere is co!!erci/ s'bs#/$ce I# is #0erefore/ppropri/#e for Gre( #o reco%$i7e / %/i$ of 83;; M/ffi$ o'.recor. #0e b'i.i$% /# #0e exc0/$%e /!o'$#

Gre( I$c<C/s0-5;;;

G/i$ o$ S/e of B'i.i$%s 3;;B'i.i$%s )$e#* :;;

M/ffi$ Corp J S/e of b'i.i$% i$ 2;-9C/s0-5-;;

G/i$ o$ S/e of B'i.i$%s -;;B'i.i$%s )$e#* -5;;;

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E+ERCISE 23,3 )Co$#i$'e.*

)e* Op#io$ -< Tr/$s/c#io$ !e/s're. /# c/rr(i$% /!o'$#<

2;-=<M/ffi$ Corp J No i!p/c# o$ #0e i$co!e s#/#e!e$# 8 ;Gre( I$c J No i!p/c# o$ #0e i$co!e s#/#e!e$# ;2;-9<M/ffi$ Corp J G/i$ =;;To#/ i$co!e for 2;-= /$. 2;-9 8 =;;

Op#io$ 2< Tr/$s/c#io$ !e/s're. /# exc0/$%e /!o'$#<

2;-=<M/ffi$ Corp J No i!p/c# o$ #0e i$co!e s#/#e!e$# 8 ;Gre( I$c J G/i$ of 83;; 3;;2;-9<M/ffi$ Corp J G/i$ of 8-;; -;;To#/ i$co!e for 2;-= /$. 2;-9 8 =;;

Re%/r.ess of #0e !e#0o. 'se.5 #0e co!bi$e. i$co!e for #0eco$soi./#e. repor#i$% '$i# i be #0e s/!e T0e p'rc0/se /$. s/eof #0e b'i.i$% be#ee$ M/ffi$ /$. Gre( beco!e c/$cee. i$ #0e

process of ei!i$/#i$% i$#erco!p/$( b//$ces T0e #r/$s/c#io$ i#0#0e '$re/#e. ex#er$/ p/r#( pro&i.es #0e obec#i&e !e/s're!e$#of #0e %/i$ #o #0e repor#i$% '$i#

Hoe&er5 Gre( /$.5 #o #0e esser ex#e$#5 M/ffi$5 /re re4'ire. #orepor# #o cer#/i$ of #0eir 'sers /s sep/r/#e repor#i$% '$i#s I$ #0isc/se5 #0e !e/s're!e$# of i$#erco!p/$( #r/$s/c#io$s beco!esi!por#/$# i$ /cc'r/#e( refec#i$% eco$o!ic s'bs#/$ce "e c/$ see#0/# '$.er op#io$ #o5 / por#io$ of #0e %/i$ )83;;* is e/r$e. b( Gre(

/$. #0e re!/i$.er is e/r$e. b( M/ffi$5 0ere/s '$.er op#io$ o$e5#0e e$#ire /!o'$# of #0e %/i$ is e/r$e. b( M/ffi$ T0e !e#0o. of repor#i$% i 0/&e si%$ific/$# i!p/c# o$ #0e i$co!e of e/c0co!p/$(

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E+ERCISE 23,= )2;,29 !i$'#es*

)/* T0e #r/$s/c#io$ is $o# i$ #0e $or!/ co'rse of oper/#io$s /$.#0e #r/$s/c#io$ 0/s co!!erci/ s'bs#/$ce<

Kere7 Li!i#e.<M/c0i$er( )$e*:;;Re#/i$e. E/r$i$%s2;;

M/c0i$er( )o.* ;;

Co$sior I$c<M/c0i$er( )$e*;;

Co$#rib'#e. S'rp's 2;;M/c0i$er( )o.* :;;

Si$ce #0e #r/$s/c#io$ is $o# i$ #0e $or!/ co'rse of oper/#io$s for #0e #o co!p/$ies /$. #0ere is $o c0/$%e i$ #0e o$ers0ip i$#eres#i$ #0e !/c0i$er(5 #0e #r/$s/c#io$ is !e/s're. /# i#s c/rr(i$%/!o'$#

)b* T0e #r/$s/c#io$ is $o# i$ #0e $or!/ co'rse of oper/#io$s /$.#0e #r/$s/c#io$ .oes $o# 0/&e co!!erci/ s'bs#/$ce<

T0e e$#ries /re #0e s/!e /s for p/r# )/* Si$ce #0e #r/$s/c#io$ is $o#

i$ #0e $or!/ co'rse of oper/#io$s for #0e #o co!p/$ies /$. #0ereis $o c0/$%e i$ #0e o$ers0ip i$#eres# i$ #0e !/c0i$er(5 #0e#r/$s/c#io$ is !e/s're. /# i#s c/rr(i$% /!o'$# re%/r.ess of 0e#0er #0e #r/$s/c#io$ 0/s co!!erci/ s'bs#/$ce or $o#

A re/#e. p/r#( #r/$s/c#io$ #0/# is $o# i$ #0e $or!/ co'rse of oper/#io$s re4'ires /..i#io$/ s'ppor# for #0e s'bs#/$ce of #0e#r/$s/c#io$ i$ or.er for #0e exc0/$%e /!o'$# #o be 'se. for fi$/$ci/ repor#i$% p'rposes T0is is co$si.ere. #o occ'r 0e$ /c0/$%e i$ #0e o$ers0ip i$#eres#s i$ #0e i#e! #r/$sferre. is

s'bs#/$#i&e /$. #0e exc0/$%e is s'ppor#e. b( i$.epe$.e$#e&i.e$ce I$ #0is c/se5 #0e exc0/$%e /!o'$# is !ore represe$#/#i&eof #0e eco$o!ic re/i#( of #0e #r/$s/c#io$ #0/$ #0e c/rr(i$% /!o'$#/$. is s'fficie$#( rei/be #o be 'se. for fi$/$ci/ repor#i$%p'rposes

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E+ERCISE 23,= )Co$#i$'e.*

)c* T0e #r/$s/c#io$ is i$ #0e $or!/ co'rse of oper/#io$s /$. #0e#r/$s/c#io$ 0/s co!!erci/ s'bs#/$ce<

Kere7 Li!i#e.<M/c0i$er( )$e*-5;;;

G/i$ o$ S/e of M/c0i$e -;;M/c0i$er( )o.* ;;

Co$sior I$c<M/c0i$er( )$e*-5;;;

G/i$ o$ S/e of M/c0i$e 3;;M/c0i$er( )o.* :;;

As o$% /s #0e /!o'$# of #0e exc0/$%e is s'ppor#e. b( i$.epe$.e$#e&i.e$ce5 #0e #r/$s/c#io$ is recor.e. /# #0e exc0/$%e /!o'$# /$. /%/i$ or oss is recor.e. o$ e/c0 co!p/$(6s i$co!e s#/#e!e$#

).* T0e #r/$s/c#io$ is i$ #0e $or!/ co'rse of oper/#io$s /$. #0e#r/$s/c#io$ .oes $o# 0/&e co!!erci/ s'bs#/$ce<

T0e e$#ries /re #0e s/!e /s for p/r# )/* A $o$,!o$e#/r( #r/$s/c#io$#0/# .oes $o# 0/&e co!!erci/ s'bs#/$ce o'. be !e/s're. /# #0e

c/rr(i$% /!o'$# I$ s'c0 / c/se5 #0e /.'s#!e$# #o re#/i$e.e/r$i$%s is co$si.ere. / c/pi#/ p/(!e$# b( Kere7 /$. / c/pi#/receip# b( Co$sior

)e* U$.er ASPE5 cer#/i$ re/#e.,p/r#( #r/$s/c#io$s !'s# bere!e/s're. #o #0e c/rr(i$% /!o'$# of #0e '$.er(i$% /sse#s or ser&ices #0/# ere exc0/$%e. T0is is #0e c/se if #0e #r/$s/c#io$ is$o# i$ #0e $or!/ co'rse of b'si$ess5 #0ere is $o s'bs#/$#i&ec0/$%e i$ o$ers0ip5 /$.or #0e exc0/$%e /!o'$# is $o# s'ppor#e.b( i$.epe$.e$# e&i.e$ce Tr/$s/c#io$s #0/# /re i$ #0e $or!/co'rse of b'si$ess #0/# 0/&e $o co!!erci/ s'bs#/$ce !'s# /sobe re!e/s're.5 /$. 0ere #0e #r/$s/c#io$ is /so / $o$,!o$e#/r(#r/$s/c#io$5 $o %/i$ or oss s0o'. be reco%$i7e. Hoe&er5 $o#e#0/# IFRS .oes $o# !/$./#e re,!e/s're!e$# of re/#e.,p/r#(#r/$s/c#io$s T0erefore5 #0e #r/$s/c#io$s o'. be recor.e. /s i$p/r# )c* for / sce$/rios

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E+ERCISE 23,9 )-;,-9 !i$'#es*

)/*

)-* T0e iss'/$ce of co!!o$ s0/res is /$ ex/!pe of / s'bse4'e$#e&e$# 0ic0 pro&i.es e&i.e$ce /bo'# co$.i#io$s #0/# .i. $o#exis# /# #0e s#/#e!e$# of fi$/$ci/ posi#io$ ./#e b'# /roses'bse4'e$# #o #0/# ./#e T0erefore5 $o /.'s#!e$# #o #0efi$/$ci/ s#/#e!e$#s is recor.e. Hoe&er5 #0is e&e$# s0o'. be.iscose. i$ #0e $o#es5 / s'ppe!e$#/ sc0e.'e5 or e&e$#0ro'%0 pro,for!/ fi$/$ci/ ./#/

)2* T0e c0/$%e. es#i!/#e of #/x p/(/be is /$ ex/!pe of /s'bse4'e$# e&e$# #0/# pro&i.es /..i#io$/ e&i.e$ce /bo'#

co$.i#io$s #0/# exis#e. /# #0e s#/#e!e$# of fi$/$ci/ posi#io$./#e T0e i$co!e #/x i/bii#( exis#e. /# Dece!ber 3-5 2;-=5 b'##0e /!o'$# /s $o# cer#/i$ T0is e&e$# /ffec#s #0e es#i!/#epre&io's( !/.e /$. s0o'. res'# i$ /$ /.'s#!e$# of #0efi$/$ci/ s#/#e!e$#s T0e correc# /!o'$# )8-52;;5;;;* o'.0/&e bee$ recor.e. /# Dece!ber 3- if i# 0/. bee$ /&/i/beT0erefore5 /so$ s0o'. i$cre/se i$co!e #/x expe$se i$ #0e2;-= i$co!e s#/#e!e$# b( 82;;5;;; I$ #0e s#/#e!e$# of fi$/$ci/ posi#io$5 i$co!e #/x p/(/be s0o'. be i$cre/se. /$.re#/i$e. e/r$i$%s .ecre/se. b( 82;;5;;;

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E+ERCISE 23,9 )-;,-9 !i$'#es*

)b* T0e i$co!e #/x p/(/be /s /# Dece!ber 3-5 2;-= s0o'. bei$cre/se. #o 8-2 !iio$ bec/'se #0e i$for!/#io$ /bo'# #0ei$cre/se. es#i!/#e is /&/i/be before #0e fi$/$ci/ s#/#e!e$#s/re co$si.ere. /'#0ori7e. for iss'e )M/rc0 -;5 2;-9* I$ #0e#i!e be#ee$ Dece!ber 3-5 2;-= /$. M/rc0 -;5 2;-95 #0eco!p/$( is prep/ri$% #o iss'e i#s fi$/$ci/ s#/#e!e$#s /$./$$'/ repor#5 i$c'.i$% prep/ri$% #0e $ecess/r( /.'s#i$%

o'r$/ e$#ries #o e$s're #0/# / !/#eri/ #r/$s/c#io$s /rerefec#e. i$ #0e fi$/$ci/ s#/#e!e$#s Accor.i$%(5 /$ /..i#io$//ccr'/ of 82;;5;;; ./#e. Dece!ber 3-5 2;-= s0o'. berecor.e. #o refec# #0e /..i#io$/ i$co!e #/x expe$se for 2;-=I$&es#ors o'. re( o$ #0e fi$/$ci/ s#/#e!e$#s i$ /ssessi$%

#0e co!p/$(6s perfor!/$ce /$. !/1i$% #0eir i$&es#i$%.ecisio$s T0erefore5 i$&es#ors o'. s'ppor# i$cre/si$% #0ees#i!/#e of i$co!e #/x p/(/be /s /# Dece!ber 3-5 2;-= so #0/##0e( !/( !/1e #0eir .ecisio$s b/se. o$ fi$/$ci/ s#/#e!e$#s#0/# /re ree&/$#5 f/i#0f'( represe$#/#i&e5 co!pe#e5 /$. freefro! !/#eri/ error

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E+ERCISE 23,> )-9,2; !i$'#es*

-23

)/*)c*)b*

=9>

)b*)c*)c*

:

)c*)b*)/*

-;---2

)c*)/*)b*

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E+ERCISE 23,: )2;,3; !i$'#es*

)/* Hori7o$#/ perce$#/%e /$/(sis is /s foos<

MACA CORPORATIONS#/#e!e$# of Fi$/$ci/ Posi#io$

Dece!ber 3-5 2;-=

Asse#s 2;-= 2;-3 Differe$ce c0/$%e

C/s0 8295;;; 8225;;; 8):5;;;* )2=*Acco'$#s recei&/be -=25;;; --5;;; )35;;;* )2-9*I$&es#!e$#s,FK,NI -335;;; -325;;; -5;;; ;I$&e$#or( 3995;;; =;-5;;; )=>5;;;* )--9P/$# /sse#s )$e#* ==25;;; =>95;;; )235;;;* )=*

I$#/$%ibe /sse#s --35;;; -=35;;; )3;5;;;* )2-;*8-5=:;5;;; 8-5>-=5;;; )-==5;;;* )*

Li/bii#ies /$. E4'i#(Acco'$#s p/(/be 82>:5;;; 833:5;;; 8):;5;;;* )2;*Lo$%,#er! .eb# >=5;;; -925;;; )5;;;* )9:*S0/re c/pi#/ 32>5;;; 32>5;;; ,;, ,

Re#/i$e. e/r$i$%s -35;;; :5;;; -=5;;; -8-5=:;5;;; 8-5>-=5;;; 8)-==5;;;* )*

MACA CORPORATIONI$co!e S#/#e!e$#

e/r E$.e. Dece!ber 3-5 2;-=

2;-= 2;-3 Differe$ce c0/$%e

Ne# s/es 8;95;;; 8:-5;;; 82=5;;; 3-Cos# of %oo.s so. 92:5;;; 93;5;;; )35;;;* );>*Gross profi# 2:5;;; 29-5;;; 2:5;;; -;Sei$%5 %e$er/5 /$.

/.!i$is#r/#i&e expe$ses -=;5;;; ---5;;; 25;;; 2>-O#0er expe$ses5 $e# --5;;; --;5;;; 5;;; :3

I$co!e before i$co!e #/x 2;5;;; 3;5;;; )-;5;;;* )333*

I$co!e #/x >5;;; 5;;; )35;;;* )333*Ne# i$co!e 8-=5;;; 82-5;;; 8):5;;;* )333*

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E+ERCISE 23,: )Co$#i$'e.*

T0e co!p/$(6s i4'i.i#( 0/s i!pro&e. /s e&i.e$ce. b( #0e 2-9.ecre/se i$ /cco'$#s recei&/be .espi#e #0e 3- i$cre/se i$ $e#s/es )0ic0 si%$/s i!pro&e. c/s0 coec#io$s*5 /s e /s #0e2; .ecre/se i$ /cco'$#s p/(/be T0e co!p/$(6s so&e$c( 0/si!pro&e. si%$ific/$#(5 /s e&i.e$ce. b( #0e 9: .ecre/se i$ o$%,#er! .eb# Hoe&er5 #0e co!p/$(6s profi#/bii#( 0/s .eci$e. /se&i.e$ce. b( #0e 333 .ecre/se i$ $e# i$co!e T0e .ecre/se i$ $e#i$co!e /ppe/rs #o be .'e #o / si%$ific/$# 2>- i$cre/se i$ sei$%5%e$er/5 /$. /.!i$is#r/#i&e expe$ses Ne# s/es /$. %ross profi#i$cre/se. o$( b( 3- /$. -; respec#i&e(5 res'#i$% i$ /.ecre/se i$ $e# i$co!e

)b* Ker#ic/ perce$#/%e /$/(sis is /s foos<

2;-= 2;-3

Ne# s/es -;;; -;;;Cos# of %oo.s so. >99 >:Gross profi# 3=9 32-Sei$%5 %e$er/5 /$./.!i$is#r/#i&e expe$ses -:= -=2

O#0er expe$ses5 $e# -=: -=-I$co!e before i$co!e #/x 29 3

I$co!e #/x ;: -2Ne# i$co!e -: 2:

T0e co!p/$(6s cos# of %oo.s so. /s / perce$#/%e of $e# s/es.ecre/se.5 res'#i$% i$ 0i%0er %ross profi# /s / perce$#/%e of $e#s/es Hoe&er5 #0e co!p/$(6s oper/#i$% expe$ses i$c'.i$%sei$%5 %e$er/5 /$. /.!i$is#r/#i&e expe$ses5 /$. o#0er expe$ses/s / perce$#/%e of $e# s/es i$cre/se. T0e co!p/$( experie$ce.

i$cre/se. $e# s/es5 (e# #0e co!p/$(6s oper/#i$% expe$ses re/#i&e#o $e# s/es i$cre/se. si%$ific/$#(5 res'#i$% i$ .ecre/se. $e#i$co!e

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E+ERCISE 23,: )Co$#i$'e.*

)c*

Referri$% #o #0e CICA Research Study .isc'sse. i$ c0/p#er 235

so!e i!i#/#io$s of #0e fi$/$ci/ s#/#e!e$# /$/(sis .o$e i$ p/r#s )/*/$. )b* /re /s foos<

- U$cer#/i$#( /bo'# #0e $/#'re /$. roe of #0e fi$/$ci/s#/#e!e$#s For ex/!pe5 #0e co!posi#io$ of sei$%5 %e$er/5/$. /.!i$is#r/#i&e expe$ses /$. o#0er expe$ses is '$cer#/i$5/$. i# is '$cer#/i$ 0e#0er #0e fi$/$ci/ s#/#e!e$#s 0/&e bee$/'.i#e. T0is !/( e/. 'sers #o !isi$#erpre# /$.or p/cei$/ppropri/#e rei/$ce o$ #0e i$for!/#io$

2 U$cer#/i$#( /bo'# #0e $/#'re of b'si$ess oper/#io$s por#r/(e.For ex/!pe5 #0e co!p/$(6s #(pe of b'si$ess /c#i&i#ies /$. #0eeco$o!ic e$&iro$!e$# #0/# #0e co!p/$( oper/#es i$ /re'$1$o$

3 U$cer#/i$#( .'e #o i!i#/#io$s of fi$/$ci/ s#/#e!e$#!e/s're!e$#s /$. .iscos'res T0e !e/s're!e$#s i$ #0ei$co!e s#/#e!e$#s /re $o# e '$.ers#oo.5 bec/'se #0ere /re$o /..i#io$/ .iscos'res /bo'# #0e /cco'$#i$% poicies /$.pr/c#ices fooe.

= U$cer#/i$#( /bo'# !/$/%e!e$#6s !o#i&es /$. i$#e$#io$sM/$/%e!e$#6s c0oices i$ .e#er!i$i$% #0e /cco'$#i$% poicies/$. !e#0o.s !/( be !o#i&/#e. b( / $ee. #o !/xi!i7ebo$'ses o&er #i!e5 for ex/!pe

O#0er i!por#/$# i!i#/#io$s of fi$/$ci/ s#/#e!e$# /$/(sis i$c'.e#0/# es#i!/#e. i#e!s )s'c0 /s .epreci/#io$ expe$se /$. b/. .eb#expe$se 0ic0 !/( be i$c'.e. i$ sei$%5 %e$er/5 /$./.!i$is#r/#i&e expe$ses* /re si%$ific/$#5 /$. #0/# /c0ie&i$%co!p/r/bii#( i#0 o#0er co!p/$ies i$ #0e s/!e i$.'s#r( !/( be.iffic'#


7/25/2019 sm ch (23).doc



EXERCISE 23-8 (20–30 minutes)

(a)The acid-test ratio is the current ratio with the subtraction ofinventory and prepaid expenses (generally insignificant relativeto inventory) from current assets. Any divergence in trendbetween these two ratios would therefore be dependent upon theinventory account. Inventory turnover has declined sharply inthe three-year period, from 4.91 to 3.72. During the same period,sales to fixed assets have increased and total sales haveincreased 5 percent. The decline in the inventory turnover istherefore not due to a decline in sales. The apparent cause is thatinvestment in inventory has increased at a faster rate thansales, and this has accounted for the divergence between theacid-test and current ratios.

(b)Financial leverage is the use of borrowed funds (debt) toincrease the return earned by investors, such as theshareholders of a business, and is measured by looking at therelationship between the amount of debt and the amount ofshareholders’ equity. For example, if a company can borrow$1,000 at an interest cost of 6% and put that $1,000 to work andearn 10%, the excess 4% return goes to the shareholderswithout their having to invest any additional funds of their own.But consider the situation for the shareholders if the $1,000

borrowed and invested earns only 3%! Too much debt can beinjurious to a company. With increased debt come increasedrequirements for regular interest and principal payments, andbankruptcy risk increases.In the Robbins situation, financial leverage has definitelydeclined during the three-year period. This is shown by thesteady drop in the long-term debt-to-total-assets ratio, and thetotal-debt-to-total-assets ratio. Apparently the decline of debt asa percentage of this firm’s capital structure is accounted for by

a reduction in the long-term portion of the firm’s indebtedness.This reduction of leverage accounts for the decrease in thereturn on equity ratio. This conclusion is reinforced by the factthat net income to sales and return on total assets have bothincreased.

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E+ERCISE 23, )Co$#i$'e.*

(c)The company’s investment in plant and equipment hasdecreased during the three-year period 2012–2014. Thisconclusion is reached by using the sales to fixed assets (fixedasset turnover) and sales as a percent of 2012 sales ratios.

Because sales have grown each year, the sales to fixed assetscould be expected to increase unless fixed assets grew at afaster rate. The sales to fixed assets ratio increased at a fasterrate than the 3 percent annual growth in sales; therefore,investment in plant and equipment must have declined.

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TIME AND PURPOSE OF PROBLEMS

4ro!lem &(1 9Time &$(/ minutes:

4ur"ose7to "ro#ide the student ;ith an understanding of rules for segmentre"orting. The student must determine ;hich of fi#e segments are su!8ect to segmentre"orting rules and descri!e the re2uired disclosures.

4ro!lem &(& 9Time (/)/ minutes:

4ur"ose7to "ro#ide the student ;ith #arious disclosure issues from "re#iouscha"ters including su!se2uent e#ents and changes in accounting "olicies andestimates. The student must descri!e the a""ro"riate disclosure for a #ariety of situations.

4ro!lem &(( 9Time )/$/ minutes:

4ur"ose7to "ro#ide the student ;ith statement of financial "osition re"orting issues.The student must "re"are a corrected statement of financial "osition ;ith "ro"er disclosure. The issues in#ol#e #arious errors and su!se2uent e#ents. The studentmust also descri!e any re2uired note disclosure related to the items in the statementof financial "osition. This "ro!lem "ro#ides a good o#er#ie; of issues from "re#iouscha"ters.

4ro!lem &() 9Time &/&$ minutes:

4ur"ose7to "ro#ide the student ;ith an understanding of the necessary informationthat should !e disclosed in the financial statements and notes. The student is

re2uired to e#aluate the facts of four items concerning the com"any3s o"erations andto discuss any additional disclosures in the financial statements and notes that theauditor should recommend ;ith res"ect to these items.

4ro!lem &($ 9Time &/&$ minutes:

4ur"ose7to "ro#ide the student ;ith an understanding of the conditions under ;hichnote disclosures are necessary. The student is re2uired to analy<e three sets of circumstances and to "re"are the res"ecti#e notes ;here deemed to !e necessary"lus an e6"lanation of the reasons for not making disclosures for those items in ;hicha note ;as not "re"ared.

4ro!lem &(* 9Time &/&$ minutes:

4ur"ose7to "ro#ide the student ;ith an understanding of segment re"orting. The"ro!lem e6"lores ;hy a com"any did not ha#e to "re"are certain segmentinformation. In addition, the student is asked to determine ;hy geogra"hical areainformation should !e "ro#ided.

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TIME AND PURPOSE OF PROBLEMS )CONTINUED*

4ro!lem &(% 9Time &$(/ minutes:

4ur"ose7to "ro#ide the student ;ith an understanding of the ty"es of disclosures

that are necessitated under certain circumstances. This assignment in#ol#es threeinde"endent situations dealing ;ith such conce"ts as ;arranty claims, a selfinsurance contingency, and the disco#ery of a "ro!a!le loss su!se2uent to the dateof the financial statements. The student is re2uired to discuss the accrual treatmentand ty"e of disclosure necessary and the reasons ;hy such disclosure is a""ro"riatefor each of the three situations.

4ro!lem &(+ 9Time 1/&/ minutes:

4ur"ose7to "ro#ide the student ;ith an understanding of the necessary informationthat must !e disclosed in the financial statements ;ith regard to certain assetclassifications. The student is re2uired to discuss each of these res"ecti#e

disclosures for In#entories and "ro"erty, "lant, and e2ui"ment in the audited financialstatements issued to the shareholders.

4ro!lem &( 9Time (/($ minutes:

4ur"ose7to "ro#ide the student ;ith an understanding of segment re"ortingre2uirements, including "ro#iding e6"lanations as to ;hich segments are re"orta!le.

4ro!lem &(1/ 9Time &/&$ minutes:

4ur"ose7to "ro#ide the student ;ith an understanding of the "ro"er accounting for

su!se2uent e#ent transactions. =ankru"tcy, issue of de!t, strikes, and other ty"icalsu!se2uent e#ent transactions are "resented.

4ro!lem &(11 9Time ($>)$ minutes:

4ur"ose7to "ro#ide the student ;ith an understanding of certain key ratios. Inaddition, the student is asked to identify and e6"lain ;hat other financial re"orts or financial analysis might !e em"loyed. Also, the student is to determine ;hether thecom"any can finance the "lant e6"ansion internally and ;hether an e6tension on thenote should !e made.

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SOLUTIONS TO PROBLEMS

PROBLEM 23,-

)/* De#er!i$/#io$ of repor#/be se%!e$#s<

)-* Re&e$'e #es#< -; + 8:;5;;; @ 8:5;;;Se%!e$#s B )8;5;;;* /$. C )89;5;;;* bo#0 !ee# #0is #es#

8=;5;;; ? 8;5;;; ? 89;5;;; ? 8395;;; ? 8995;;;

)2* Oper/#i$% profi# #es#<-; + )8--5;;; ? 8:95;;; ? 8=5;;; ? 8:5;;;* @ 85:;;Se%!e$#s A )8--5;;;*5 B )8-;5;;; /bso'#e &/'e*5 /$. C)8:95;;;* / !ee# #0is #es#

)3* I.e$#ifi/be /sse#s #es#< -; + 8:-;5;;; @ 8:-5;;;O$( se%!e$# C )89;;5;;;* !ee#s #0is #es#

8395;;; ? 8>;5;;; ? 89;;5;;; ? 8>95;;; ? 89;5;;;

)b* Discos'res re4'ire. b(IFRS 8<

A B C O#0er To#/s

Ex#er$/ Re&e$'esI$#erse%!e$# Re&e$'esTo#/ Re&e$'esCos# of Goo.s So.Oper/#i$% Expe$sesTo#/ Expe$ses

Oper/#i$% Profi# )Loss*I.e$#ifi/be Asse#s

8=;5;;; ; =;5;;; -5;;; -;5;;; 25;;;

--5;;;8395;;;

8)>;5;;; 2;5;;; );5;;; )9;5;;; )=;5;;; );5;;;

)-;5;;;8)>;5;;; *

8=;5;;; -;;5;;; 9;5;;; 2:;5;;; 2395;;; 9;95;;;

:95;;;89;;5;;;

8 ;5;;; ;

;5;;; =5;;; 3;5;;; :5;;;

--5;;;8--95;;;

8>:;5;;; -2;5;;; :;5;;;

:5;;;8:-;5;;;Li/bii#ies 8225;;; 8 3-5;;; 8==35;;; 8 =-5;;; 893:5;;;

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PROBLEM 23,- )Co$#i$'e.*

Reco$cii/#io$ of re&e$'esTo#/ se%!e$# re&e$'es 8:;5;;;

Re&e$'es of i!!/#eri/ se%!e$#s

);5;;;*Ei!i$/#io$ of i$#er,se%!e$# re&e$'es )-2;5;;;*Re&e$'es fro! repor#/be se%!e$#s 89;5;;;

Reco$cii/#io$ of profi# or ossTo#/ se%!e$# oper/#i$% profi# 8 :5;;;Profi#s of i!!/#eri/ se%!e$#s

)--5;;;*Profi#s fro! repor#/be se%!e$#s 8 :>5;;;

Reco$cii/#io$ of /sse#sTo#/ se%!e$# /sse#s 8:-;5;;;Asse#s of i!!/#eri/ se%!e$#s )8>95;;; ? 89;5;;;* )--95;;; *Asse#s fro! repor#/be se%!e$#s 8995;;;

Reco$cii/#io$ of i/bii#iesTo#/ se%!e$# i/bii#ies 893:5;;;Li/b of i!!/#eri/ se%!e$#s )8-25;;; ? 825;;;* )=-5;;; *Li/bii#ies fro! repor#/be se%!e$#s 8=>5;;;

)c* O$e of #0e !/or /r%'!e$#s /%/i$s# pro&i.i$% se%!e$#i$for!/#io$ is #0/# co!pe#i#ors i #0e$ be /be #o .e#er!i$e#0e profi#/be se%!e$#s /$. e$#er #0/# pro.'c# i$e #0e!se&esIf #0is occ'rs /$. #0e o#0er co!p/$( is s'ccessf'5 #0e$ #0eprese$# s0/re0o.ers of Fr/$1i$ Corpor/#io$ !/( s'ffer T0is4'es#io$ s0o'. i's#r/#e #o #0e s#'.e$# #0/# #0e /$sers /re$o# //(s b/c1 /$. 0i#e Discos're of se%!e$#s'$.o'b#e.( pro&i.es so!e $ee.e. i$for!/#io$5 b'# so!e.iscos'res .esire. b( ex#er$/ p/r#ies !/( be co$fi.e$#i/

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PROBLEM 23,2

- T0is is / c0/$%e i$ es#i!/#e /$. s0o'. be /ppie. #o #0e

c/c'/#io$s for 2;-= o$ / prospec#i&e b/sis If #0e i!p/c# of #0ec0/$%e o$ .epreci/#io$ expe$se is !/#eri/5 $o#e .iscos'reexp/i$i$% #0e c0/$%e i$ es#i!/#e /$. #0e effec# o$ e/r$i$%s isre4'ire.

2 Si$ce i$co!e #/x is sef,/ssesse. b( co!p/$ies5 /..i#io$//ssess!e$#s of prior (e/rs6 /!o'$#s occ/sio$/( 0/ppe$ T0isis co$si.ere. / re&isio$ of /$ es#i!/#e /$. #0e /..i#io$//!o'$# of i$co!e #/x is expe$se. i$ 2;-= If #0e /..i#io$/i$co!e #/x s#e!s fro! /$ error i$ #0e prep/r/#io$ of #0e #/xre#'r$5 s'c0 /s '$repor#e. re&e$'es or o&er,es#i!/#io$ of .e.'c#io$s5 #0e /ssess!e$# o'. be #re/#e. /s /$ /cco'$#i$%error If #0e /!o'$#s /re .e#er!i$e. /$. /.'s#e. prior #o #0eree/se of 2;-= fi$/$ci/ s#/#e!e$#s5 $o p/r#ic'/r .iscos're isre4'ire. If $o#5 s'c0 /$ /cco'$#i$% error is recor.e. /s /$/.'s#!e$# #o ope$i$% re#/i$e. e/r$i$%s Co!p/r/#i&e fi$/$ci/s#/#e!e$# /!o'$#s /re res#/#e. /$. $o#e .iscos're exp/i$i$%#0e $/#'re of #0e error /$. #0e s#/#e!e$# i#e!s /.'s#e. o'.be i$c'.e.

3 T0e o&ers#/#e!e$# of 2;-3 officers6 s//ries is /$ /cco'$#i$%error A$( i!p/c# o$ 2;-= expe$ses o'. be correc#e. i$ #0ec'rre$# (e/r /$. #0e ope$i$% b//$ce of re#/i$e. e/r$i$%so'. be /.'s#e. $e# of /$( re/#e. i$co!e #/x effec#Co!p/r/#i&e fi$/$ci/ s#/#e!e$# /!o'$#s /$. e/r$i$% per s0/re /!o'$#s /re res#/#e. /$. $o#e .iscos're exp/i$i$% #0e$/#'re of #0e error /$. #0e s#/#e!e$# i#e!s /.'s#e. o'. bei$c'.e.

= T0e s#oc1 .i&i.e$. re.'ces re#/i$e. e/r$i$%s o$ #0e ./#e of .ec/r/#io$ I# o'. #0erefore be s0o$ o$ #0e 2;-= s#/#e!e$#of re#/i$e. e/r$i$%s Si$ce #0e s#oc1 .i&i.e$. is $o# iss'e.before (e/r,e$.5 #0ere o'. /so be / S#oc1 Di&i.e$.Dis#rib'#/be b//$ce i$c'.e. i$ #0e S0/re C/pi#/ sec#io$ of S0/re0o.ers6 E4'i#(

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PROBLEM 23,2 )Co$#i$'e.*

= )Co$#i$'e.*

E/r$i$%s per s0/re o'. be /.'s#e. /s if #0e s0/res 0/. bee$o'#s#/$.i$% #0ro'%0o'# #0e (e/r 2;-= /$. /$( EPS fi%'respro&i.e. for e/rier perio.s o'. /so 0/&e #o be res#/#e. for co!p/r/#i&e p'rposes T0is is / re4'ire!e$# e&e$ if #0e s#oc1.i&i.e$. /s .is#rib'#/be i$ #0e $e (e/r As o$% /s i# isbefore #0e fi$/$ci/ s#/#e!e$#s /re iss'e.5 #0ese /.'s#!e$#s/re re4'ire.

9 T0is is / &o'$#/r( c0/$%e i$ /cco'$#i$% poic( /s / res'# of si#c0i$% #o / poic( #0/# pro&i.es rei/be /$. !ore ree&/$#

i$for!/#io$ D/$ie i $ee. #o recor. /$ /.'s#!e$# #oope$i$% re#/i$e. e/r$i$%s for #0e c0/$%e i$ poic(5 $e# of /$(re/#e. i$co!e #/x effec# /$. res#/#e #0e co!p/r/#i&es#/#e!e$#s No#e .iscos're is re4'ire. exp/i$i$% #0e c0/$%ei$ poic( /$. #0e re/so$ for #0e c0/$%e T0e !e#0o. of /pp(i$%#0e c0/$%e )f' or p/r#i/ re#rospec#i&e* !'s# be .iscose. /se /s #0e i!p/c# of #0e c0/$%e o$ i$.i&i.'/ s#/#e!e$# i#e!s

> T0e %'/r/$#ee s0o'. be )/$. s0o'. 0/&e bee$* .iscose. i$#0e $o#es #o #0e fi$/$ci/ s#/#e!e$#s /s / si%$ific/$#co!!i#!e$# Bo$bee I$c 0/s .ef/'#e. o$ /$ i$#eres# p/(!e$#/$. D/$ie 0/s s#/#e. #0/# i# i p/( #0e .ef/'#e. i$#eres# #o#0e bo$.0o.ers o$ /$'/r( -95 2;-9 T0is is / s'bse4'e$#e&e$# #0/# pro&i.es e&i.e$ce of / co$.i#io$ #0/# exis#e. /# (e/r e$.5 /$. if Bo$bee .oes $o# p/( #0e i$#eres# b( /$'/r( -952;-95 #0e i$#eres# s0o'. be s0o$ /s / c'rre$# i/bii#( /$. /$expe$se or oss c0/r%e. #o i$co!e )i#0 / recei&/be se# 'p if i#is co$si.ere. #0/# /$ /sse# exis#s i$ #er!s of coec#/bii#( fro!Bo$bee* If D/$ie co$si.ers #0e possibii#( of 0/&i$% #o 0o$o'r

#0e pri$cip/ /!o'$# of #0e bo$.s of Bo$bee i1e( /$.!e/s'r/be5 #0e$ / oss /$. i/bii#( s0o'. be /ccr'e. i$ #0e2;-= fi$/$ci/ s#/#e!e$#s If #0e prob/bii#( of /..i#io$/ ossis $o# .e#er!i$/be5 D/$ie !/( s#i 0/&e #o .iscose #0e ris1 of /..i#io$/ oss I$ ei#0er c/se5 D/$ie i 0/&e #o ex/!i$e #0e'$.er(i$% c/'se of Bo$bee6s !isse. i$#eres# p/(!e$# #o

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.e#er!i$e #0e i1ei0oo. of #0e %'/r/$#ee bei$% e$force./%/i$s# D/$ie

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: T0e /cco'$#i$% #re/#!e$# .epe$.s o$ D/$ie6s e%/ co'$se6se&/'/#io$ of #0e i1ei0oo. of oss o$ /ppe/ If #0e co!p/$(6se%/ co'$se es#i!/#es #0/# i# is $o# prob/be or '$.e#er!i$/be #0/# #0e( i ose #0e /ppe/ #0e$ $o /ccr'/ isre4'ire. T0is posi#io$ o'. be .o'b#f' 0oe&er si$ce #0eco!p/$( 0/s /re/.( bee$ fo'$. i$ bre/c0 of co$#r/c# T0eco!p/$( o'. 0/&e #o /ccr'e #0e oss /$. i/bii#( A..i#io$/$o#e .iscos're o'. be re4'ire. #o .escribe #0e i/bii#( /$.0e#0er /$( '$/ccr'e. /..i#io$/ expos're #o oss exis#s


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PROBLEM 23,3

)/*

SAMSON CORPORATIONS#/#e!e$# of Fi$/$ci/ Posi#io$

As of Dece!ber 3-5 2;-=

Asse#sC'rre$# /sse#s

C/s0 )89:-5;;; J 8=;;5;;;* 8 -:-5;;;Acco'$#s recei&/be

)8=;5;;; ? 83;5;;;*

8 9-;5;;;

Less /o/$ce for .o'b#f' /cco'$#s

3;5;;;

=;5;;;No#es recei&/be ->253;;I$&e$#or( )FIFO* >=95-;;Prep/i. expe$ses =:5=;;

To#/ c'rre$# /sse#s 8-59;95;;

Lo$%,#er! i$&es#!e$#sI$&es#!e$#s i$ /$. -95;;;

C/s0 s'rre$.er &/'e of ife i$s'r/$ce

=5;;;

C/s0 res#ric#e. for p/$#exp/$sio$

=;;5;;;

>>5;;;

Proper#(5 p/$#5 /$. e4'ip!e$#P/$# /$. e4'ip!e$#

)pe.%e. /s co/#er/

for bo$.s*

)8=5-3;5;;; ? 8-5=3;5;;;*

959>;5;;;

Less /cc'!'/#e..epreci/#io$

-5=3;5;;; =5-3;5;;;L/$. ==>52;; =59:>52;;

Goo.i 2925;;;

To#/ /sse#s 8:5;;35;;;

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Li/bii#ies /$. S0/re0o.ers6 E4'i#(

C'rre$# i/bii#ies

Acco'$#s p/(/be 8 9-;5;;;I$co!e #/x p/(/be -=95;;;

Di&i.e$.s p/(/be 2;;5;;;

S//ries /$. /%es p/(/be 2:95;;;

U$e/r$e. re&e$'e =59;;

I$#eres# p/(/be )8:9;5;;; + + -2*

=;5;;;To#/ c'rre$# i/bii#ies 8-5>959;;

Lo$%,#er! i/bii#ies

No#es p/(/be ).'e 2;->* -9:5=;;

bo$.s p/(/be ).'e 2;- sec're. b( p/$# /$. e4'ip!e$#* :;953 >3533

To#/ i/bii#ies 2592253

S0/re0o.ers6 e4'i#(Co!!o$ s0/res5 /'#0ori7e. 2;;5;;; s0/res -=5;;;

s0/res iss'e. /$. o'#s#/$.i$% -5;5;;; Re#/i$e. e/r$i$%s 25=;5->-

To#/ s0/re0o.ers6 e4'i#( =5=;5->-To#/ i/bii#ies /$. s0/re0o.ers6 e4'i#( 8:5;;35;;;

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To fi$. #0e effec#i&e i$#eres# r/#e o$ #0e $o#e<

Usi$% / fi$/$ci/ c/c'/#or<PK 8 :;;59;;I ie.s :3N 9PMT 8)>;5;;;*FK 8):9;5;;;*T(pe ;

Exce for!'/< @RATE)$per5p!#5p&5f&5#(pe*

I$#eres# expe$se @ 8:;;59;; + :3 + -2 @ 8=95=3I$#eres# p/(/be @ 8:9;5;;; + + -2 @ 8=;5;;;

8-5;5;;; @ 8-5=;5;;; ? 8-9;5;;;Re#/i$e. e/r$i$%s 825-;5>;;

S//ries /$. /%es o!i##e. )2:95;;;*I$#eres# o!i##e. )=;5;;;*Bo$. .isco'$# /!or#i7/#io$ )95=3*

825=;5->-

A..i#io$/ co!!e$#s<

- T0e i$for!/#io$ re/#e. #o #0e co!pe#i#or s0o'. be .iscose.bec/'se #0is i$$o&/#io$ !/( 0/&e / si%$ific/$# effec# o$ #0eco!p/$( T0e &/'e of #0e i$&e$#or( is o&ers#/#e. bec/'se of #0e $ee. #o re.'ce sei$% prices T0is f/c#or /o$% i#0 #0e $e#re/i7/be &/'e of #0e i$&e$#or( /$. #0e speci/( .esi%$e. $e

p/$# s0o'. be .iscose. Co$si.er/#io$ s0o'. be %i&e$ /s #o0e#0er or $o# S/!so$ is / %oi$% co$cer$ '$.er #0esecirc'!s#/$ces or 0e#0er /$( of S/!so$6s pro.'c# i$es /$.#0e /ssoci/#e. p/$# /sse#s )0ere #0e fixe. cos#s !/( o$( bep/r#i/( reco&ere.* 0/&e s'ffere. i!p/ir!e$#

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2 T0e pe.%e. /sse#s s0o'. be .escribe. i$ #0e s#/#e!e$# of fi$/$ci/ posi#io$ /s i$.ic/#e. or i$ / foo#$o#e

3 T0e error i$ c/c'/#i$% i$&e$#or( i 0/&e bee$ offse#5 so $o/.'s#!e$# is $ee.e. i$ #0e s#/#e!e$# of fi$/$ci/ posi#io$ T0eco!p/r/#i&e i$co!e s#/#e!e$# /$. s#/#e!e$# of re#/i$e.e/r$i$%s for 2;-3 i $ee. #o be res#/#e. #o refec# #0ecorrec#io$ of #0is error

= S//ries /$. /%es p/(/be is i$c'.e. /s / i/bii#( /$.re#/i$e. e/r$i$%s /re re.'ce.

9 T0e f/c# #0/# #0e %/i$ o$ s/e of p/$# /sse#s /s cre.i#e..irec#( #o re#/i$e. e/r$i$%s 0/s $o effec# o$ #0e s#/#e!e$# of fi$/$ci/ posi#io$ prese$#/#io$ #0e i$co!e s#/#e!e$# /$.s#/#e!e$# of re#/i$e. e/r$i$%s i $ee. #o be correc#e.

> T0e p/$# /$. e4'ip!e$# /cco'$# s0o'. be sep/r/#e(.iscose. /$. .epreci/#io$ c/c'/#e. o$ e/c0 i#e!i$.i&i.'/( /cc'!'/#e. .epreci/#io$ s0o'. be /so spi# o'#o$ #0e s#/#e!e$# of fi$/$ci/ posi#io$ Hoe&er5 #0e i$for!/#io$#o .i&i.e #0e /cco'$#s /s $o# %i&e$ i$ #0is probe!

7. Accrued interest on the bonds ($750,000 X 8% X 8/12 = $40,000)was not recorded. This amount will also reduce retainedearnings. The related discount amortization [($700,500 X 9.73%X 8/12) – $40,000 = $5,439] will reduce retained earnings andincrease the carrying amount of the bond.

8. The premium on common shares is combined with commonshares since shares are recorded at the fair market value of the

consideration received. A premium is recorded when sharesare par value shares; there is no indication in the problem thatthis is the case.

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9. The company needs to include a summary of accountingpolicies in its notes, detailing its accounting policies forinventory (FIFO), depreciation method for plant and equipment(straight-line), revenue recognition policy and any otherpolicies used.

(b)Management has the primary responsibility for the preparation,integrity, and objectivity of the company’s financial statements.If management wishes to present information in a certain way, itmay do so. If the auditor objects because GAAP is violated,some type of audit exception is called for.

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PROBLEM 23,=

I#e! -

T0e s#/ff /'.i#or re&iei$% #0e o/$ /%ree!e$# !isi$#erpre#e. i#sre4'ire!e$#s Re#/i$e. e/r$i$%s /re res#ric#e. i$ #0e /!o'$# of 8=2;5;;;5 0ic0 /s #0e b//$ce of re#/i$e. e/r$i$%s /# #0e ./#e of #0e /%ree!e$# T0e $/#'re /$. /!o'$# of #0e res#ric#io$ s0o'. be.iscose. i$ #0e s#/#e!e$# of fi$/$ci/ posi#io$ or / $o#e #o #0efi$/$ci/ s#/#e!e$#s

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I#e! 2U$ess c'!'/#i&e preferre. .i&i.e$.s /re i$&o&e.5 $oreco!!e$./#io$ b( #0e /'.i#or is re4'ire. Di&i.e$. poic( is'$.ers#oo. b( re/.ers of fi$/$ci/ s#/#e!e$#s #o be .iscre#io$/r(o$ #0e p/r# of #0e Bo/r. of Direc#ors T0e co!p/$( $ee. $o# co!!i#i#sef #o / prospec#i&e .i&i.e$. poic( or exp/i$ i#s 0is#oric/ poic(i$ #0e fi$/$ci/ s#/#e!e$#s5 p/r#ic'/r( si$ce .i&i.e$. poic( is #obe .isc'sse. i$ #0e presi.e$#6s e##er If c'!'/#i&e preferre..i&i.e$.s /re o!i##e.5 #0is s0o'. be .iscose. i$ #0e $o#es #o #0efi$/$ci/ s#/#e!e$#s

I#e! 3A co!pe#i#i&e .e&eop!e$# of #0is $/#'re $or!/( is co$si.ere. #obe #0e seco$. #(pe of s'bse4'e$# e&e$#5 o$e #0/# pro&i.es e&i.e$ce

i#0 respec# #o / co$.i#io$ #0/# .i. $o# exis# /# #0e ./#e of #0es#/#e!e$# of fi$/$ci/ posi#io$5 b'# i$ so!e circ'!s#/$ces #0e/'.i#or !i%0# co$c'.e #0/# R/.io0e/.6s poor co!pe#i#i&e si#'/#io$/s e&i.e$# /# (e/r,e$. I$ /$( e&e$#5 #0e .e&eop!e$# s0o'. be.iscose. #o 'sers of #0e fi$/$ci/ s#/#e!e$#s bec/'se #0eeco$o!ic reco&er/bii#( of #0e $e p/$# is i$ .o'b# /$. R/.io0e/.!/( i$c'r s'bs#/$#i/ expe$.i#'res #o !o.if( i#s f/cii#ies Bec/'se#0e eco$o!ic effec#s prob/b( c/$$o# be .e#er!i$e.5 #0e 's'/.iscos're i be i$ / $o#e #o #0e fi$/$ci/ s#/#e!e$#s )O$( if circ'!s#/$ces ere s'c0 #0/# i# /s co$c'.e. #0/# #0is co$.i#io$.i. exis# /# (e/r,e$. s0o'. #0e fi$/$ci/ s#/#e!e$#s for #0e (e/r e$.e. Dece!ber 3-5 2;-=5 be /.'s#e. for #0e /scer#/i$/beeco$o!ic effec#s of #0is .e&eop!e$#* Co$si.er/#io$ s0o'. be%i&e$ 0e#0er #0e %oi$% co$cer$ /ss'!p#io$ is /ppropri/#e i$ #0esecirc'!s#/$ces

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PROBLEM 23,= )Co$#i$'e.*

I#e! =T0e e/se /%ree!e$# i#0 Ar!/.io N/#io$/ B/$1 !ee#s #0e cri#eri/for / c/pi#/ e/se bec/'se i# co$#/i$s / b/r%/i$ p'rc0/se op#io$ )/29,(e/r,ife b'i.i$% c/$ be p'rc0/se. /# #0e e$. of -; (e/rs for 8-*A..i#io$/(5 '$ess #0e f/ir &/'e of #0e b'i.i$% is co$si.er/b(%re/#er #0/$ i#s 825=;;5;;; cos#5 #0e prese$# &/'e of #0e e/sep/(!e$#s prob/b( excee.s ; of #0e f/ir &/'e of #0e b'i.i$%IFRS .oes $o# 'se 4'/$#i#/#i&e f/c#ors #o es#/bis0 0e#0er or $o##0e ris1s /$. re/r.s of o$ers0ip /re #r/$sferre. #o #0e esseeNo$e#0eess #0e c/c'/#io$s s'ppor#s #0e c/ssific/#io$ /s /fi$/$ce e/se T0e essee5 #0erefore5 !'s# c/pi#/i7e #0e e/se./sse# /$. #0e re/#e. obi%/#io$ i$ #0e s#/#e!e$# of fi$/$ci/

posi#io$ /# #0e /ppropri/#e .isco'$#e. /!o'$# of #0e f'#'re re$#/p/(!e$#s '$.er #0e e/se /%ree!e$# T0e essee !'s# .iscose< )-*#0e %ross /!o'$# of #0e e/se. /sse# /$. #0e /cc'!'/#e..epreci/#io$ #0ereo$5 )2* #0e f'#'re !i$i!'! e/se p/(!e$#s /s of #0e /#es# s#/#e!e$# of fi$/$ci/ posi#io$ ./#e5 i$ #0e /%%re%/#e /$.for e/c0 fi&e s'ccee.i$% fisc/ (e/rs /$. #0e /!o'$# of i!p'#e.i$#eres# $ecess/r( #o re.'ce #0e e/se p/(!e$#s #o prese$# &/'e5)3* / %e$er/ .escrip#io$ of #0e e/se /rr/$%e!e$#5 /$. )=* #0eexis#e$ce of /$. #0e #er!s of #0e p'rc0/se op#io$ T0e i$co!es#/#e!e$# s0o'. co$#/i$ / c0/r%e for .epreci/#io$ of #0e e/se./sse# p's #0e i$#eres# c0/r%e

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PROBLEM 23,9

)/* T0e /'.i#or !i%0# reco!!e$. #0e fooi$% $o#es be /ppe$.e.

#o #0e fi$/$ci/ s#/#e!e$#s i$ re%/r. #o i#e! 2 /$. i#e! 3

Note A. I$ 2;-= .epreci/#io$ of p/$# /sse#s is c/c'/#e. b( #0es#r/i%0#,i$e !e#0o. I$ prior (e/rs .epreci/#io$ /s c/c'/#e.'si$% /$ /cceer/#e. !e#0o. T0e $e !e#0o. of .epreci/#io$/s /.op#e. i$ reco%$i#io$ of )s#/#e 's#ific/#io$ for #0ec0/$%e of .epreci/#io$ !e#0o.* /$. 0/s bee$ /ppie.prospec#i&e( effec#i&e /$'/r( -5 2;-= T0e c0/$%e i$/cco'$#i$% es#i!/#e 0/s $o# /ffec#e. prior (e/r co!p/r/#i&e/!o'$#s

O#0er Obser&/#io$s- T0e c0/$%e i$ !e#0o. of c/c'/#i$% .epreci/#io$ for /

c/pi#/ /sse#s represe$#s / c0/$%e i$ /cco'$#i$% es#i!/#e/$. /s s'c0 is /cco'$#e. for o$ / prospec#i&e b/sis

2 Accor.i$%(5 #0e $e !e#0o. s0o'. be refec#e. i$ #0ec'rre$#,(e/r fi$/$ci/ s#/#e!e$#s5 /$. #0e fi$/$ci/s#/#e!e$#s i$c'.e. for co!p/r/#i&e p'rposes s0o'. $o#

be res#/#e.

Note B. T0e C/$/./ Re&e$'e A%e$c( )CRA* is ex/!i$i$% #0efe.er/ i$co!e #/x re#'r$5 fie. b( #0e Corpor/#io$6s .o!es#ics'bsi.i/r( for #0e (e/r 2;-2 T0e CRA 0/s 4'es#io$e. #0e/!o'$# of / .e.'c#io$ c/i!e. for / oss s's#/i$e. b( #0es'bsi.i/r( i$ 2;-2 T0e ex/!i$/#io$ b( #0e CRA 0/s $o#pro%resse. #o #0e poi$# #0/# o'. i$.ic/#e #0e ex#e$# of #0es'bsi.i/r(6s i/bii#( T0e Co!p/$( beie&es #0/# #0e( i $o#be s'bec# #o /$( s'bs#/$#i/ co$soi./#e. i$co!e #/x i/bii#(i#0 respec# #o #0is !/##er

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)b* I#e! - No$,/cco'$#i$% !/##ers s'c0 /s !/$/%e!e$# c0/$%es/$. pe$.i$% prox( fi%0#s /re $o# .iscose. '$ess s'c0i$for!/#io$ is $ee.e. for #0e proper i$#erpre#/#io$ of #0efi$/$ci/ s#/#e!e$#s T0e presi.e$# s0o'. be i$for!e. #0/#$o#es /re /$ i$#e%r/ p/r# of #0e fi$/$ci/ s#/#e!e$#s /$. /ss'c0 s0o'. be i!i#e. #o i$for!/#io$ #0/# re/#es #o #0efi$/$ci/ s#/#e!e$#s F'r#0er!ore5 #0ere is $o cer#/i$#( #0/# /prox( fi%0# i !/#eri/i7e /$.5 0e$ce5 i$ &ie of #0e'$cer#/i$#( $o re/so$ for $o#e .iscos're Discos're of e&e$#s#0/# 0/&e $o ree&/$ce #o #0ose !/##ers esse$#i/ #o proper i$#erpre#/#io$ of #0e fi$/$ci/ s#/#e!e$#s fre4'e$#( cre/#es.o'b# /s #o #0e re/so$s for .iscos're /$. i$fere$ces .r/$

co'. be !ise/.i$% I$for!/#io$ /bo'# #0e pe$.i$% prox( fi%0#!i%0# be i$c'.e. i$ #0e presi.e$#6s e##er #o #0e s0/re0o.ers50ic0 is 's'/( /$ i$#e%r/ p/r# of / co!p/$(6s /$$'/ repor#


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PROBLEM 23,>

)/* So!e co!p/$ies s'c0 /s H Hei$7 0/&e o$( o$e .o!i$/$#

pro.'c# or ser&ice /$. #0erefore i# is i!possibe #o pro&i.ese%!e$#e. ./#/ i$ / !e/$i$%f' f/s0io$ Do!i$/$# !e/$s #0/#/ %i&e$ se%!e$# 0/s ; of / #0e s/es5 profi# /$. i.e$#ifi/be/sse#s of #0e co!p/$( I$ #0is c/se5 se%!e$#e. ./#/ /re $o#pro&i.e.5 b'# #0e i$.'s#r( i$ 0ic0 #0e .o!i$/$# se%!e$#oper/#es !'s# be i.e$#ifie.

)b* Repor#i$% s/es b( %eo%r/p0ic/ /re/ is ex#re!e( i!por#/$#Co'$#ries 0/&e i.e( .ifferi$% poi#ic/ /$. eco$o!ic ris1

profies5 0ic0 !/( /ffec# e/r$i$%s prospec#s Less s#/be%eo%r/p0ic /re/s s0o'. be e&/'/#e. c/ref'(5 0ere/s !ores#/be /re/s !/( re4'ire ess /$/(sis /$. /##e$#io$

Note to Instructor:T0e IASB re4'ires #0/# fi$/$ci/ s#/#e!e$#s

i$c'.e seec#e. i$for!/#io$ o$ / si$%e b/sis of se%!e$#/#io$ T0e!e#0o. c0ose$ is so!e#i!es referre. #o /s #0e !/$/%e!e$#/ppro/c0 T0e !/$/%e!e$# /ppro/c0 is b/se. o$ #0e /( #0/#!/$/%e!e$# se%!e$#s #0e co!p/$( for !/1i$% oper/#i$%.ecisio$s5 0ic0 is !/.e e&i.e$# b( #0e co!p/$(6s or%/$i7/#io$s#r'c#'re As #0is /ppro/c0 foc'ses o$ i$for!/#io$ /bo'# #0eco!po$e$#s of #0e b'si$ess #0/# !/$/%e!e$# oo1s /# i$ !/1i$% i#s.ecisio$s /bo'# oper/#i$% !/##ers5 #0e co!po$e$#s /re referre. #o/s oper/#i$% se%!e$#s rather than geographic or industry

segments.

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PROBLEM 23,:

)/*

Situation 1"0e$ / co!p/$( ses / pro.'c# s'bec# #o / /rr/$#(5 i# is prob/be#0/# #0ere i be expe$ses i$c'rre. i$ f'#'re /cco'$#i$% perio.sre/#i$% #o re&e$'es reco%$i7e. i$ #0e c'rre$# perio. As s'c05 /i/bii#( 0/s bee$ i$c'rre. #o 0o$o'r #0e /rr/$#( /# #0e s/!e ./#e/s #0e reco%$i#io$ of #0e re&e$'e B/se. o$ prior experie$ce or #ec0$ic/ /$/(sis5 #0e occ'rre$ce of /rr/$#( c/i!s c/$ bere/so$/b( es#i!/#e. /$. / prob/be .o/r es#i!/#e of #0e i/bii#(

c/$ be !/.e5 /$. #0e es#i!/#e. /!o'$# of #0e expe$se /$. re/#e.i/bii#( s0o'. be refec#e. i$ #0e fi$/$ci/ s#/#e!e$#s

Si#'/#io$ 2E&e$ #0o'%0< )-* #0ere is / prob/be oss o$ #0e co$#r/c#5 )2* #0e/!o'$# of #0e oss c/$ be re/so$/b( es#i!/#e. /$. )3* #0ei1ei0oo. of #0e oss /s .isco&ere. prior #o #0e ./#e of /'#0ori7/#io$ of #0e fi$/$ci/ s#/#e!e$#s5 #0e f/c# #0/# #0e co$#r/c#/s e$#ere. i$#o s'bse4'e$# #o #0e ./#e of #0e fi$/$ci/ s#/#e!e$#sprec'.es /ccr'/ of #0e oss co$#i$%e$c( i$ fi$/$ci/ s#/#e!e$#s

for perio.s prior #o #0e i$c'rre$ce of #0e oss Hoe&er5 #0e f/c# #0/#/ !/#eri/ oss 0/s bee$ i$c'rre. s'bse4'e$# #o #0e ./#e of #0efi$/$ci/ s#/#e!e$#s b'# prior #o #0eir /'#0ori7/#io$ s0o'. be.iscose. b( !e/$s of / $o#e i$ #0e fi$/$ci/ s#/#e!e$#s T0e.iscos're s0o'. co$#/i$ #0e $/#'re of #0e co$#i$%e$c( /$. /$es#i!/#e of #0e /!o'$# of #0e prob/be oss or / r/$%e i$#o 0ic0#0e oss i prob/b( f/

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PROBLEM 23,: )Co$#i$'e.*

Si#'/#io$ 3T0e f/c# #0/# / co!p/$( c0ooses #o sef,i$s're #0e co$#i$%e$c( of i$'r( #o o#0ers c/'se. b( i#s &e0ices is $o# e$o'%0 of / b/sis #o/ccr'e / oss co$#i$%e$c( #0/# 0/s $o# occ'rre. /# #0e ./#e of #0efi$/$ci/ s#/#e!e$#s A$ /ccr'/ or reser&e c/$$o# be !/.e for #0e /!o'$# of i$s'r/$ce pre!i'! #0/# o'. 0/&e bee$ p/i. 0/. /poic( bee$ ob#/i$e. #o i$s're #0e co!p/$( /%/i$s# #0is p/r#ic'/r ris1 A oss co$#i$%e$c( !/( o$( be /ccr'e. if prior #o #0e ./#e of #0e fi$/$ci/ s#/#e!e$#s / specific e&e$# 0/s occ'rre. #0/# ii!p/ir /$ /sse# or cre/#e / i/bii#( /$. /$ /!o'$# re/#e. #o #0/#specific occ'rre$ce c/$ be re/so$/b( es#i!/#e. T0e f/c# #0/# #0eco!p/$( is sef,i$s'ri$% #0is ris1 s0o'. be .iscose. b( !e/$s of

/ $o#e #o /er# #0e fi$/$ci/ s#/#e!e$# re/.er #o #0e expos'recre/#e. b( #0e /c1 of i$s'r/$ce

)b*

If the contract is a non-cancellable purchase contract that willprobably result in a significant loss to the company, the unavoidablecosts of completing the contract are higher than the benefitsexpected from receiving the contracted goods or services. This isknown as an onerous contract. ASPE does not require a loss and aliability to be recognized if the company has entered into anonerous contract, although Canadian practice has been torecognize the loss and the liability. Before a contract takes effect, noasset or liability is recognized because it is an executory contract(meaning that neither party has fulfilled its part of the contract).However, if the contract is non-cancellable and a probable lossrelated to the contract would be unavoidable, the loss and theliability should be recognized. A user of the financial statementswould support recognizing the loss and the liability in the period

that a probable loss becomes evident, so that they may make theirdecisions based on financial statements that are relevant, faithfullyrepresentative, and complete.

olutions Manual &($& Cha"ter &(

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PROBLEM 23,

)/*

Leop/r. Corpor/#io$5 !'s# .iscose #0e fooi$% i$for!/#io$re%/r.i$% i$&e$#or( '$.er IFRS<

- T0e .o/r /!o'$# /ssi%$e. #o i$&e$#or(2 T0e !e#0o. of i$&e$#or( cos#i$% e%5 FIFO5 ei%0#e.

/&er/%e or specific i.e$#ific/#io$3 T0e b/sis of &/'/#io$< ie5 cos# or oer of cos# or $e#

re/i7/be &/'e if /$ /!o'$# o#0er #0/$ cos# is prese$#e.5#0e$ cos# s0o'. s#i be prese$#e. b( s#/#i$% #0e /!o'$# of cos# or b( s#/#i$% #0e /!o'$# of #0e &/'/#io$ /o/$ce

= T0e co!posi#io$ of #0e i$&e$#or(5 i.e$#if(i$% #0e &/'e of r/!/#eri/s5 or1,i$,process5 fi$is0e. %oo.s /$.!/$'f/c#'ri$% s'ppies

9 I$&e$#or( pe.%e. /s co/#er/ for o/$s> T0e /!o'$# of i$&e$#or( reco%$ise. /s expe$se .'ri$% #0e

/cco'$#i$% perio.

T0e fooi$% i$for!/#io$ !'s# be .iscose. for proper#(5 p/$#5 /$.e4'ip!e$#<

- T0e !e/s're!e$# b/ses 'se. for .e#er!i$i$% #0e %rossc/rr(i$% /!o'$#

2 T0e b//$ce of !/or c/sses of .epreci/be /sse#s )/sse#sc/ssifie. b( $/#'re or f'$c#io$* /$. #0eir cos#

3 Acc'!'/#e. .epreci/#io$5 ei#0er b( !/or c/sses of .epreci/be /sse#s or i$ #o#/ i$c'.i$% /$( ri#e,.o$s

= A %e$er/ .escrip#io$ of #0e !e#0o.s 'se. i$ co!p'#i$%.epreci/#io$ o$ !/or c/sses of .epreci/be /sse#s /$. #0e.epreci/#io$ r/#e or perio. of 'sef' ife

9 A reco$cii/#io$ of #0e c/rr(i$% /!o'$# /# #0e be%i$$i$% /$.e$. of #0e /cco'$#i$% perio.5 i$c'.i$% #0e /!o'$# of #0e.epreci/#io$ recor.e.

> A$( i!p/ir!e$# osses5 /$. re&ers/s re&erse.

: Lie$s5 res#ric#io$s5 pe.%es /$. co!!i#!e$#s

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PROBLEM 23, )Co$#i$'e.*

)/* )Co$#i$'e.*

T0e i$for!/#io$ re%/r.i$% i$&e$#or( /$. proper#(5 p/$#5 /$.e4'ip!e$# i be .iscose. i$ #0e bo.( of #0e fi$/$ci/ s#/#e!e$#s/$. i$ #0e $o#es5 0ic0 /re /$ i$#e%r/ p/r# of #0e s#/#e!e$#s

)b*

T0e f' .iscos're pri$cipe c/s for repor#i$% of /$( fi$/$ci/ f/c#s#0/# /re si%$ific/$# e$o'%0 #o i$f'e$ce #0e '.%e!e$# of /$i$for!e. 'ser of #0e fi$/$ci/ s#/#e!e$#s "0ie pro&i.i$%

i$for!/#io$ #0/# is $o# .e#/ie. e$o'%0 is probe!/#ic5 pro&i.i$% #oo!'c0 i$for!/#io$5 i$c'.i$% i$for!/#io$ #0/# o'. $o# !/1e /.iffere$ce i$ / 'ser6s .ecisio$5 is e4'/( probe!/#ic A 'ser of #0efi$/$ci/ s#/#e!e$#s o'. /$# #0e co!p/$( #o pro&i.e ree&/$#i$for!/#io$ #0/# is .e#/ie. e$o'%0 #o .iscose !/##ers #0/# o'.!/1e / .iffere$ce i$ #0eir .ecisio$s5 /$. co$.e$se. e$o'%0 #o!/1e #0e i$for!/#io$ '$.ers#/$./be T0e $/!e of #0e s'ppier #0/#e/c0 /sse# /s p'rc0/se. fro! /$. #0e c'rre$# oc/#io$ of e/c0/sse# o'. $o# $or!/( !/1e / .iffere$ce i$ / 'ser6s .ecisio$Pro&i.i$% #0is i$for!/#io$ !/( res'# i$ i$for!/#io$ o&ero/.5

0ere #0e 'ser !/( be '$/be #o .i%es# or process #0e ree&/$#i$for!/#io$ effec#i&e(

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PROBLEM 23,

To< Ti!o#0( C0o5 Acco'$#/$#

Fro!< S#'.e$#

D/#e< C'rre$# ./#e

S'bec#< De#er!i$/#io$ of repor#/be se%!e$#s for K'Corpor/#io$ I$#er$/#io$/

T0e fooi$% co!!e$#s /ss'!e #0/# #0e i$for!/#io$ pro&i.e. #o

!e represe$#s #0e co!p/$(6s oper/#i$% se%!e$#s .efi$e./ccor.i$% #o IFRS 9 Pe/se $o#e #0/# Corpor/#e c/$$o# be.efi$e. /s /$ oper/#i$% or repor#/be se%!e$# bec/'se i# .oes $o#%e$er/#e re&e$'es5 b'# o$( ser&es #o i$c'r co!!o$ cos#s #0/# /re$o# /oc/#e. o'# #o e/c0 se%!e$# I /so /ss'!e #0/# (o' 0/&e/ppie. #0e 4'/i#/#i&e #es#s #o #0ese se%!e$#s /$. .e#er!i$e. #0/#$o$e of #0e! 0/s #0e s/!e b/sic eco$o!ic c0/r/c#eris#ics #0/#o'. s'%%es# co!bi$i$% so!e of #0e! i$#o repor#/be se%!e$#sT0e $ex# s#ep5 #0e$5 is #o /pp( #0e 4'/$#i#/#i&e #0res0o.re4'ire!e$#s

I 0/&e /$/(7e. #0e i$for!/#io$ /$. .e#er!i$e. #0/# #0e f'$er/5 #0ece!e#er(5 /$. #0e i!o'si$e se%!e$#s s0o'. be repor#e.sep/r/#e( T0e re!/i$i$% #oQ#0e for/5 /$. c/#eri$% se%!e$#sQc/$ be co!bi$e. '$.er #0e c/#e%or( of o#0er i#0 #0e corpor/#e./#/ i$.ic/#e. /s '$/oc/#e.

To !/1e #0is .e#er!i$/#io$5 I /ppie. #0ree cri#eri/ p'# for#0 b( #0eIFRS 8 #o #0e i$for!/#io$ pro&i.e. fro! 2;-= Mee#i$% /$( o$e of

#0e #0ree cri#eri/ !/1es #0e se%!e$# repor#/be Firs#5 / se%!e$#!'s# be repor#e. sep/r/#e( if i#s re&e$'e is %re/#er #0/$ or e4'/ #o-; perce$# of #0e e$#erprise6s co!bi$e. re&e$'e T0is is #0e c/sei#0 bo#0 #0e f'$er/ /$. #0e ce!e#er( se%!e$#s5 /s re&e$'e for bo#0 is %re/#er #0/$ 8=-5>;; )-; perce$# of co!bi$e. re&e$'e*

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Seco$.5 / se%!e$# is co$si.ere. si%$ific/$# e$o'%0 #o be repor#e.sep/r/#e( if i#s /bso'#e oper/#i$% profi# or oper/#i$% oss is %re/#er #0/$ or e4'/ #o< )/* #0e co!bi$e. oper/#i$% profi# of / se%!e$#si#0o'# /$ oper/#i$% oss or )b* #0e co!bi$e. oper/#i$% oss of /se%!e$#s #0/# i$c'rre. / oss Co!bi$e. oper/#i$% profi# for /profi#/be se%!e$#s #o#/s 8 >95;;; ? 83>5;;; @ 8-;-5;;; T0ef'$er/5 ce!e#er(5 /$. i!o'si$e se%!e$#s / !ee# #0isre4'ire!e$# T0's5 / #0ree !'s# be sep/r/#e( repor#e.

T0ir.5 / se%!e$# !'s# be repor#e. sep/r/#e( if i#s i.e$#ifi/be/sse#s /re %re/#er #0/$ or e4'/ #o -; perce$# of #0e co!bi$e.

i.e$#ifi/be /sse#s for / oper/#i$% se%!e$#s A%/i$5 #0e f'$er/ /$.#0e ce!e#er( se%!e$#s !ee# #0is #es# No#e #0/# #0e for/ /$.c/#eri$% se%!e$#s !ee# $o$e of #0e /bo&e cri#eri/5 so #0e( /re $o#repor#e. sep/r/#e(5 (e# /re co!bi$e. #o e$/be / reco$cii/#io$ of se%!e$# ./#/ #o co$soi./#e. /!o'$#s T0e '$/oc/#e. Corpor/#e./#/ i /so be $ee.e. #o co!pe#e #0e reco$cii/#io$

"0e$ repor#i$% se%!e$# i$for!/#io$5 (o' !'s# i$c'.e #0e profi# /se /s #0e #o#/ /sse#s /$. i/bii#ies for e/c0 A..i#io$/i$for!/#io$ b( se%!e$# is re4'ire. o$( if #0e /!o'$#s /re re%'/r(re&iee. b( #0e c0ief .ecisio$,!/1er!/$/%e!e$# i$ #0eir re&ie/$. /ssess!e$# of #0e se%!e$#s T0ese i$c'.e re&e$'es fro!ex#er$/ c's#o!ers5 i$#er,se%!e$# re&e$'es5 i$#eres# re&e$'e /$.expe$se5 .epreci/#io$5 /!or#i7/#io$5 '$'s'/ i#e!s5 e4'i#( !e#0o.i$&es#!e$# i$co!e5 i$co!e #/x expe$se or be$efi# re&e$'es5oper/#i$% profi# )oss*5 i.e$#ifi/be /sse#s5 i/bii#ies5 .epreci/#io$/$. /!or#i7/#io$ expe$se /$. o#0er si%$ific/$# $o$,c/s0 i#e!s5 /$./!o'$# of c/pi#/ expe$.i#'res

Reco$cii/#io$s of se%!e$# re&e$'es5 oper/#i$% profi#s /$. osses/$. /sse#s /$. i/bii#ies #o #0e #o#/s repor#e. o$ #0e co$soi./#e.fi$/$ci/ s#/#e!e$#s !'s# be pro&i.e.

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Pe/se /so $o#e #0/# o#0er e$#i#(,i.e .iscos'res /re /sore4'ire.5 e&e$ if / co!p/$( .e#er!i$es #0/# i# oper/#es i$ o$( o$ese%!e$#< 0o #0e se%!e$#s ere .e#er!i$e.5 #0e /!o'$# of re&e$'e fro! ex#er$/ c's#o!ers )$o# /ppic/be i$ (o'r c/se*5C/$/.i/$ /$. forei%$ re&e$'es5 c/pi#/ /sse#s /$. %oo.i I .o $o#expec# #0/# (o' 0/&e /$( !/or c's#o!ers #0/# /cco'$# for !ore#0/$ -; of (o'r #o#/ re&e$'e5 /s #0/# o'. /so be / re4'ire..iscos're

I 0ope #0/# #0is i$for!/#io$ 0eps (o' i$ .e#er!i$i$% f'#'rerepor#/be se%!e$#s If (o' 0/&e /$( o#0er 4'es#io$s5 pe/seco$#/c# !e

olutions Manual &($% Cha"ter &(

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PROBLEM 23,-;

1. The financial statements should be adjusted for the expected

loss pertaining to the remaining receivable of $260,000. Suchadjustment should reduce accounts receivable to its realizablevalue as of December 31, 2014.

2 Repor# #0e fire oss i$ / $o#e #o #0e s#/#e!e$# of fi$/$ci/posi#io$ /$. refer #o i# i$ co$$ec#io$ i#0 #0e i$co!e s#/#e!e$#5si$ce e/r$i$%s poer is pres'!/b( /ffec#e.

3 S#ri1es /re co$si.ere. %e$er/ 1$oe.%e /$. #0erefore.iscos're is $o# re4'ire. M/$( /'.i#ors5 0oe&er5 o'.e$co'r/%e .iscos're i$ / c/ses

= T0is c/se is / .iffic'# probe! If #0is e&e$# is of #0e seco$.#(pe #0/# pro&i.es e&i.e$ce i#0 respec# #o co$.i#io$s #0/# .i.$o# exis# /# Dece!ber 3-5 2;-=5 #0e$ /ppropri/#e .iscos'ress0o'. i$.ic/#e #0/#<)/* Reco&er( of cos#s i$&es#e. i$ p/$# /$. i$&e$#or( is i$

.o'b#)b* T0e co!p/$( !/( i$c'r /..i#io$/ cos#s #o !o.if( #0e

exis#i$% f/cii#()c* D'e #o #0is si#'/#io$5 f'#'re eco$o!ic e&e$#s c/$$o# be.e#er!i$e.

If i# is #0e firs# #(pe of s'bse4'e$# e&e$# /$. #0e co$.i#io$exis#e. /# Dece!ber 3-5 2;-=5 #0e$ #0e fi$/$ci/ s#/#e!e$#s!'s# be /.'s#e. T0e pro&isio$s of /cco'$#i$% for co$#i$%e$cies o'. %o&er$ if /!o'$#s co'. $o# be es#i!/#e.I# s0o'. be e!p0/si7e. i$ c/ss #0/# $o ri%0# /$ser exis#s for #0is probe! '.%e!e$# !'s# p/( / !/or roe i$ .e#er!i$i$%

#0e /.'s#!e$# or .iscos're $ecess/r( for #0is #r/$s/c#io$Co$si.er/#io$ s0o'. be %i&e$ 0e#0er #0e %oi$% co$cer$/ss'!p#io$ is /ppropri/#e '$.er #0e circ'!s#/$ces

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PROBLEM 23,-; )Co$#i$'e.*

9 A.'s# #0e i$&e$#or( fi%'re /s of Dece!ber 3-5 2;-= /s re4'ire.b( / !/r1e# price of 82;; i$s#e/. of 8-=;5 /pp(i$% #0e oer of cos# /$. $e# re/i7/be &/'e pri$cipe T0e /c#'/ 4'o#/#io$/s / #r/$si#or( error /$. $o p'rc0/ses 0/. bee$ !/.e /# #0is4'o#/#io$

> Repor# #0e /c#io$ of #0e $e s0/re iss'e i$ / $o#e #o #0efi$/$ci/ s#/#e!e$#s5 /s #0is 0/s ree&/$ce #o #0e 'sers5p/r#ic'/r( exis#i$% s0/re0o.ers

: T0is is / s'bse4'e$# e&e$# #0/# pro&i.es e&i.e$ce /bo'#co$.i#io$s #0/# .i. $o# exis# /# #0e s#/#e!e$# of fi$/$ci/

posi#io$ ./#e T0e .eci$e i$ &/'e5 if !/#eri/ i$ effec# o$Bo'&ier6s s#/#e!e$#s5 o'. be .iscose. i$ #0e $o#es #o #0efi$/$ci/ s#/#e!e$#s T0e oss o'. $o# be recor.e. i$ #0eDece!ber 3-5 2;-= fi$/$ci/ s#/#e!e$#s


7/25/2019 sm ch (23).doc



PROBLEM 23-11

(a) BRADBURN CORPORATIONFinancial Statistics

1. Current ratio =Current assetsCurrent liabilities

2013:$320,000

= 2.02 to 1 2014:$403,000

= 2.46 to $158,500 $164,000

Current assets:2013: $12,500 + $132,000 + $125,500 + $50,000 = $320,0002014: $18,200 + $148,000 + $131,800 + $105,000 = 403,000Current liabilities:2013: $6,000 + $61,500 + $90,000 = $158,5002014: $9,000 + $76,000 + $79,000 = $164,000

2. Quick ratio =Current assets – Inventories

Current liabilities

2013:$270,000

= 1.70 to 1 2014:$298,000

= 1.82 to$158,500 $164,000

3. Inventory turnover =Cost of goods soldAverage inventory

$1,530,0002014:$50,000 + $105,000= 19.7 times (every 18.5 days)

2

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PROBLEM 23-11 (Continued)

4. Return on assets =Net income

Average total assets

$346,5002013: $1,688,500 + $1,740,500 = 20.2%

2

$427,0002014: $1,740,500 + $1,852,000 = 23.8%

2

5.Percent Changes Amounts Percent Increase

(000s omitted)

2014 2013

Sales $3,000 $2,700$300

= 11.11%$2,700

Cost of goods sold 1,530 1,425$105

= 7.37%$1,425

Gross margin 1,470 1,275$195

= 15.29%$1,275

Net income 427 346$80.5

= 23.23%$346.5

(b)Other financial reports and financial analyses which might behelpful to the commercial loan officer of Hibernia Bank include:

1.The Statement of Cash Flows would highlight the amount ofcash provided by operating activities, the other sources ofcash, and the uses of cash for the acquisition of non-current assets and long-term debt requirement.

2.Projected financial statements for 2015 including a projectedStatement of Cash Flows. In addition, a review of Bradburn’scomprehensive budgets might be useful. These items wouldpresent management’s estimates of operations for thecoming year.

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(b) (Continued)

3.A closer examination of Bradburn’s liquidity by calculatingsome additional ratios, such as day’s sales in receivables,accounts receivable turnover, and day’s sales in inventory.

4.An examination as to the extent that leverage is being usedby Bradburn.

5.Details concerning the due dates of the notes receivable onaccount of their large size in both fiscal years.

(c)If the percentage changes experienced in fiscal year for salesand cost of goods sold and operating expenses continue foreach of the next 2 years, assuming depreciation expenseremains constant to that of 2014, Bradburn Corporation shouldbe able to finance the plant expansion from internally generatedfunds as shown in the calculations presented below.

(000 omitted)

2014 2015 2016

Sales $3,000.0 $3,333.3 $3,703.7Cost of goods sold 1,530.0 1,642.7 1,763.7Gross margin 1,470.0 1,690.6 1,940.0Operating expenses 860.0 948.2 1,045.5Income before tax 610.0 742.4 894.5Income tax (30%) 183.0 222.7 268.4Net income $ 427.0 $ 519.7 $ 626.1

Add: Depreciation 102.5 102.5Deduct: Dividends (260.0) (260.0)

Note repayment (6.0) Funds available for plant

expansion356.2 468.6

Plant expansion (150.0) (150.0)Excess funds $ 206.2 $ 318.6

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Assumptions: for 2015For 2016

Sales increase at a rate of 11.11%.Cost of goods sold increases at rateof 7.37%, despite depreciationremaining constant.

Other operating expenses increaseat the same rate experiencedfrom 2013 to 2014; i.e., at 10.26%($80,000 ÷ $780,000).

There are no other significantnon-cash expenses.

Dividends remain at $2.00 pershare.

Plant expansion is financedequally over the two years($150,000 each year).

Loan extension is granted.

(c)Hibernia Bank should probably grant the extension of theloan, if it is really required, because the projected cash flowsfor 2015 and 2016 indicate that an adequate amount of cashwill be generated from operations to finance the plantexpansion and repay the loan. In actuality, there is somequestion whether Bradburn needs the extension because theexcess funds generated from 2015 operations might cover the$70,000 loan repayment. However, Bradburn may want theloan extension to provide a cushion because its cash balance

is low. The financial ratios indicate that Bradburn has a solidfinancial structure. If the bank wanted some extra protection,it could require Bradburn to restrict cash dividends for thenext two years to the 2014 amount of $2.00 per share.

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CASES

No#e< See #0e C/se Pri!er o$ #0e S#'.e$# ebsi#e5 /s e /s #0e

S'!!/r( of #0e C/se Pri!er i$ #0e fro$# of #0e #ex# No#e #0/# #0efirs# fe c0/p#ers i$ &o'!e - /( #0e fo'$./#io$ for fi$/$ci/repor#i$% .ecisio$ !/1i$%

CA 23,- HOLTMAN ENTERPRISES

?#er#ie;

Com"any has authori<ed the issue of !onds ;hich ;ill affect financialstatement ratios once the !onds are issued.

Treasurer concerned a!out the ratios ;hich might negati#ely affect the share"rice. @sers of financial statements ;ill ;ant trans"arency. ince the shares trade on the local e6change, I'0 is a constraint.

Analysis and recommendations

The issue is ;hether to delay the issuance of the !onds until the follo;ingyear.

hould a com"any delay transactions 8ust !ecause they do not like the im"acton the financial statements

Technically no. If the com"any has done an analysis from an economic or strategic "ers"ecti#e and has decided that they need the money no;, thefinancial re"orting should not !e a factor.

Accounting should !e neutral. ?n the other hand, if they do not really need the money, then there is no real

loss to the com"any to defer the issue.

In summary, must look at the cost to the com"any of deferral of the issue9economic costs and other costs:.

If there are real costs, then must not delay. Must ;eigh the costs of deferral ;ith the costs of sho;ing more de!t on the

!alance sheet.

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IC 23,- PENRON

?#er#ie;

4B is in the !usiness of selling oil and gas and deri#ati#es. E#en though they aree6"anding, they a""ear to !e s"inning off nonessential assetsD. ue to the gro;th,there may !e "ressure to mani"ulate the financial statements to continue this trend.

In addition, the com"any has signaled to the market"lace that they ;ill meet their gro;th targets, adding further "ressure.

The !ank ;ould !e a key user since the com"any has guaranteed the B4B de!t andB4B other;ise does not seem to ha#e any cash flo;s.

The analysts ;ill also !e key users and ;ill !e looking for information to su""ort;hether they should tell their clients to !uy or sell. They ;ill !e looking for signalssuch as declines in re#enues or "rofits.

The "ension "lan ;ould also !e a key stakeholder since it is in#esting significantamounts of money onto the com"any stock. The "lan ;ould !e looking at the sta!ility

and sol#ency of the com"any. There is additional "otential !ias for management to o#erstate earnings since they

ha#e stock o"tions. It a""ears as though many of the e6ecuti#e may lea#e ne6t year and so they may !e interested in "roducing short term "rofits 9#ersus longer term:.'inally, the Class A shares are mandatorily redeema!le if management resigns and sothey stand to gain if the share "rice is higher or the com"any looks good in thefinancial statements.

The auditor must !e #ery conser#ati#e since there a""ears to !e multi"leo""ortunities for !iased information.

I'0 is a constraint since this is a "u!lic com"any.

Analysis and 0ecommendationsIssue > ho; to account for the "i"eline sales.

This is related "arty since B4B is o;ned !y the 4resident of the com"any. Additionaldisclosures are re2uired. I'0 does not re2uire remeasurement of related "artytransactions ho;e#er, this information is rele#ant to the users es"ecially gi#en themagnitude of the transactions and significance to the !ottom line.

Issue > ho; to account for the Class A share issue

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IC 23,- )CONTINUED*

Bia!ility E2uity or "art de!t"art e2uity- The shares are lia!ilities in su!stance

since they ha#e a mandatoryredem"tion feature. In this case, the

shares must !e redeemed if the

e6ecuti#esshareholders resign. At this

"oint, the com"any ;ill ha#e to "ay

the shares out and this creates a

lia!ility or o!ligation to "ay cash.

- The "ro!a!ility of the triggering e#ent

must !e assessed. At year end, it

a""ears likely that many of the

e6ecuti#es ;ill lea#e since their

!enefits #est and there is a concern

that they ;ill resign.

- Thus the o!ligation to "ay cash is

likely.

- ?ther.

- The shares are e2uitylike since they

re"resent residual o;nershi" interestsin terms of asset and di#idend

distri!ution.

- They ha#e no "referential rights and do

not o!ligate the com"any to "ay cash.

- The legal form is e2uity and more

im"ortantly, the shares are e2uity in

su!stance since a!sent the triggering

e#ent, they are residual in nature.

- ?ther.

0ecommendationF More conser#ati#e to treat at least "art of the instrument as lia!ility sincethe entity stands ready to "ay of the triggering e#ent occurs.

Issue > ho; to account for the ;e!site costs

Ca"itali<e costs E6"ense costs- ?nce in de#elo"ment stage, costs

should !e ca"itali<ed if related to

hard;are and soft;are as they ha#e

future !enefit.

- e#elo"ment of gra"hics ;ould !e

seen as an integral "art of the

soft;are and thus ca"itali<ed.

- Costs incurred to de#elo" content

should !e ca"itali<ed since they ;ill

ha#e future !enefit7 lasting !eyond

the ne6t year.

- ?ther.

- All costs in the "lanning stages should

!e e6"ensed due to the uncertainty

attached to "ossi!le future re#enues.

In this case, the com"any had not e#en

decided ;hether to go ahead ;ith this

ne; !usiness model.

- The !enefit of any content is uncertain

and should therefore !e e6"ensed.

- Content ;ill likely change e#ery year

and thus is an ongoing cost of doing

!usiness.

- ?ther.

0ecommendationF More conser#ati#e to e6"ense due to the uncertainty of futurere#enues.?therF isclosure of guarantee andor going concern.

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IC 23,2 FRANGIPANI LTD )FL*

?#er#ie;

Ge; com"any "ri#ately o;ned > tight cash situation @sers include go#ernment ;ho has s"onsored a !ank loan and ;ill !e

interested in long term #ia!ility and cash flo;s > must re"ort annually andmaintain de!t to e2uity of 1F1 > therefore key ratio

'amily mem!ers o;n "referred shares and ;ill !e interested in return onin#estment and management ste;ardshi" > note that shares are redeema!le if no "rofit therefore "ressure to sho; a "rofit

cientists are taking share a""reciation rights in lieu of salary > ;ill !einterested in "erformance of com"any and net #alue

As accountant ;ill ;ant to !e trans"arent !ut "ut !est foot for;ard and sho;com"any in a fa#oura!le light

Go legal 5AA4 constraint !ut users may find most useful. The com"any hasdecided to use A4E 9although com"any has the o"tion to follo; I'0 as anaccounting "olicy choice:

Analysis and recommendations

A0s > settlea!le in cash or a #aria!le num!er of shares at the o"tion of thecom"any

e!t 4art de!t"art e2uity or all e2uity- Whether settle in cash or #aria!le

num!er of shares > still ano!ligation to gi#e the same amount

of #alue.

- @nder A4E > may argue de!t

since it ;ill !e settled ;ith cash or

a #aria!le num!er of shares 9see

accounting for financial

instruments:.

- Go o!ligation to deli#er cash since

may settle in shares. @nder A4Emay argue all e2uity since

settlement method at the o"tion of

the com"any.

0ecommendationF There is significant 8udgement here and therefore, ;hiche#er

"resentation is chosen 9de!t, e2uity or "art de!t"art e2uity:, the com"any should"ro#ide am"le note disclosures.

5o#ernment loan forgi#a!le 9;ill take !ack "referred shares:

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IC 23,2 )CONTINUED*

5rante2uity Boan- Gormally, ;ould treat as grant and

recogni<e as offset to costsincurred. Ho;e#er, this is not

com"letely forgi#a!le as the

go#ernment ;ould take !ack

"referred shares in the com"any.

Therefore the transaction ;ould !e

credited to e2uity.

- The com"any needs to meet

certain conditions for it to !e

forgi#a!le including com"leting the

"ro8ect ;ithin three years. They are

#ery close to "atenting the "rocess

- The loan is ;ith the !ank e#en

though the go#ernment iss"onsoring it. Therefore it is a

lia!ility to the !ank.

- Certain conditions must !e met for

the loan to !e forgi#a!le and those

ha#e not yet !een met. There are

com"lications as someone else

may "atent the "rocess first

9technology stolen:.

- In addition, the com"any must

maintain a de!t to e2uity ratio of 1F1

other;ise the de!t is re"aya!le.

0ecommendationF 4ro!a!ly more reasona!le to re"resent as de!t due to thesignificant uncertainty surrounding the "atenting of the ne; technology.

4referred shares

e!t E2uity- 0edeema!le at the o"tion of the

holder if no "rofit. @nder A4E

;ould assess "ro!a!ility of this

ha""ening. The issues discussed

here ;ill ha#e a significant im"act

on the amount of "rofit recogni<ed

so care must !e taken to ensure

un!iased re"orting.

- Go o!ligation to "ay cash since

may redeem for common shares.

- The shares are only redeema!le at

the o"tion of the holder if a "rofit is

made. This may not !e the case

this year.

0ecommendationF @nder A4E > ;ould assess likelihood of "rofits. If not likely, thenrecogni<e as e2uity.

Ad#ertising re#enues 9significant amount recei#ed 8ust !efore year end:

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IC 23,2 )CONTINUED*

0ecogni<e re#enues u"front 0ecogni<e o#er time

- Ad#ertising is for the month andnonrefunda!le therefore earned !y

the end of the month at latest

- Ad#ertising ser#ices are "ro#idedo#er time therefore recogni<e o#er

time

- Commonly dis"lay ad#ertising for

the entire year

- Ensure that the entity does not

succum! to "ressure to recogni<e

these early due to the "referred

shares !ecoming "aya!le in cash if

the com"any does not make a

"rofit.

0ecommendationF 0ecogni<e o#er time as earned o#er time.5oing concern issue

Ensure full disclosure since idea stolen and may not !e a!le to !ring to market. If this is the case, the go#ernment loan is not forgi#en and "referred shares

may !e redeema!le 9if no "rofit:.0Ca"itali<e E6"ense;riteoffdo;n- Technology is feasi!le since a""ear

close to su!mitting for

"atentsimilarly costs kno;n or close

to !eing kno;n

- Intent is there to "roduce since that is

the main goal of the com"any

- Go info !ut a""ears to !e a market

for solar "o;ered #ehicles in general

- 0esources a#aila!le through

go#ernment loan and in#estors

- 4resenting as an asset sho;s that

the com"any is in#esting in its future- Ba;yer confident that he can "ro#e

theft of ideas so #alue not

com"romised

- ?ther

- Ha#e not 2uite reached the stage

;here technical feasi!ility is

esta!lished

- Technology has !een stolen !efore

"atent and therefore may ha#e no

future #alue

- @nder A4E > may choose to

e6"ense de#elo"ment costs e#en if

criteria are met

- This ;ill reduce costs and !e less

com"le6


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0ecommendationF It is likely okay to recogni<e as asset as long as conditions met for ca"itali<ation. The com"any is confident that they can "ro#e theft of the ideas. Theyshould check ;ith la;yers for their #ie;s.

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SOLUTIONS TO "RITING ASSIGNMENTS

"A 23,-

9a: 'inancial re"orting for segments of a !usiness enter"rise in#ol#esre"orting financial information on a lessthantotal enter"rise !asis.These segments may !e defined along organi<ational lines, such asdi#isions, !ranches, or su!sidiaries. egmentation could !e !asedon areas of economic acti#ity, such as industries in ;hich theenter"rise o"erates, "roduct lines, ty"es of ser#ices rendered,markets, ty"es of customers, or geogra"hical areas. In addition tothese "ossi!le indi#idual definitions of an enter"rise3s segments, a

com"any may use more than one of the a!o#ecited !ases of segmentation.

9!: The reasons for re2uiring financial data to !e re"orted !y segmentsinclude the follo;ingF1. They ;ould "ro#ide more detailed disclosure of information

needed !y in#estors, creditors, and other users of financialstatements.

&. A""raisers can e#aluate ma8or segments of a !usinessenter"rise !efore considering the !usiness in its entirety.

(. In addition to !eing useful and desira!le, such information is"ractical to com"ute.

). The gro;th "otential of an enter"rise can !e e#aluated !yre#ie;ing the gro;th "otential of its ma8or segments.

$. @sers can !etter assess management3s decisions to dro" or add a segment.

*. 4ro8ection of future earnings "o;er is made more effecti#e;hen a""roached on a segment !asis !ecause differentsegments may ha#e differing rates of gro;th, "rofita!ility, anddegrees of risk.

%. Managerial a!ility is !etter assessed ;ith segment data!ecause managerial res"onsi!ility ;ithin the enter"rise isfre2uently decentrali<ed.

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"A 23,- )CONTINUED*

9c: The "ossi!le disad#antages of re2uiring financial data to !e re"orted!y segments include the follo;ingF1. They could !e misinter"reted due to the "u!lic3s general lack of

a""reciation of the limitations of the some;hat ar!itrary !asesfor most allocations of common costs.

&. They may disguise the interde"endence of all the segments.(. They might result in misleading com"arisons of segments of

different enter"rises.). Confidential information ;ould !e re#ealed to com"etitors a!out

"rofita!le or un"rofita!le "roducts, "lans for ne; "roducts or entries into ne; markets, a""arent ;eaknesses that might

induce com"etitors to increase their o;n efforts to takead#antage of the ;eakness, and the e6istence of ad#antagesnot other;ise indicated.

$. Information thus made a#aila!le might cause customers tochallenge "rices, to the disad#antage of the com"any.

*. ?"erating data re"orted !y segments might !e misleading tothose ;ho read them. egment data "re"ared for internalmanagement "ur"oses often include ar!itrary 8udgments thatare kno;n to those using the data and taken into account inmaking e#aluations. The difficulty of making such !ackgroundinformation a#aila!le and understanda!le to outside users isconsidered !y many to !e insurmounta!le.

%. @niform re"orting categories ;ould !e esta!lished that mightcall for additional e6"ense in recording and re"orting, and that,!ecause ar!itrarily defined, might not fairly re"resent theo"erations of the enter"rise as a going concern. ome fear thatesta!lishment of ar!itrary re"orting re2uirements might in turnlead to ar!itrary rules for !usiness acti#ities in order to make there2uired re"orting "ossi!le.

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"A 23,- )CONTINUED*

9d: The accounting difficulties inherent in segment re"orting include thefollo;ingF1. The !asis of segmentation must !e esta!lished. JThe #arious

"ossi!le !ases ;ere cited in ans;er 9a:, a!o#e.&. The transfer "rices must !e determined. Transfer "rices are

those charged ;hen one segment deals ;ith another segmentof the same enter"rise. Larious "ossi!le transfer "rices e6ist,and the com"any must select one.

(. The method of re"orting segment sales must !e defined. Acom"any may or may not include intercom"any transactions;ith other segments ;ithin the enter"rise in its sales.

). The com"utation of segment net income must !e defined. Thenet income may !e merely a contri!ution margin- that is, salesless #aria!le costs or a more con#entional measure of netincome. If a contri!utionmargin a""roach is used, the #aria!lecosts must !e identified. If a more con#entional measure of netincome is used, the treatment of #arious items for eachsegment3s net income must !e esta!lished. uch items includethe follo;ingFa. etermining ;hether common costs should !e allocated to

segments.!. electing allocation !ases if common costs are to !e

allocated.c. etermining ;hich costs of ca"ital 9interest, "referred

di#idends, etc.: should !e attri!uted to segments.d. etermining ;hether e6traordinary items should !e

attri!uted to segments.e. etermining ho; income ta6 should !e allocated to

segments.f. etermining ho; a minority interest3s share of income, and

income from in#estee com"anies, should !e attri!uted tosegments.$. The segment information to !e re"orted, relating to a !alance

sheet and statement of cash flo;s, must !e esta!lished. Thisincludes allocation of assets to #arious segments.

*. The treatment of segment information in interim financial re"ortsmust !e esta!lished.

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"A 23,- )CONTINUED*

7. The method of "resenting segment information in financialstatements must !e esta!lished. uch "resentation may !e !ynotes or !y se"arate financial statements.

+. The additional disclosures re2uired, such as accounting "oliciesused, must !e esta!lished.

. The effect of annual com"arisons must !e considered. This;ould entail retroacti#e restatement of "re#iously re"ortedsegment information "resented currently for com"arati#e"ur"oses.

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"A 23,2

9a: 1. I'0 fa#ours the discrete #ie; for interim re"orting. Thismeans that Kersee should re"ort its o"erating results for the2uarter as if the 2uarter ;ere an entirely se"arate re"orting

"eriod.

&. The com"any3s re#enue and e6"enses ;ould !e re"orted asfollo;s on its 2uarterly re"ort "re"ared for the first 2uarter of the&/1) fiscal yearF

ales */,///,///Cost of goods sold 9(*,///,/// N &)$,///: (*,&)$,///Laria!le selling e6"enses &,///,///

'i6ed selling e6"enses Ad#ertising &,///,///?ther 91,$//,/// > $//,///: 1,///,///

ales and cost of goods sold recei#e the same treatment as if this ;ere an annual re"ort. @nder I'0 the in#entory #ariancecannot !e deferred e#en though the com"any !elie#es it ;illre#erse !efore the third 2uarter. Conse2uently, the in#entorymust !e reduced and cost of goods sold increased !y theamount of the "rice #ariance of &)$,///. Costs and e6"enses

other than "roduct costs should !e charged to e6"ense ininterim "eriods as incurred or allocated among interim "eriods.Conse2uently, the #aria!le selling e6"ense and the "ortion of fi6ed selling e6"enses not related to the tele#ision ad#ertisingshould !e re"orted in full. With res"ect to the ad#ertising costs,if the costs cannot !e recogni<ed as an asset and deferred atthe year end, then this treatment is not !e allo;ed for theinterim "eriod. Conse2uently, the full ad#ertising e6"ense must!e e6"ensed.

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"A 23,2 )CONTINUED*

9!: The financial information to !e disclosed to its shareholders in its2uarterly re"orts, as a minimum, includesF1. a condensed !alance sheet sho;ing com"arati#e information

for the immediately "receding fiscal year 9ecem!er (1, &/1(:-&. a statement of com"rehensi#e income sho;ing the current

interim "eriod and yeartodate and com"ara!le information for the "receding year -

(. a statement of changes in e2uity sho;ing cumulati#e totals todate and com"ara!le information for the "re#ious year-

). a statement of cash flo;s sho;ing cumulati#e year to dateinformation and com"ara!le information for the "receding year.

$. !asic and fully diluted earnings "er share-

*. nature and amount of any unusual items-%. nature and amount of any changes in estimates-+. disclosure that the statements com"ly ;ith I'0-. a statement that the com"any follo;s the same accounting

"olicies as at the "re#ious fiscal year end1/. a descri"tion of any changes in accounting "rinci"les-11. any su!se2uent e#ents to the interim "eriod-1&. issuances, re"urchases or re"ayments of de!t or e2uity-1(. di#idends "aid-1). information a!out the re"orta!le segments-1$. information a!out any changes in com"osition of the entity-1*. information a!out any contingencies-1%. a descri"tion of any seasonality or cyclicality of interim "eriod

o"erations and1+. other material matters not "re#iously re"orted.

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"A 23,3

9a: Acce"ta!le. The use of estimated gross "rofit rates to determine thecost of goods sold is acce"ta!le for interim re"orting "ur"oses aslong as the method and rates utili<ed are reasona!le. The com"anyshould disclose the method em"loyed and any significantad8ustments that result from reconciliations ;ith annual "hysicalin#entory.

9!: Got acce"ta!le. E#en though "ension costs are identifia!le ;ith atime "eriod rather than ;ith the sale of a "roduct or ser#ice, the"ension e6"ense for the interim "eriod is to !e calculated usingactuarial estimates of costs. In addition, any onetime ad8ustmentsfor significant market fluctuations, curtailments, settlements and any

other e#ents must !e included in the interim "eriod. Conse2uently,the full gain or loss on settlement should !e recogni<ed in the2uarter in ;hich the settlement occurred 9IA 1.11/:.

9c: Acce"ta!le. Any loss in in#entory #alue should !e re"orted ;hen thedecline occurs. Any reco#eries of the losses on the same in#entoryin later "eriods should !e recogni<ed as gains 9reco#ery of loss: inthe later interim "eriods of the same fiscal year. Ho;e#er, the gainsshould not e6ceed the "re#iously recorded losses.

9d: Got acce"ta!le. 5ains on the sale of in#estments ;ould not !edeferred if they occurred at yearend. Conse2uently, they should not!e deferred to future interim "eriods !ut should !e re"orted in the2uarter the gain ;as reali<ed.

9e: Acce"ta!le. The annual audit fee is an e6"ense that !enefits thecom"any3s entire year. Com"anies are encouraged to make2uarterly estimates of these items that usually result in yearendad8ustments. Therefore, this e6"ense can !e "rorated o#er the four

2uarters.

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"A 23,3 )Co$#i$'e.*

9f: Got acce"ta!le. 0e#enue from "roducts sold should !e recogni<edas earned during the interim "eriod on the same !asis as follo;edfor the full year. =ecause the com"any normally recogni<es a sale;hen shi"ment occurs, it should recogni<e the re#enue in thesecond 2uarter and not defer the re#enue recognition. To doother;ise ;ould !e an inconsistent a""lication of com"anyaccounting "olicy and #iolate general accounting rules for re#enuerecognition.

9g: Got acce"ta!le. 5ood;ill im"airment losses cannot !e re#ersed inthe interim "eriod, ;hich is consistent ;ith yearend treatment.

9h: Got acce"ta!le. A !onus that is antici"ated can only !e accrued inthe interim "eriod if the !onus is a legal o!ligation or a constructi#eo!ligation, the com"any is re2uired to "ay it, and a reasona!leestimate can !e made. In this case, the com"any ;ill only !e legallyre2uired to "ay the !onus only if the share "rice at ecem!er (1,&/1) is still a!o#e the target "rice. ince this is not kno;n at theend of Oune (/, &/1), the !onus should not !e accrued.

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"A 23,=

There are some ma8or differences !et;een I'0 and A4E ;ith res"ectto the items discussed in the cha"ter. The differences arise due to thefact that A4E is used !y "ri#ate com"anies ;ith less com"le6 !usinessstructures and fe;er users. In addition, the standards for A4E ha#e!een designed to kee" costs in line ;ith !enefits !y reducing disclosureand allo;ing more choices in standards. The follo;ing highlights thedifferences !et;een I'0 and A4EF

• isclosure is greatly reduced for "ri#ate enter"rises as their !usiness structures are less com"le6 and the main users usuallyha#e access to management and rely less on the notes for information.

• ue to the large range of si<es and com"le6ity of "ri#ateenter"rises, A4E has a greater num!er of accounting "olicychoices for re"orting and measuring items such as income ta6es,controlled or significantly influenced in#estments, defined !enefit"ension "lans, to name a fe;. Additionally, ;hen a choice is made,it does not need to !e sho;n to !e relia!le and more rele#ant. Incontrast, I'0 is trying to reduce the num!er of choices so thatcom"arisons across "eer grou"s are easier, and any change in anaccounting "olicy must !e sho;n to !e relia!le and more rele#ant

than the "re#ious one.• I'0 re2uires segment re"orting and "ro#ides detailed guidanceon the definition of a re"orta!le segment and the information thatmust !e disclosed. A4E does not re2uire segment re"orting dueto "ri#ate enter"rises !eing less com"le6, and to reduce the notedisclosure re2uired.

• A4E does not re2uire interim re"orts. ue to the fact that sharesof a "ri#ate enter"rise are not easily li2uidated, shareholders andcreditors are long term in#estors in "ri#ate enter"rises.Conse2uently, interim re"orting ;ould not !e rele#ant for their

needs. In addition, these stakeholders ha#e access tomanagement to re2uest information as re2uired. 'or "u!liclytraded enter"rises that ha#e shareholders ;ho might !e in#estedfor #ery short "eriods of time, interim re"orts are #ital for their needs. Although I'0 does not mandate ;ho ;ill issue interimre"orts and ho; often, guidance is "ro#ided on measurement andre"orting interim financial information.


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"A 23,= )Co$#i$'e.*

• A4E has detailed standards on ho; to measure, re"ort and

disclose related "arty transactions. This results from "ast Canadian"ractices and also the fact that related "arty transactions may !emore "re#alent in "ri#ate enter"rises. I'0 only "ro#idesguidance on disclosure re2uirements for related "arty transactions.I'0 also re2uires disclosure on key management com"ensation,;hereas A4E does not. 9It is interesting to note that the first draftof A4E did include similar com"ensation disclosure, !ut thefeed!ack ;as so negati#e that the re2uirement ;as eliminated onthe final #ersion.:

• 'or A4E, su!se2uent e#ents arise !et;een the re"ort date and

the com"letion date, ;hich has !een "ast "ractice in Canada.I'0 defines su!se2uent e#ents to !e e#ents arising !et;een there"ort date and the date of authori<ation.

• A4E has standards for unincor"orated !usiness re2uiring thestatements to define the entity and disclose salaries and other items accrued to the o;ners. A4E has this standard since theremay !e "ri#ate enter"rises that are not incor"orated. As all"u!licly traded entities are incor"orated, there are no similar standards under I'0.

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"A 23,9

9a:

1. Current ratio P /$,/// Q 9)&/,/// N $&,///: P 1.&F1

&. Acidtest ratio P 9*/,/// N 1+,/// N 1&/,///: Q )%&,/// P .+F1

(. Accounts recei#a!le turno#er P1,*)/,/// Q +/,///N1+,/// P 11.+ times &). In#entory turno#er P+//,/// Q *)/,/// N $&/,/// P 1.) times &

$. ays "aya!les outstanding P)&/,/// N ()$,/// Q 9+//,/// N ))/,///: P 11( days & (*$*. 0ate of return on assets P(*/,/// Q 1,%(&,///N 1,%*&,/// P &/.*R &%. 4rofit margin on sales P(*/,/// Q 1,*)/,/// P &1.$R

)b* 'inancial ratios should !e e#aluated in terms of industry "eculiaritiesand "re#ailing !usiness conditions. Although industry and general!usiness conditions are unkno;n in this case, the com"any a""earsto ha#e a relati#ely strong current "osition. The main concern from ashortterm "ers"ecti#e is the a""arently lo; in#entory turno#er ratio.This ratio may !e lo; !ecause the !usiness !uys in !ulk and doesnot "urchase fre2uently. The rate of return on assets and "rofitmargin on sales are e6tremely good and indicate that the com"anyis em"loying its assets ad#antageously. The days "aya!lesoutstanding seems high, !ut should !e e#aluated in terms of the

credit terms "ro#ided !y Maude3s su""liers.

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"A 23,9 )Co$#i$'e.*

)c* @nearned re#enue is a lia!ility that arises from current sales !ut for ;hich some future ser#ices or "roducts are o;ed to customers inthe future. At the time of sale, customers "ay not only for thedeli#ered "roduct, !ut they also "ay for future "roducts or ser#ices.In this case, the com"any recogni<es re#enue from the current"roduct and "art of the sale "roceeds is recorded as a lia!ility9unearned re#enue: for the #alue of future "roducts or ser#ices thatare o;edD to customers. An increase in the unearned re#enuelia!ility, rather than raising a red flag, often "ro#ides a "ositi#e signala!out sales and "rofita!ility. When the sales are gro;ing, theunearned re#enue account should gro;. Thus, an increase in a

lia!ility may !e good ne;s a!out com"any "erformance. In contrast,;hen unearned re#enues decline as they did for Maude, thecom"any o;es fe;er ser#ices and "roducts, !ut this also meansthat sales of ne; "roducts may ha#e slo;ed.

9d: iscounting the "rice of some of their goods to mo#eD sales and"rofits from &/1$ into &/1) ;ould !e misleading for in#estors !yo#erstating sales in &/1). This ;ould su!se2uently lead to anunderstatement of sales in &/1$. 'urthermore it is not considered to

!e normal !usiness acti#ity, therefore the managers ;ould !eunethically increasing !ottom line "rofits. The normale6"ectedamount of sales ;ill not occur in the ne6t "eriod, so it also ad#erselyaffects the 2uality of earnings the firm "roduces.

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RESEARCH AND FINANCIALANALYSIS

RA23,- AIR CANADA INC KERSUS BRITISH AIR"AS PLC

9a: 91: Air Canada commented on the follo;ing list of items in its Gote( on accounting "oliciesF

=asis of Measurement

4rinci"les of consolidation

4assenger and cargo re#enues

Ca"acity "urchase agreements

Aero"lan loyalty "rogram

?ther re#enuesEm"loyee future !enefits

Em"loyee "rofit sharing "lan

tock!ased com"ensation "lan

Maintenance and re"airs

?ther o"erating e6"enses

'inancial instruments

'oreign currency translation

Income ta6es

Earning 4er hare

Cash and cash e2ui#alents

hortterm in#estments

0estricted cash

Aircraft fuel in#entory and s"are "arts

in#entory

4ro"erty and e2ui"ment

Interest ca"itali<edBeases

Intangi!le assets

5ood;ill

Im"airment of longli#ed assets

Goncurrent assets held for sale

4ro#isions

Aircraft lease "ayments in e6cess of or

less than rent e6"ense

E6ce"tional items

egment re"orting

Accounting standards and amendments

issued !ut not yet ado"ted

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RA23,- AIR CANADA INC KERSUS BRITISH AIR"AS PLC)Co$#i$'e.*

9&: =ritish Air;ays commented on the follo;ing list of items in itsGote & on accounting "olicies 9S:F

=asis of 4re"aration

=asis of consolidation

0e#enue

0e#enue recognitionF customer loyalty

"rogrammes

egmental re"orting

Intangi!le fi6ed assets

4ro"erty, "lant, and e2ui"mentGoncurrent assets held for sale

In#entories

Interests in associates

Cash and cash e2ui#alents

?ther current interest !earing de"osits

Trade and other recei#a!les

A#aila!leforsale financial assets

Em"loyee !enefits

hare!ased "ayment

Ta6ation

4ro#isions

'oreign currency translation

eri#ati#es and financial instruments

Cash flo; hedges

Im"airment of financial assets

In#estment in o;n shares

erecognition of financial assets andlia!ilities

E6ce"tional items

Key accounting estimates and

8udgements

Im"act of ne; International 'inancial

0e"orting tandards

Ge; standards, amendments and

inter"retations not yet effecti#e

9S: hares of =ritish Air;ays trade on !oth the Bondon tock E6change9BE: and the Ge; York tock E6change 9GYE:. The information in thissam"le solution is contained in the &/11 annual re"ort on the com"any3s;e!site.

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9!: There are se#eral of the items discussed in their notes onaccounting "olicies that are similar. =oth com"anies are in the airlineindustry. Their "olicies that are similar and that relate to this industryinclude re#enue recognition for loyalty "rogram, foreign currencytranslation, and "ro"erty and e2ui"ment. ome "olicies ;ould !ecommon to all !usinesses such as cash and cash e2ui#alents, shortterm in#estments, share !ased "ayments, financial assets, financialinstruments and hedging and ta6ation. ?ther "olicies relate more tothe si<e of the !usinesses, such as "rinci"les of consolidation.

Gota!le differences in the accounting "olicies deal ;ith restrictedcash, aircraft lease "ayments in e6cess of or less than rent e6"ense,in Air Canada3s notes. =ritish Air;ays3 notes deal ;ith interests inassociates.

9c: @nder Gote (, ummary of Accounting 4olicies, Air Canada statesthat it o"erates as only one re"orta!le segment !ased on ho;financial information is "roduded internally for the "ur"oses of making o"erating decisions. In Gote &1, Air Canada Inc. "ro#idesinformation on "assenger re#enues and cargo re#enues. In addition,geogra"hic segment re#enues are "ro#ided for Canada, @trans!order, Atlantic, 4acific and ?ther.

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)c* )Co$#i$'e.*

=ritish Air;ays, in Gote (, also states that its cargo and "assenger o"erations are managed as single !usiness unit as managementmakes resource allocations !ased on route economics and ;ith littlereference to cargo o"erations. It also states that although theo"erations of ?"enkies and City'lyer are considered se"arateo"erating segments, they are similar enough to !e grou"ed in ;ith"assenger and cargo o"erations. As a result, the com"any only hasone re"orta!le segment for its airline !usiness. ?ther segmentsinclude Air Miles Tra#el 4romotions Bimited, =ritish Air;ays Holidays

Bimited, "eed!ird Insurance Com"any Bimited. Information"ro#ided !y segments includeF sales to e6ternal customers- intersegment sales- segment results- other nono"erating e6"enses-"rofit !efore finance and ta6es- net finance costs- loss on sale of assets- share or associate "rofits- re#aluation of con#erti!le !ondderi#ati#e lia!ility- ta6es- "rofit after ta6- assets- in#estment inassociates- segment lia!ilities- unallocated lia!ilities- "ro"erty, "lantand e2ui"ment additions- intangi!le asset additions, "urchase of su!sidiary- de"reciation, amorti<ation- noncurrent assets held for saletransfers in and im"airment- im"airment of a#aila!leforsalein#estments- e6ce"tional items including restructuring, and netim"airment re#ersal.

=ritish Air;ays also "ro#ides geogra"hic segment re#enueinformation forF @K and Continental Euro"e- The Americas- Africa,Middle East and India su!continents- 'ar East and Australasia.

ince !oth com"anies really only ha#e one significant re"orta!lesegment, the information has limited use. The note disclosure for =ritish Air;ays a""ears to !e more useful since disclosure is made

as to ;hy the com"any !elie#es it has only one re"orta!le unit for itsairline o"erations. In addition, !ecause it does ha#e more than onere"orta!le segment, a lot of indi#idual segment information is"ro#ided ;hich ;ould !e difficult to find in the other notes.

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9d: Air Canada3s inde"endent auditors are 4rice;aterhouseCoo"ersBB4, ;hich conducted the audit in accordance ;ith Canadiangenerally acce"ted auditing standards. Air Canada3s auditors did notreference certain regulations !ut did make note of management andauditor3s res"onsi!ility.

=ritish Air;ays3 inde"endent auditors are Ernst Young BB4, ;hichconducted the audit in accordance ;ith International 'inancial0e"orting tandards. It "ro#ided the details of res"onsi!ilities of management 9directors: and auditors and made more references tothe regulations 9I'0 re2uirements: related to the com"any.

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RA 23,2 T0o!so$ Re'#ers Corpor/#io$

9a: As descri!ed in Gote &, the com"any had the follo;ing related "artytransactionsF

•The com"any is o;ned $$R !y Wood!ridge.- uring the year, Wood!ridge and some of its affiliates "urchased

some of the com"any3s ;holly o;ned su!sidiaries for a""ro6imately ) million. A gain of ) million ;as recorded ;ithin?ther o"erating gains 9losses:.

- uring the year, the com"any "aid administration ser#ice fees of *,/// to Wood!ridge. There is no indication ;hether thesereflected fair #alue for the ser#ices or not or if there any outstanding!alances still o;ing at the year end.

-Thomson 0euters !uys insurance co#erage for ;hich Wood!ridgeis also co#ered. uring the year, Wood!ridge "aid $+,/// toThomson 0euters ;hich ;ould a""ro6imate ;hat a third "artyinsurer ;ould charge for similar co#erage.

- The com"any has negligi!le amounts in recei#a!les fromWood!ridge. Again, the amount is not "ro#ided as the com"anyindicates that it is not significant at the re"ort date.

- @ntil A"ril &//+, the com"any "aid Wood!ridge an annual fee of %$/,/// to indemnify u" to 1// million in lia!ilities for directors

and officers. This amount ;as less than normal market "rices;ould ha#e !een 9although ;e are not told !y ho; much:. In &//+,this ;as re"laced ;ith con#entional insurance co#erage. Theco#erage ;ith Wood!ridge is in "lace for any claims arising !efore

A"ril &/1), ;hich relate to e#ents occurring "rior to A"ril &//+.

•The com"any also had the follo;ing transactions ;ith affiliates and 8oint #enturers ;hich occurred as "art of normal !usiness and at arm3slengthF- The com"any and The e"ository Trust and Clearing Cor"oration

each ha#e a $/R o;nershi" in ?mega. uring the year, ?mega"aid fees for facility, technology and other ser#ices totalling 1/million and the outstanding recei#a!le is 1 million. There is noinformation as to ;hether or not this re"resents fair market #alueand ;hether terms of "ayments are normal !usiness terms.

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RA 23,2 T0o!so$ Re'#ers Corpor/#io$ )Co$#i$'e.*

- The Com"any and hin Gi""on Hoki hu""an K.K. each o;n $/Rof Westla; Oa"an K.K., a 8oint #enture. uring the year, thecom"any "ro#ided technology and other ser#ices #alued at 1million. The recei#a!le at the yearend ;as negligi!le. There is noinformation as to ;hether or not this re"resents fair market #alueand ;hether terms of "ayments are normal !usiness terms.

- The com"any o;ns (U Associates from ;hich it leases offices"ace. The com"any3s in#estment in (U Associates is re"ortedusing the e2uity method, although the "ercentage of o;nershi" isnot disclosed in this note. The lease is for */,/// s2uare feet ande6"ires in &/&1, and includes "ro#isions for "ortions to terminate

early and #arious rene;al o"tions. The com"any incurred (%million for rental costs, ta6es and other related e6"enses to thislease agreement. The amount "aya!le at the yearend ;asnegligi!le. The com"any did not disclose if the lease ;as at fair market rates or not.

•The com"any also "urchased u"erBa;yers, a com"any controlled !yone of the directors for 1$ million. The director3s father is CE? of thiscom"any and has agreed to stay on until later in &/1/. The director,

Lance ?""erman a!stained from #oting on the transaction ;hich ;asre#ie;ed and a""ro#ed !y the =oard. There is no indication if thisre"resents fair #alue for the ac2uisition.

•In ?cto!er &/1/, the Com"any ac2uired erengeti, a "ro#ider of electronic !illing and matter management systems for cor"orate legalde"artments. As a result of a "rior in#estment in a #enture lendingfirm, 4eter Thomson, one of the Com"any3s directors, may ha#e theright to the ac2uisition of erengeit and refrained from deli!erating and#oting on the ac2uisition.

•'inally the last disclosure for related "arties relates to the keymanagement com"ensation. uring &/11 and &/1/, the com"any "aidthe follo;ing total amounts to its directors and e6ecuti#e officersF


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RA 23,2 T0o!so$ Re'#ers Corpor/#io$ )Co$#i$'e.*

@ millions &/11 &/1/alaries and !enefits &% &(hare!ased "ayments &$ &+Total $& $1

9!: In general the information ;as useful and mostly ade2uate. In allcases, the nature of the relationshi" ;as "ro#ided, along ;ithdisclosure of the s"ecific related "arty. The amount of thetransactions and the reasons for the transactions ;ere also"ro#ided. E#en though this is not re2uired !y I'0, users ;ould

a""reciate kno;ing the amounts reflect fair #alues. In some areasthe com"any did not disclose if the transactions ;ere at fair #alueand consistent ;ith market conditions. In addition, the com"any didnot disclose if "ayment terms and conditions ;ere consistent ;ithnormal !usiness "ractices. 'inally, for some of the transactions, if the amounts ;ere insignificant, the amounts ;ere not disclosed.'rom a user "ers"ecti#e, e#en these minorD details ;ould ha#e!een hel"ful since !y their nature related "arty transactions may notoccur under normal market and !usiness conditions.

9c: Gote (/ "ro#ides details of the su!se2uent e#ents, ;hich aresummari<ed !elo;F

• In Oanuary &/1&, the sale of the Trade and 0isk Management!usiness ;as com"leted. The Com"any e6"ects to record a gainon this transaction in the first 2uarter of &/1&.

• In 'e!ruary &/1&, the Com"any reached agreement to sell it 4ortia!usiness. The Com"any e6"ects to record a gain on thistransaction, ;hich is e6"ected to close in the second 2uarter of &/1&.

• In 'e!ruary &/1&, the Com"any3s !oard of directors a""ro#ed a/./) share increase in the annuali<ed di#idend to 1.&+ "er common share. A 2uarterly di#idend of /.(& ;as "aid on March1$, &/1& to shareholders of record as of 'e!ruary &&, &/1&.

• As disclosed under Gote 1, under general !usiness descri"tion, thedirectors a""ro#ed the statements on March %, &/1&.

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RA23,3 NESTL GROUP

9a: The statement of com"rehensi#e income has !een "resented for thesi6 month "eriods ended Oune (/, &/1& and Oune (/, &/11. The

statement of financial "osition has !een "resented as at Oune (/,&/1&, ecem!er (1, &/11 and Oune (/, &/11. The statement of changes in e2uity has !een "resented sho;ing the changes duringthe "eriods Oanuary 1 to Oune (/, &/1& and Oanuary 1 to Oune (/,&/11. The statement of cash flo;s has !een "resented for the "eriodOanuary 1 to Oune (/, &/1& and Oanuary 1 to Oune (/, &/11.

9!: Gote 1 on accounting "olicies, !asis of "re"aration, indicates that thecom"any has follo;ed IA () in "re"aring the interim financialstatements. The com"any has used the same accounting "olicies and

con#entions as it did for its &/11 fiscal yearend re"ort, e6ce"t for theadditional disclosures "ro#ided. These changes in the accounting"olicies are the follo;ingF

• I'0 > 'inancial InstrumentsF The standard addresses theclassification, measurement and derecognition of financialassets and financial lia!ilities.

• I'0 1/ > Consolidated 'inancial tatementsF This standardintroduces a ne; single control model as the !asis for consolidation a""lica!le to all in#estors-

• I'0 11 > Ooint ArrangementsF This standard esta!lishes"rinci"les from the financial re"orting !y "arties !y a 8ointagreement. I'0 1& > isclosure of Interests in ?ther EntitiesFThis standard com!ines, enhances and re"laces disclosurere2uirements for su!sidiaries, 8oint arrangements, associatesand unconsolidated structured entities-

• I'0 1( > 'air Lalue MeasurementF This standard a""lies ;henother I'0 re2uire or "ermit fair #alue measurements. IA 10e#ised &/11 > Em"loyee =enefitsF These changes ;ill affect"rofit for the "eriod and the earnings "er share !y increasing

em"loyee !enefit costs of the 5rou".• Im"ro#ements and other amendments to I'0 ha#e no material

im"act on the financial re"orts of the com"any-IA 1 > 4resentation of 'inancial tatements > 0e2uires entitiesto se"arate items "resented in other com"rehensi#e income into


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t;o grou"s, !ased on ;hether or not they may !e recycled tothe income statement in the future.


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RA23,3 NESTL GROUP )Co$#i$'e.*

9c: The other notes include information on the follo;ingF

• Gote & Modification in the sco"e of consolidations indicates thatthere ;ere no ac2uisitions or dis"osals during the "eriod.

• Gote ( > 4ro#ides segmented information for the "eriods Oanuary 1to Oune (/, &/1& and com"arati#e information for the "eriodOanuary 1, to Oune (/, &/11.

• Gote ) > discusses seasonality and indicates that the results for thegrou" do not sho; seasonal #ariations or cyclical "atterns.

• Gote $ > 4ro#ides a detailed !reakdo;n of Get other income

9e6"enses:D ;hich "ro#ides further information on "rofit and losseson sales of assets and di#isions, restructuring costs and im"airmentlosses re"orted during the interim "eriod.

• Gote * > 4ro#ides information on the share of associates3 "rofitsand indicates that this relates to the grou"3s o;nershi" of B3?real.

• Gote % on cash flo; !efore changes in o"erating assets andlia!ilities. ho;s the o"erating "rofits and changes in noncashitems included in "rofit for the year, and ;hich are "art of thereconciliation of net income to o"erating cash flo; in the statement

of cash flo;s. Gote + > on e2uity "ro#ides disclosure on sharere"urchases and issuances during the interim "eriod and the totalnum!er of shares outstanding as of Oune (/, &/1&. In addition, thenote "ro#ides information on di#idends "aid and declared duringthe interim "eriod.

• Gote > 4ro#ides the details of s"ecific !onds issued and re"aidduring the year.

• Gote 1/ > u!se2uent e#ents that ;arrant a modification of the#alue of the assets and lia!ilities or an additional disclosure.

9d: Go, this information is not audited.


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RA23,= ADOPTION OF IFRS IN THE UNITED STATES

9a: The article states that in Go#em!er, &//+, the EC "u!lished aroadma" regarding ado"tion of I'0 in the @nited tates. At thetime feed!ack comments ;ere re2uested, !ut the EC only recei#eda!out &// comment letters in total, ;hich seems insignificant gi#enthe num!er of organi<ations that ;ould !e im"acted ;ith this mo#e.ince that time, there has !een #irtual silence on this issue. Thearticle suggests that this lack of "rogress has cost com"anies in the;ay of o"erational efficiencies and credi!ility in crunching thenum!ers. ?ne e6am"le ;as "ro#ided of a com"any that had hiredI'0 e6"ertise to use )/R of their time to look at strategies toim"lementing the I'0 standards. This I'0 transition ;as no; on

hold until notice from the EC. A second com"any that ;ill go "u!licin the near future and ;ants to use I'0 in its re"orts, has hired thee6"ertise re2uired and is no; ;aiting for a""ro#al from the EC togo for;ard.

9!: ome argue that the @ ;ill ne#er ado"t I'0 for the follo;ingreasonsF

• There is no com"elling reason for "u!lic com"anies or "ri#atecom"anies to ado"t I'0 9as stated !y =ruce 4ounder, "resident to

an accounting education firm:.• A "rofessor 9and a former academic fello; in the EC3s office:

conducted an informal sur#ey and found that most res"ondents feltthat I'0 ;as not "ercei#ed to !e !etter than @ 5AA4 and thatefforts to try to make I'0 and @ 5AA4 consistent ;as not;orth;hile.

• A 5rant Thornton study found that only &(R of 9+//: res"ondentsfelt that the IA= should !e setting accounting standards for the@nited tates.

• A "artner in a @ C4A firm stated that stakeholders are not askingfor I'0 so there is no sense of urgency. In addition, there seem to!e other more im"ortant things going on > there is 8ust little intereston con#ersion to I'0 right no;.

• Microsoft has studied the con#ersion to I'0 for a ;hile and hasconcluded that sa#ings ;ill not likely !e achie#ed.


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RA23,9 ADOPTION OF IFRS IN UNITED STATES )Co$#i$'e.*

• C'?3s in the "ast &) months ha#e had larger issues to deal ;ith

including the im"act of the recession and the financial crisis, themandate to mo#e =0B, along ;ith uncertain "u!lic "olicies relatedto health care, em"loyee !enefits, and ta6ation.

• In a sur#ey of 'inancial E6ecuti#es International, I'0 has mo#edfrom the Go & challenge facing these res"ondents to Go.$.

• ome !elie#e that trial la;yers ;ill ha#e more to argue under I'0since I'0 is a "rinci"les!ased system and allo;s more choicesthan under the rules !ased @ 5AA4. Historically, @ 5AA4 ;asonce a "rinci"les!ased a""roach and mo#ed to rules!ased"rimarily due to litigation and "ercei#ed lo;er lia!ility risk.

• In the rush to con#erge I'0 and 'A=, many suggest thatcom"romises ;ill !e made, ;hich might !e detrimental tocom"anies in the long run.

• Estimates of costs to con#ert to I'0 #ary !et;een /.1R and /.$Rof re#enues, again making com"anies ;ary of the transition.

?thers argue that the @ should "roceed to I'0 con#ersion and this issu""orted !y the follo;ing commentsF

• Many @ multinationals are already mo#ing to;ards ado"tingI'0.

• A &//+ sur#ey of &// C'?3s of firms ;ith more than 1 !illion inre#enues found that +(R of res"ondents felt that one standard;ould "roduce !usiness !enefits and hel" ;ith com"arisons acrossinternational "eers.

• =y streamlining the !ack office and ha#ing only one accountingstandard across all geogra"hic locations for multinational firms,significant cost sa#ings could !e achie#ed.

• mall and medium si<ed "ri#ate com"anies that are in#ol#ed ininternational o"erations and raise de!t internationally are mo#ing toado"t I'0 for ME3s since it is less com"le6 that @ 5AA4.

• The AIC4A su""orts the mo#e to I'0 and states that I'0 iscredi!le and authoritati#e.


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RA23,9 ADOPTION OF IFRS IN UNITED STATES )Co$#i$'e.*

• In 'e!ruary, &/1/, the EC issued a notice indicating that it still

!elie#es that a single set of high 2uality accounting standards ;ill!enefit @ "re"arers. It is ;orking on a "lan to e#aluate @con#ersion to I'0 and ;ill make a statement in &/11 as to;hether or not it ;ill "roceed ;ith incor"orating I'0 into the @re"orting system.

9c: The ans;er is de"endent on decisions made !y EC ;hich is stillongoing.


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