Bidlow Construction Corporation
|BidLow Construction Corporation |
|Candidate: |Shuang Liang | |
|S4 |
|PM |
|S18 – PQ |The student demonstrates professional …show more content…
skills by providing a useful report. |
|Marker Notes |Consider performance on summative indicators (S4, S5, S6, S7, S8, S11, S12, S15, S17) |
| | |
| |RC/C/HC – No NAs on any summative indicators listed above (NA on S16 OK) |
|Ranking |NC |
|S4 – PMR |The candidate applies technical knowledge to case facts in discussing the financial statement implications of |
| |BidLow’s conversion to IFRS. |
| |NC – 2 NCs on D1 to D3 n |
| | |
| |RC – 2 RCs on D1 to D3 |
| | |
| |C – 1 C and 1 RC on D1 and D2 |
| | |
| |HC – 2 Cs or higher on D1 and D2 |
|Marker Notes |RC/C/HC = must integrate case facts to support analysis |
| | |
| |Other issues (D3) – discusses: |
| |Replacement parts = Capitalize cost under IFRS (supported by future economic benefits flow to entity and cost can|
| |be measured reliably) |
| |Amortization/depreciation = depreciate assets based on useful life under IFRS and must depreciate significant |
| |components separately under IFRS |
|Ranking |NA |
|Comments |You lacked adequate breadth on financial accounting issues in this case as you only talked about construction |
| |revenue and did not consider any IFRS issues related to other case facts. You needed to touch on one more issue |
| |to get to NC. |
| |NC |RC |C |HC |Ranking |
|D1 – Revenue |Identifies the |Completed contract not |RC y and assesses criteria|C and need to apply |RC |
|recognition |revenue recognition |allowed under IFRS y |to determine whether costs|retrospectively (adjust | |
| |issue y | |can be measured reliably n|for contracts started in | |
| | | | |2012 and completed in | |
| | | | |2013) | |
|D2 – Asset |Identifies the asset|Asset impairment based on |Asset impairment based on |C and concludes assets |NA |
|impairment |impairment issue |discounted cash flows under |discounted cash flows |impaired under IFRS and | |
| | |IFRS or determines |under IFRS and determines |not impaired under ASPE | |
| | |recoverable amount (FV less |recoverable amount (FV |(supported) | |
| | |cost to sell vs.
value in |less cost to sell vs. | | |
| | |use) |value in use) | | |
|D3 – Other issues |Identifies the |Discusses 1 of the issues |Discusses both of the |C and compares IFRS |NA |
| |replacement parts or| |issues |treatment to ASPE for both| |
| |the amortization/ | | |issues | |
| |depreciation issue | | | | …show more content…
|
|S5 – F |The student applies technical knowledge to case facts in revising the forecast of BidLow’s 2013 operating income.|
| |NC – Attempts to revise forecasted 2013 operating income y |
| | |
| |RC – Reasonable attempt to revise forecasted 2013 operating income n |
| | |
| |C – Prepares a reasonable revised forecast of 2013 operating income |
| | |
| |HC – Prepares a complete revised forecast of 2013 operating income |
|Marker Notes |Operating income – 2013: |
| |Attempts = incorporates at least 1 attempt at an IFRS adjustment y |
| |Reasonable attempt = incorporates 1 correct IFRS adjustment n
|
| |Reasonable = incorporates 2 correct IFRS adjustments |
| |Complete = incorporates 3 correct IFRS adjustments |
| | |
| |IFRS adjustments (must be supported by case facts): |
| |Construction revenue related to contracts started in 2013 ($10,150K) n |
| |Construction revenue related to contracts started in 2012 ($19,683K) n |
| |Direct cost of operations relating to contracts started in 2013 ($6,293K) n |
| |Direct cost of operations relating to contracts started in 2012 contracts ($11,810K) n |
| |Loss on asset impairment ($40K) n |
|Ranking |NC |
|Comments |Your assumption that nothing would change in 2012 affected the reasonability of your construction revenue and |
| |related direct costs. Go over the solution to make sure you understand what you should have considered in your |
| |revision of the company’s income. |
|S6 – F |The student applies technical knowledge to case facts in forecasting BidLow’s operating income for 2014. |
| |NC – Attempts to forecast 2014 operating income y |
| | |
| |RC – Reasonable attempt to forecast 2014 operating income y |
| | |
| |C – Prepares a reasonable forecast of 2014 operating income n |
| | |
| |HC – Prepares a complete forecast of 2014 operating income |
|Marker Notes |Operating income – 2014: |
| |Attempts = incorporates at least 1 attempt at an adjustment y |
| |Reasonable attempt = incorporates 1 correct adjustment y |
| |Reasonable = incorporates 2 correct adjustments n |
| |Complete = incorporates 3 correct adjustments |
| | |
| |Adjustments (must be supported by case facts): |
| |Construction revenue related to contracts started in 2013 ($10,150K) n |
| |Construction revenue for additional volume ($16,200K) n |
| |Direct cost of operations (38% margin) n |
| |Increase in salaries/wages (2% contract increase) y |
| |Depreciation (must include blade) id |
| |Interest id |
| |Note: G&A not a valid adjustment because given in question |
|Ranking |RC |
|Comments |You made several adjustments to 2014 forecast but only one (the 2% increase in salaries) was correct. Make sure |
| |you compare your calculations to the solution to understand where you went wrong in your financial analysis. |
|S7 – PM |The student applies technical knowledge to case facts in assessing the impact of the IFRS conversion on BidLow’s |
| |debt covenant and the impact of the share purchase agreement. |
| |NC – Attempts to calculate the debt service coverage ratio y OR attempts to qualitatively assess whether the debt|
| |covenant is met/violated y OR attempts to discuss impact of share purchase agreement y |
| | |
| |RC – Reasonable attempt to assess the impact of the conversion of IFRS on the debt covenant n OR discusses impact|
| |of share purchase agreement n |
| | |
| |C – Assesses the impact of the IFRS conversion on the debt covenant AND concludes whether the covenant is |
| |met/violated for each year AND discusses impact of share purchase agreement |
| | |
| |HC – C AND considers how to mitigate the impact of the IFRS conversion |
|Marker Notes |Debt covenant |
| |Reasonable attempt = recalculates debt service coverage ratio (correct formula) based on revised operating income|
| |for 2013 |
| |Assesses = recalculates debt service coverage ratio (correct formula) based on revised operating income for 2013 |
| |and 2014 |
| | |
| |Impact of share purchase agreement = below $2.5M average operating income target if adopt IFRS in 2013 and 2014 |
| |(explicit) incorrect conclusions + another 168 shares to GI y + GI will control BidLow y |
| | |
| |How to mitigate impact = only adopt IFRS in 2014 or renegotiate agreement or other valid |
|Ranking |NC |
|Comments |You did not provide any support (footnotes) for your calculation of covenants and failed to understand that the |
| |risk the existing shareholders face is losing control of the company if IFRS is adopted in 2013. You thought the|
| |problem would be adopting the new standards in 2014. Go over the solution to make sure you understand where you |
| |went wrong. |
|S8 – GSRM |The student applies technical knowledge to case facts in discussing the corporate governance weaknesses relating |
| |to BidLow. |
| |NC – Identifies corporate governance weakness y OR attempts to make a recommendation to fix a corporate |
| |governance weakness n |
| | |
| |RC – Discusses 2 corporate governance weaknesses OR recommends how to fix 2 weaknesses |
| | |
| |C – Discusses 3 corporate governance weaknesses AND recommends how to fix the weaknesses (for the 3 discussed) |
| | |
| |HC – Discusses 4 corporate governance weaknesses AND recommends how to fix the weaknesses (for the 4 discussed) |
| |AND Low brothers may lose control of Board so need to fix weaknesses immediately (must be explicit) |
|Marker Notes |Discusses = identifies corporate governance weakness supported by case facts and explains implication (i.e., |
| |impact on BidLow, why it’s a weakness) |
| | |
| |Recommends = recommendation must be definitive and must fix corporate governance weakness (must make sense based |
| |on BidLow’s operations) |
|Ranking |NC |
|Comments |You understood that GI would have the ability to appoint a new board member and also find a replacement member |
| |when an existing member left but did not expand on those case facts. To score well on this sort of required, you|
| |should consider the WIR ~ weakness, implication, recommendation ~ of each issue you mention. |
|WEAKNESS |IDENTIFIES |DISCUSSES |RECOMMENDATION |
|Board – replacement member |y | | |
|Board – new member |y | | |
|Strategic planning | | | |
|Budgeting | | | |
|Meetings – attendance | | | |
|Meetings – frequency | | | |
|Other valid | | | |
|S11 – MDM |The student applies technical knowledge to case facts in evaluating the potential new accounting systems. |
| |NC – 1 NC on D9 or D10 y OR discusses why BidLow needs a new system weak |
| | |
| |RC – 2 RCs on D9 and D10 n OR 1 C and 1 NC on D9 and D10 n |
| | |
| |C – Discusses why BidLow needs a new system AND 2 Cs on D9 and D10 AND a supported recommendation |
| | |
| |HC – Discusses why BidLow needs a new system AND 2 HCs on D9 and D10 AND a supported recommendation |
|Marker Notes |Quantitative analysis (D9) |
| |Reasonable calculation of NPV of option 1 = software cost + PV of annual maintenance wrong discount factor used |
| |Reasonable calculation of NPV of option 2 = PV of annual payments wrong discount factor used |
| | |
| |Qualitative analysis (D10) |
| |Discusses = case facts + why it’s an advantage or disadvantage |
| |Option 1 (deluxe) |
| |Advantages – data conversion, staff, multiple G/Ls |
| |Disadvantages – lack of integration with job costing, availability of Ian |
| |Option 2 (ERP) |
| |Advantages – end-to-end system (no interface required), additional modules |
| |Disadvantages – supplier, data conversion |
| | |
| |Supported recommendation = must be definitive (option 1 or option 2) + must be consistent with analysis |
|Ranking |NC |
|Comments |You attempted calculation of the present value of both choices but you used the wrong discount factor in your |
| |exhibit. When you talked about non-financial issues, you focused on cost and made general comments. You did not|
| |refer to case facts (see list in the grid above) when talking about the pros and cons of either alternative. |
| |NC |RC |C |HC |RANKING |
|D9 – Quantitative |Attempts to calculate |Reasonable calculation|Reasonable calculation |C AND considers either |NC |
|analysis |NPV for option 1 or |NPV for option 1 or |of NPV for option 1 and |time frame or tax | |
| |option 2 y |option 2 n |option 2 |implications | |
|D10 – Qualitative |Discusses 1 advantage |Discusses 1 advantage |Discusses 1 advantage |C AND considers other |NA |
|analysis |or disadvantage for |or disadvantage for |and disadvantage for |factors (additional | |
| |either Option 1 or |each Option 1 and |each Option 1 and Option|stress on staff or | |
| |Option 2 n |Option 2 |2 |ability to perform | |
| | | | |variance analysis) | |
|S12 – T |The student applies technical knowledge to case facts in discussing the tax implications associated with the |
| |share purchase agreement. |
| |NC – Recognizes 1 of the tax implications associated with the share purchase agreement y |
| | |
| |RC – Recognizes 2 OR discusses 1 of the tax implications associated with the share purchase agreement n |
| | |
| |C – Discusses 2 of the tax implications associated with the share purchase agreement |
| | |
| |HC – Discusses 3 of the tax implications associated with the share purchase agreement |
|Marker Notes |Discusses = technically correct analysis + supported by case facts |
|Ranking |NC |
|Comments |Your analysis of the tax issues focused on the details of acquisition of control and did not consider the overall|
| |impact ~ company would no longer be a CCPC and would lose the ability to use small business deduction, capital |
| |dividend account, RDTOH and eligible dividends. Use the solution to improve your understanding of these |
| |technical issues. |
| |RECOGNIZES |DISCUSSES |
|Acquisition of Control |y |GI will control BidLow y + BidLow will lose CCPC status n |
|Small Business Deduction | |Not eligible for SBD if lose CCPC status |
|Capital Dividend Account | |Can’t pay out dividends tax-free if lose CCPC status + pay out CDA |
| | |balance before lose CCPC status |
|RDTOH | |Not available if lose CCPC status + pay out dividend to clear out |
| | |balance before lose CCPC status |
|Eligible Dividends | |Ineligible dividends until LRIP depleted or eligible dividends after |
| | |LRIP depleted or considers dividend gross up/tax credit |
|S15 – A |The student applies technical knowledge to case facts in discussing the audit implications of the IFRS |
| |implementation. |
| |NC – 1 NC on D13 or D14 y |
| | |
| |RC – 2 RCs n OR 1 C and 1 NC on D13 and D14 n |
| | |
| |C – 2 Cs on D13 and D14 |
| | |
| |HC – 2 HCs on D13 and D14 |
|Marker Notes |Audit planning issues (D13) – discusses: |
| |Independence = potential self-review threat + 1 way auditors could be involved in conversion |
| |Risks of material misstatements = increase risk y + 2 valid risk factors (how/why impacts risk) n |
| |Approach = increased substantive testing y + additional time required y |
| |Materiality = lower materiality (debt covenant or share purchase agreement) weak + either additional work on |
| |opening balances or performance materiality n |
| | |
| |Procedures (D14): |
| |Valid = designed to address the specific accounting differences between ASPE and IFRS |
| |Key risk areas = revenue, impairment loss, depreciation, other valid |
|Ranking |NC |
|Comments |Good discussion of the audit approach that would be taken. You touched on risk and materiality but had limited |
| |depth in your discussion of those two aspects of audit planning. To move up to C, you needed to cover one more |
| |audit planning issue at the ‘discuss’ level. |
| |NC |RC |C |HC |RANKING |
|D13 – Planning issues |Identifies 1 of the |Discusses 1 of the audit|Discusses 2 of the |Discusses 3 of the audit |RC |
| |audit planning issues y|planning issues y |audit planning issues n|planning issues | |
|D14 – Procedures |Attempts to give an |1 valid audit procedure |2 valid audit |3 valid audit procedures |NC |
| |audit procedure y |n |procedures in 2 |in 3 different risk areas| |
| | | |different risk areas | | |
|S16 – MDM |The student applies technical knowledge to case facts in preparing a variance analysis. |
| |NC – Attempts to calculate 1 of the variances related to either sales or labour |
| | |
| |RC – Calculates 1 of the variances related to either sales or labour |
| | |
| |C – Calculates 1 of the variances related to both sales and labour AND interprets the results |
| | |
| |HC – Calculates both of the variances related to both sales and labour y AND interprets the results y |
|Marker Notes |Variances: |
| |Sales – price variance y, volume variance y |
| |Labour – rate variance y, efficiency variance y |
| | |
| |Interprets results – impact of the variance or what caused it (i.e., more than just stating what the variance is)|
| |excellent work on this discussion |
|Ranking |HC |
|Comments |Excellent work on both the financial and non-financial aspects of this required. Well done! |
|S17 – PQ |The student demonstrates professional skills by providing recommendations about preparing for the implementation |
| |of IFRS. |
| |NC – Identifies 1 of the issues relating to BidLow’s implementation of IFRS y |
| | |
| |RC – Discusses 2 of the issues relating to BidLow’s implementation of IFRS n |
| | |
| |C – Discusses 3 of the issues relating to BidLow’s implementation of IFRS |
| | |
| |HC – Discusses 4 of the issues relating to BidLow’s implementation of IFRS |
|Marker Notes |Implementation issues |
| |Discusses – identifies issue using case facts + explains impact of issue on IFRS implementation |
| |Issues – need to understand ASPE/IFRS differences, project manager id, training, existing staff, new system |
| |needed, need to communicate to Board, need to contact bank, other valid |
|Ranking |NC |
|Comments |While you did identify the need for someone to handle the transition from ASPE to IFRS, you thought a new board |
| |member with financial expertise was all that was needed. Review the list of issues you could have talked about |
| |in the grid above. |
To: Mr. Kevin Hale, CFO of Bidlow Ltd. Nicely set up
From: CA, business advisor
Subject: Discussion and suggestions about issues you raised on our Sep 13, 2013 meeting
Accounting implications on conversion into IFRS reporting framework
• D1 Revenue recognition
I noticed that Bidlow is using completed contract method for revenue recognition, which is a valid accounting choice under ASPE, whereas is not allowed under IFRS. Under IFRS, you have to use a percentage of completeness method to record revenue and corresponding construction expenses, which means a lot of accounting estimate will be used in reporting. Since you have been deferring the revenue generated from project under construction until the terms and conditions of contract are met, (recorded as unearned revenue so far), it means after the conversion, liability will be decreased and revenue will be increased. This will enhance your income stream (profitability) and better your working capital, however the accosting costs could increase as well. S5/S6 You need to use case facts you were given to determine the impact on revenue in each year.
As the adoption of IFRS do not require retrospective adjustment, I assume the contracts started in 2012 and completed in 2013 will be fully recognized in 2013 and the contracts started in 2013 and completed in 2014 will be partly recognized in 2013 based on the percentage finished. See exhibit 1 for adjustment-1 Your revenue for both 2013 and 2014 is materially overstated
• D1 Construction costs
Correspondingly, on the transfer from complete contract method to percentage of completeness method, cost recognition would be changed from fully capitalization until the construction is complete to expense the construction costs as it occurs. The combine effect of revenue and construction cost recognized based on the percentage of completeness of the construction contract will result in the income increased by the net income occurred from construction on hand. You need to consider theory… use Handbook criteria and case facts to determine whether costs can be measured reliably. Similarly, as the adoption of IFRS do not require retrospective adjustment, I assume costs of the contracts started in 2012 and completed in 2013 will be fully recognized in 2013 and the contracts started in 2013 and completed in 2014 will be partly recognized in 2013 based on the actual spending. No impairment is considered as no costs expected will exceed the contract price so far. See exhibit 1 for adjustment-2
What about other accounting adjustments related to the adoption of IFRS?
• S8 New investment from GI
By reading though the share purchase agreement, I noticed that GI is requesting one third of the voting common shares from the outstanding common share holders. These shares allow them to appoint one member to the board and have rights to nominate member to replace vacant board members. This implies even if they are not the majority shareholder, they do have rights to participate in company policy making and operating, financing and other important strategy design. Accounting to IFRS, a significant influence is established, which means GI you are advising the CFO of Bidlow… how GI accounts for the investment is not relevant to the case may want to use equity method to account for income earned from Bidllow since GI is following IFRS. This would not have direct implication on Bidlow's operating income, as the share investment could mainly affect balance sheet due to its financing transaction nature. You missed the impact of GI being able to appoint board members. Will GI be able to control the board of directors?
S16 Analysis of your variance and budget
Excellent analysis of these variances • labour variance
I have calculate the year to end labour cost variance as shows in Exhibit 2 and have analysis and suggestion as below:
The labour rate variance shows a unfavourable variance of 140k, which means your real rate is higher than the standards rate you set and cause $140k dollar value of labour cost higher than your expectation. Considering the 2% future increase potential as undertaking Union contruction in 2014, I do not think this variance is caused by you have overpaid the employees too high. This variance would be more likeyly caused by the outdated salary rate standards. As you controller has left, I assume you stop updating the standards to reality and cause this variance. I suggest you raise the standard payroll rate and do the analysis in the future in case of confusion.
The labour efficiency variance shows a a unfavourable variance of 170k, which means your real labour volume spent on each project is higher than the your expectation and cause $170k dollar value of labour cost higher than your projected. Although this may also caused by the outdated budget, I believe this is more likely due to the increased complexity of the new construction projects you are taking. Try to write in shorter paragraphs so it is easier to read (and mark) your report. Please go further to find out whether your employees are lacking of skills to perform as efficiently as you planned or the they are simply not performed at their best in work. Based on the reasonable you find out, you can further implement some new rule such as hiring more skilled employees and better trained your employees to adapt to the more complicated construction work you are undertaking, or redesign the employee compensation system to enhance the morale and work efficiency.
• Sales variance
The sales price variance shows a unfavourable variance of 7787k, which means your underestimate your sales price, and cause a decrease of $7787k in total sales.
However, at the same time, the sales volume variance shows a favourable variance of 2662k, which means you sales volume is higher than budgeted and cause a 2662k higher income.
Combine the effect from above variance, I assume you have adopted a low price sales policy to attract more customers and thus increase your overall income. This may because you want to meet the $2500k income covenants from your share sales agreement. However, this strategy is not working as the combined variance is unfavourable than you have expected. Thus, I suggest you discontinue this strategy and reset your sales price to enhance your revenue.
• S5/S6 Budget for 2013 and 2014
The budget I made is adjusted based on the information you have provided (exhibit 3), which shows a income level higher than your forecasted income statement. However, in order to meet the share sale agreement covenant, a higher income level is required ($2500). As is shown in my calculation, whether to adopt IFRS in 2013 or 2014 makes a huge difference. Please see the analysis below:
S7 Timing of adoption of IFRS
As you are concerning about the time of adoption of IFRS, here is my analysis:
Please refer to my calculation in exhibit 3.
The adoption of IFRS increase your operating income by recognizing the net income generated from construction contract on hand before the construction is completed (based on the percentage you have completed). Since currently, all the construction you are taking have projected revenue higher than projected cost, the transition into IFRS will have positive effect on your operating income. Incorrect conclusion. The choice of year to introduce the new accounting standards is critical
According to my calculation, either way, meeting the current line of credit and bank loan covenant (2.5:1 debt service coverage) seem not to be a problem. However, there is a huge difference in meeting the share sales agreement covenant.
According my calculation, adopting IFRS in 2013 will let you meet the covenant incorrect conclusion, whereas adopting in 2014 incorrect conclusion will not let you meet the $2500 operating income covenant in 2013. And considering the inappropriate sales policy I mentioned before, it is likely that if you change your sales policy, the 2014 operating income will be further enhanced as meet the covenant, as there is huge revenue increase potential there.
You understood the implications of not meeting the target but your related financial analysis is incorrect. On the other hand, if you adopt IFRS in 2014, it is sure that there is a difficulty meeting the covenant in 2013. This would cause you to issue another 168 voting shares to GI. Combined 501 (333+168) common shares would means that 56.8% (568/1000) of ownership in Bidlow. Thus, GI would become the majority shareholder, and have enough power from the board to control Bidlow's overall strategy and operation. According to IFRS, based on these implications, a control is likely exist. A series of implication could be caused based on this fact:
• This is not relevant. You are advising the CFO of Bidlow. You are not advising GI. GI would consolidate Bidlow's financial statement line by line as it becomes GI's subsidiary. Extra accouting costs could be generated as GI will request a component annual audit from Bidlow, which would be more complicated and time consuming than the current engagement as the situation and information user is changed, thus risk and materiality need to be reconsidered. (will be further discussed later)
• S8 It is sure that the current shareholder would lose come interest since GI would have the power to influence the dividends policy.
• It is likely that further strategy-changing and maybe structure-changing action would be taken by GI that will drift Bidlow from its original planned developing path. i.e. GI may offer to buy out currently shareholder's share or maybe conduct an merge or amalgamation.
• S12 A series of tax issues would also be implied and negative tax effect could be triggered on current shareholders, as discussed below. You were asked to discuss corporate tax issues; not personal tax issues
S8 As there is a huge potential that GL will take over the business, if Bidlow refuse to adopt IFRS in 2013, I suggest you to consult with the shareholders about their further plan of the business. Since one of the shareholder shows less interest in the existing business (as he is helping his son), maybe sale additional 168 shares is not a bad option to him. Otherwise, you should thinking adopting IFRS in 2013 to ensure Bidlow do no breach the covenant this is incorrect conclusion and remains it operation.
S12 Tax implication of the share sales agreement
As I have discussed before, if additional 168 shares are acquired by GI, the control over Bidlow will be shifted over from the current shareholders to GI. Thus, besides from the normal tax consequences from share disposal, there is other effects that will be caused on the existing sharehodlers.
• Acquisition of control
There will be an acquisition of control as GI is taking over Bidlow. According to ITA, Bidlow will have a deemed year end which result in:
1. Net capital loss will be denied after the acquisition. Neither GI or Bidlow will allow to use this loss if future net capital gain generated from their operation
2. Non capital loss will be restricted. Bidlow or GI would only be allowed to utilize the non capital loss against income generated from same line of business, which will be earthmoving business in this case, given the condition that Bidlow is making or expected to generate profit from its operation
3. If there is any non capital loss carrying by Bidlow, the loss expiration will be accelerate, as there is an estra deem year end on the acquisition of control. This will limit its ability to use this loss against taxable income generated in the future. You are getting lost in the detail. If GI controls Bidlow, the company will lose its status as a CCPC
4. The contruction in progress (likely has value between 6 million to 10 million), which considered as inventory for Bidlow (which is a contruction company), will be deemed sold at fair market value and likely to generate a big business income, which is taxable to Bidlow.
To quantify this income, use contract price as indication of fair market value: contracts started in 2012 and completed in 2013: 25300-11814 = 13486 contracts started in 2013 and completed in 2014: 29000/12*5-6293/9*5=8587 Total business income 22073
This 22 million business income would be taxed promptly to the acquisition. This detail is not what you were expected to discuss. How will things change if GI controls Bidlow?
5. All assets and liabilities will remains at its current tax base, unless GI want to utilize the net capital loss by selecting to realize some capital gain on value appreciated assets, likely to be leasehold improvemenet.
• Futher restructure
1. GI may tend to further amalgamate GI and Bidlow to utilize Bidlow's loss, by offering shares from the amalgamated corporation to exchange Bidlow's other common share. These new share will have the same tax basis as those of Biglow's old share (PUC)
2. GI may want to conduct share exchange under section 85.1, which will automatically gives stop and think about the case facts before you jump in to discussion of this unrelated technical
S11 Accounting software change
I definitely suggest you to change the operation of the accounting system as it is not functioning efficiently right now and is not helpful in facilitating the management accounting anaysis, such as the variance analysis.
You need to talk about the pros and cons of each alternative • Advantage
1. To compensate the currently shortage of the accouting system, more labour is requiring, for example the controller is needed to do extra mannual work, which would be conducted by the system. Considering you are cutting the cost to meet the share sales agreement covernant, it maybe more advantageous to change the accounting system, as it helps you save the payroll expenses, especially the controller's salary
2. Could utilize the proceeds generate from the share sale to invest in the system changing. Although this alternative may require the shareholders to lend the proceeds to Bidlow as a shareholder loan, as the proceeds are paid to the shareholders not Bidlow. This is feasible, as Bidlow could use the future dividends issued to the shareholder to repay the loan
3. This will help you better management your income and cost, thus enhance the future profitability of Bidlow. This is more of the case, as noticed from the variance I calculated, there are problems with sales price setting and cost price and volume management. You are talking in general terms. Use case facts to explain why the company needs a new system (the current one can’t handle percentage of completion which is required under IFRS).
• Disadvantage • Judging from your currrent working caputal situation (which is negative on 2012 F/S), you may not have the capital for this investment. • New capital cost will be spent on the change, which will generate amortization costs and lower the income • Increase the IT risk and need continuous technical support for the new accounting system.
In order to compare which option should we choose for the change, I have consideration as stated in exhibit 4:
Option 1;
Advantage
• PV of the total costs are lower, which is better for Bidlow's financing pressure and income generating goal. Use the case facts to discuss the pros and cons of each option. Your financial analysis is not a qualitative factor.
Disadvantage • However, this option may not be as effective as the second option since the usefulness of the system is not proved.
Option 2:
Advantage
More integrated ERP system use case facts to support your comment that this system is most integrated indicates less IT risk in the future
Disadvantage
Costs are higher, which is not as efficient as the first option
S8 Changing of process for formal business plan • I agree that you should discuss with the shareholder and re-discuss the company structure and design the process for business plan and objectives. A few suggestions about the management issue are listed below:
• You should consider to restructure the board and ensure it functions properly how would the company do that?.
As the board member only cares about the dividends issuance and ignore the operating management, it is clear that the board is now not functioning properly. I suggest you reset the principle that the board should follow to discipline the board member to conduct their responsibility what does that mean?.
• S17 Instead of a controller, I suggest Bidlow set up an audit committee or at least appoint some personnel with expertise in financial management and public accounting into the board to supervise the operation of the business and financial reporting on the transit from ASPE to IFRS • I suggest the board to renegotiate the share sales agreement what terms would be up for renegotiation? as there is some obvious unfair terms that is unfavorable to Bidlow.
S15 Impact on audit engagement • Risk: The audit risk is increased for 2013 year end audit as the financial frame work is changed from ASPE to IFRS.
Implication; You need to make sure the auditor has the competency to conduct the audit of financial statement, which is following IFRS.
• As new user, GI, is added to the information users base, the materiality would be changed (likely based on the operating income as this is part of the covenant). It is likely that thef materiality will decrease, and extra audit work will be conducted due to the change. It is reasonable that the auditor will charge more for the engagement the lower materiality should be tied to the company’s debt covenant or share purchase agreement as the users would demand more precision • As GI could consider equity method or consolidation (if control exist from the acquisition of additional share) to report income from Bidlow, it is possible that auditor of GI (group auditor) would contact your auditor (component auditor) for the working details they have conducted. This is not relevant • If the accounting system change is made, the new control test would be conducted as the auditor need to make sure the new control works. Additionally, risk assessment associated with IT system could be complicated. • Likely, the auditor will conduct a substantive approach on this audit as the change from ASPE to IFRS require different reporting treatment, and lots of specific work could be done on this. • D14 Auditor would likely to include external expert for auditing construction percentage, as this has significant impact on assets (construction in process) and revenue, expenses valuation assertion.
|Candidate: |Shuang Liang | |
|S4 |
|PM |
|S18 – PQ |The student demonstrates professional …show more content…
skills by providing a useful report. |
|Marker Notes |Consider performance on summative indicators (S4, S5, S6, S7, S8, S11, S12, S15, S17) |
| | |
| |RC/C/HC – No NAs on any summative indicators listed above (NA on S16 OK) |
|Ranking |NC |
|S4 – PMR |The candidate applies technical knowledge to case facts in discussing the financial statement implications of |
| |BidLow’s conversion to IFRS. |
| |NC – 2 NCs on D1 to D3 n |
| | |
| |RC – 2 RCs on D1 to D3 |
| | |
| |C – 1 C and 1 RC on D1 and D2 |
| | |
| |HC – 2 Cs or higher on D1 and D2 |
|Marker Notes |RC/C/HC = must integrate case facts to support analysis |
| | |
| |Other issues (D3) – discusses: |
| |Replacement parts = Capitalize cost under IFRS (supported by future economic benefits flow to entity and cost can|
| |be measured reliably) |
| |Amortization/depreciation = depreciate assets based on useful life under IFRS and must depreciate significant |
| |components separately under IFRS |
|Ranking |NA |
|Comments |You lacked adequate breadth on financial accounting issues in this case as you only talked about construction |
| |revenue and did not consider any IFRS issues related to other case facts. You needed to touch on one more issue |
| |to get to NC. |
| |NC |RC |C |HC |Ranking |
|D1 – Revenue |Identifies the |Completed contract not |RC y and assesses criteria|C and need to apply |RC |
|recognition |revenue recognition |allowed under IFRS y |to determine whether costs|retrospectively (adjust | |
| |issue y | |can be measured reliably n|for contracts started in | |
| | | | |2012 and completed in | |
| | | | |2013) | |
|D2 – Asset |Identifies the asset|Asset impairment based on |Asset impairment based on |C and concludes assets |NA |
|impairment |impairment issue |discounted cash flows under |discounted cash flows |impaired under IFRS and | |
| | |IFRS or determines |under IFRS and determines |not impaired under ASPE | |
| | |recoverable amount (FV less |recoverable amount (FV |(supported) | |
| | |cost to sell vs.
value in |less cost to sell vs. | | |
| | |use) |value in use) | | |
|D3 – Other issues |Identifies the |Discusses 1 of the issues |Discusses both of the |C and compares IFRS |NA |
| |replacement parts or| |issues |treatment to ASPE for both| |
| |the amortization/ | | |issues | |
| |depreciation issue | | | | …show more content…
|
|S5 – F |The student applies technical knowledge to case facts in revising the forecast of BidLow’s 2013 operating income.|
| |NC – Attempts to revise forecasted 2013 operating income y |
| | |
| |RC – Reasonable attempt to revise forecasted 2013 operating income n |
| | |
| |C – Prepares a reasonable revised forecast of 2013 operating income |
| | |
| |HC – Prepares a complete revised forecast of 2013 operating income |
|Marker Notes |Operating income – 2013: |
| |Attempts = incorporates at least 1 attempt at an IFRS adjustment y |
| |Reasonable attempt = incorporates 1 correct IFRS adjustment n
|
| |Reasonable = incorporates 2 correct IFRS adjustments |
| |Complete = incorporates 3 correct IFRS adjustments |
| | |
| |IFRS adjustments (must be supported by case facts): |
| |Construction revenue related to contracts started in 2013 ($10,150K) n |
| |Construction revenue related to contracts started in 2012 ($19,683K) n |
| |Direct cost of operations relating to contracts started in 2013 ($6,293K) n |
| |Direct cost of operations relating to contracts started in 2012 contracts ($11,810K) n |
| |Loss on asset impairment ($40K) n |
|Ranking |NC |
|Comments |Your assumption that nothing would change in 2012 affected the reasonability of your construction revenue and |
| |related direct costs. Go over the solution to make sure you understand what you should have considered in your |
| |revision of the company’s income. |
|S6 – F |The student applies technical knowledge to case facts in forecasting BidLow’s operating income for 2014. |
| |NC – Attempts to forecast 2014 operating income y |
| | |
| |RC – Reasonable attempt to forecast 2014 operating income y |
| | |
| |C – Prepares a reasonable forecast of 2014 operating income n |
| | |
| |HC – Prepares a complete forecast of 2014 operating income |
|Marker Notes |Operating income – 2014: |
| |Attempts = incorporates at least 1 attempt at an adjustment y |
| |Reasonable attempt = incorporates 1 correct adjustment y |
| |Reasonable = incorporates 2 correct adjustments n |
| |Complete = incorporates 3 correct adjustments |
| | |
| |Adjustments (must be supported by case facts): |
| |Construction revenue related to contracts started in 2013 ($10,150K) n |
| |Construction revenue for additional volume ($16,200K) n |
| |Direct cost of operations (38% margin) n |
| |Increase in salaries/wages (2% contract increase) y |
| |Depreciation (must include blade) id |
| |Interest id |
| |Note: G&A not a valid adjustment because given in question |
|Ranking |RC |
|Comments |You made several adjustments to 2014 forecast but only one (the 2% increase in salaries) was correct. Make sure |
| |you compare your calculations to the solution to understand where you went wrong in your financial analysis. |
|S7 – PM |The student applies technical knowledge to case facts in assessing the impact of the IFRS conversion on BidLow’s |
| |debt covenant and the impact of the share purchase agreement. |
| |NC – Attempts to calculate the debt service coverage ratio y OR attempts to qualitatively assess whether the debt|
| |covenant is met/violated y OR attempts to discuss impact of share purchase agreement y |
| | |
| |RC – Reasonable attempt to assess the impact of the conversion of IFRS on the debt covenant n OR discusses impact|
| |of share purchase agreement n |
| | |
| |C – Assesses the impact of the IFRS conversion on the debt covenant AND concludes whether the covenant is |
| |met/violated for each year AND discusses impact of share purchase agreement |
| | |
| |HC – C AND considers how to mitigate the impact of the IFRS conversion |
|Marker Notes |Debt covenant |
| |Reasonable attempt = recalculates debt service coverage ratio (correct formula) based on revised operating income|
| |for 2013 |
| |Assesses = recalculates debt service coverage ratio (correct formula) based on revised operating income for 2013 |
| |and 2014 |
| | |
| |Impact of share purchase agreement = below $2.5M average operating income target if adopt IFRS in 2013 and 2014 |
| |(explicit) incorrect conclusions + another 168 shares to GI y + GI will control BidLow y |
| | |
| |How to mitigate impact = only adopt IFRS in 2014 or renegotiate agreement or other valid |
|Ranking |NC |
|Comments |You did not provide any support (footnotes) for your calculation of covenants and failed to understand that the |
| |risk the existing shareholders face is losing control of the company if IFRS is adopted in 2013. You thought the|
| |problem would be adopting the new standards in 2014. Go over the solution to make sure you understand where you |
| |went wrong. |
|S8 – GSRM |The student applies technical knowledge to case facts in discussing the corporate governance weaknesses relating |
| |to BidLow. |
| |NC – Identifies corporate governance weakness y OR attempts to make a recommendation to fix a corporate |
| |governance weakness n |
| | |
| |RC – Discusses 2 corporate governance weaknesses OR recommends how to fix 2 weaknesses |
| | |
| |C – Discusses 3 corporate governance weaknesses AND recommends how to fix the weaknesses (for the 3 discussed) |
| | |
| |HC – Discusses 4 corporate governance weaknesses AND recommends how to fix the weaknesses (for the 4 discussed) |
| |AND Low brothers may lose control of Board so need to fix weaknesses immediately (must be explicit) |
|Marker Notes |Discusses = identifies corporate governance weakness supported by case facts and explains implication (i.e., |
| |impact on BidLow, why it’s a weakness) |
| | |
| |Recommends = recommendation must be definitive and must fix corporate governance weakness (must make sense based |
| |on BidLow’s operations) |
|Ranking |NC |
|Comments |You understood that GI would have the ability to appoint a new board member and also find a replacement member |
| |when an existing member left but did not expand on those case facts. To score well on this sort of required, you|
| |should consider the WIR ~ weakness, implication, recommendation ~ of each issue you mention. |
|WEAKNESS |IDENTIFIES |DISCUSSES |RECOMMENDATION |
|Board – replacement member |y | | |
|Board – new member |y | | |
|Strategic planning | | | |
|Budgeting | | | |
|Meetings – attendance | | | |
|Meetings – frequency | | | |
|Other valid | | | |
|S11 – MDM |The student applies technical knowledge to case facts in evaluating the potential new accounting systems. |
| |NC – 1 NC on D9 or D10 y OR discusses why BidLow needs a new system weak |
| | |
| |RC – 2 RCs on D9 and D10 n OR 1 C and 1 NC on D9 and D10 n |
| | |
| |C – Discusses why BidLow needs a new system AND 2 Cs on D9 and D10 AND a supported recommendation |
| | |
| |HC – Discusses why BidLow needs a new system AND 2 HCs on D9 and D10 AND a supported recommendation |
|Marker Notes |Quantitative analysis (D9) |
| |Reasonable calculation of NPV of option 1 = software cost + PV of annual maintenance wrong discount factor used |
| |Reasonable calculation of NPV of option 2 = PV of annual payments wrong discount factor used |
| | |
| |Qualitative analysis (D10) |
| |Discusses = case facts + why it’s an advantage or disadvantage |
| |Option 1 (deluxe) |
| |Advantages – data conversion, staff, multiple G/Ls |
| |Disadvantages – lack of integration with job costing, availability of Ian |
| |Option 2 (ERP) |
| |Advantages – end-to-end system (no interface required), additional modules |
| |Disadvantages – supplier, data conversion |
| | |
| |Supported recommendation = must be definitive (option 1 or option 2) + must be consistent with analysis |
|Ranking |NC |
|Comments |You attempted calculation of the present value of both choices but you used the wrong discount factor in your |
| |exhibit. When you talked about non-financial issues, you focused on cost and made general comments. You did not|
| |refer to case facts (see list in the grid above) when talking about the pros and cons of either alternative. |
| |NC |RC |C |HC |RANKING |
|D9 – Quantitative |Attempts to calculate |Reasonable calculation|Reasonable calculation |C AND considers either |NC |
|analysis |NPV for option 1 or |NPV for option 1 or |of NPV for option 1 and |time frame or tax | |
| |option 2 y |option 2 n |option 2 |implications | |
|D10 – Qualitative |Discusses 1 advantage |Discusses 1 advantage |Discusses 1 advantage |C AND considers other |NA |
|analysis |or disadvantage for |or disadvantage for |and disadvantage for |factors (additional | |
| |either Option 1 or |each Option 1 and |each Option 1 and Option|stress on staff or | |
| |Option 2 n |Option 2 |2 |ability to perform | |
| | | | |variance analysis) | |
|S12 – T |The student applies technical knowledge to case facts in discussing the tax implications associated with the |
| |share purchase agreement. |
| |NC – Recognizes 1 of the tax implications associated with the share purchase agreement y |
| | |
| |RC – Recognizes 2 OR discusses 1 of the tax implications associated with the share purchase agreement n |
| | |
| |C – Discusses 2 of the tax implications associated with the share purchase agreement |
| | |
| |HC – Discusses 3 of the tax implications associated with the share purchase agreement |
|Marker Notes |Discusses = technically correct analysis + supported by case facts |
|Ranking |NC |
|Comments |Your analysis of the tax issues focused on the details of acquisition of control and did not consider the overall|
| |impact ~ company would no longer be a CCPC and would lose the ability to use small business deduction, capital |
| |dividend account, RDTOH and eligible dividends. Use the solution to improve your understanding of these |
| |technical issues. |
| |RECOGNIZES |DISCUSSES |
|Acquisition of Control |y |GI will control BidLow y + BidLow will lose CCPC status n |
|Small Business Deduction | |Not eligible for SBD if lose CCPC status |
|Capital Dividend Account | |Can’t pay out dividends tax-free if lose CCPC status + pay out CDA |
| | |balance before lose CCPC status |
|RDTOH | |Not available if lose CCPC status + pay out dividend to clear out |
| | |balance before lose CCPC status |
|Eligible Dividends | |Ineligible dividends until LRIP depleted or eligible dividends after |
| | |LRIP depleted or considers dividend gross up/tax credit |
|S15 – A |The student applies technical knowledge to case facts in discussing the audit implications of the IFRS |
| |implementation. |
| |NC – 1 NC on D13 or D14 y |
| | |
| |RC – 2 RCs n OR 1 C and 1 NC on D13 and D14 n |
| | |
| |C – 2 Cs on D13 and D14 |
| | |
| |HC – 2 HCs on D13 and D14 |
|Marker Notes |Audit planning issues (D13) – discusses: |
| |Independence = potential self-review threat + 1 way auditors could be involved in conversion |
| |Risks of material misstatements = increase risk y + 2 valid risk factors (how/why impacts risk) n |
| |Approach = increased substantive testing y + additional time required y |
| |Materiality = lower materiality (debt covenant or share purchase agreement) weak + either additional work on |
| |opening balances or performance materiality n |
| | |
| |Procedures (D14): |
| |Valid = designed to address the specific accounting differences between ASPE and IFRS |
| |Key risk areas = revenue, impairment loss, depreciation, other valid |
|Ranking |NC |
|Comments |Good discussion of the audit approach that would be taken. You touched on risk and materiality but had limited |
| |depth in your discussion of those two aspects of audit planning. To move up to C, you needed to cover one more |
| |audit planning issue at the ‘discuss’ level. |
| |NC |RC |C |HC |RANKING |
|D13 – Planning issues |Identifies 1 of the |Discusses 1 of the audit|Discusses 2 of the |Discusses 3 of the audit |RC |
| |audit planning issues y|planning issues y |audit planning issues n|planning issues | |
|D14 – Procedures |Attempts to give an |1 valid audit procedure |2 valid audit |3 valid audit procedures |NC |
| |audit procedure y |n |procedures in 2 |in 3 different risk areas| |
| | | |different risk areas | | |
|S16 – MDM |The student applies technical knowledge to case facts in preparing a variance analysis. |
| |NC – Attempts to calculate 1 of the variances related to either sales or labour |
| | |
| |RC – Calculates 1 of the variances related to either sales or labour |
| | |
| |C – Calculates 1 of the variances related to both sales and labour AND interprets the results |
| | |
| |HC – Calculates both of the variances related to both sales and labour y AND interprets the results y |
|Marker Notes |Variances: |
| |Sales – price variance y, volume variance y |
| |Labour – rate variance y, efficiency variance y |
| | |
| |Interprets results – impact of the variance or what caused it (i.e., more than just stating what the variance is)|
| |excellent work on this discussion |
|Ranking |HC |
|Comments |Excellent work on both the financial and non-financial aspects of this required. Well done! |
|S17 – PQ |The student demonstrates professional skills by providing recommendations about preparing for the implementation |
| |of IFRS. |
| |NC – Identifies 1 of the issues relating to BidLow’s implementation of IFRS y |
| | |
| |RC – Discusses 2 of the issues relating to BidLow’s implementation of IFRS n |
| | |
| |C – Discusses 3 of the issues relating to BidLow’s implementation of IFRS |
| | |
| |HC – Discusses 4 of the issues relating to BidLow’s implementation of IFRS |
|Marker Notes |Implementation issues |
| |Discusses – identifies issue using case facts + explains impact of issue on IFRS implementation |
| |Issues – need to understand ASPE/IFRS differences, project manager id, training, existing staff, new system |
| |needed, need to communicate to Board, need to contact bank, other valid |
|Ranking |NC |
|Comments |While you did identify the need for someone to handle the transition from ASPE to IFRS, you thought a new board |
| |member with financial expertise was all that was needed. Review the list of issues you could have talked about |
| |in the grid above. |
To: Mr. Kevin Hale, CFO of Bidlow Ltd. Nicely set up
From: CA, business advisor
Subject: Discussion and suggestions about issues you raised on our Sep 13, 2013 meeting
Accounting implications on conversion into IFRS reporting framework
• D1 Revenue recognition
I noticed that Bidlow is using completed contract method for revenue recognition, which is a valid accounting choice under ASPE, whereas is not allowed under IFRS. Under IFRS, you have to use a percentage of completeness method to record revenue and corresponding construction expenses, which means a lot of accounting estimate will be used in reporting. Since you have been deferring the revenue generated from project under construction until the terms and conditions of contract are met, (recorded as unearned revenue so far), it means after the conversion, liability will be decreased and revenue will be increased. This will enhance your income stream (profitability) and better your working capital, however the accosting costs could increase as well. S5/S6 You need to use case facts you were given to determine the impact on revenue in each year.
As the adoption of IFRS do not require retrospective adjustment, I assume the contracts started in 2012 and completed in 2013 will be fully recognized in 2013 and the contracts started in 2013 and completed in 2014 will be partly recognized in 2013 based on the percentage finished. See exhibit 1 for adjustment-1 Your revenue for both 2013 and 2014 is materially overstated
• D1 Construction costs
Correspondingly, on the transfer from complete contract method to percentage of completeness method, cost recognition would be changed from fully capitalization until the construction is complete to expense the construction costs as it occurs. The combine effect of revenue and construction cost recognized based on the percentage of completeness of the construction contract will result in the income increased by the net income occurred from construction on hand. You need to consider theory… use Handbook criteria and case facts to determine whether costs can be measured reliably. Similarly, as the adoption of IFRS do not require retrospective adjustment, I assume costs of the contracts started in 2012 and completed in 2013 will be fully recognized in 2013 and the contracts started in 2013 and completed in 2014 will be partly recognized in 2013 based on the actual spending. No impairment is considered as no costs expected will exceed the contract price so far. See exhibit 1 for adjustment-2
What about other accounting adjustments related to the adoption of IFRS?
• S8 New investment from GI
By reading though the share purchase agreement, I noticed that GI is requesting one third of the voting common shares from the outstanding common share holders. These shares allow them to appoint one member to the board and have rights to nominate member to replace vacant board members. This implies even if they are not the majority shareholder, they do have rights to participate in company policy making and operating, financing and other important strategy design. Accounting to IFRS, a significant influence is established, which means GI you are advising the CFO of Bidlow… how GI accounts for the investment is not relevant to the case may want to use equity method to account for income earned from Bidllow since GI is following IFRS. This would not have direct implication on Bidlow's operating income, as the share investment could mainly affect balance sheet due to its financing transaction nature. You missed the impact of GI being able to appoint board members. Will GI be able to control the board of directors?
S16 Analysis of your variance and budget
Excellent analysis of these variances • labour variance
I have calculate the year to end labour cost variance as shows in Exhibit 2 and have analysis and suggestion as below:
The labour rate variance shows a unfavourable variance of 140k, which means your real rate is higher than the standards rate you set and cause $140k dollar value of labour cost higher than your expectation. Considering the 2% future increase potential as undertaking Union contruction in 2014, I do not think this variance is caused by you have overpaid the employees too high. This variance would be more likeyly caused by the outdated salary rate standards. As you controller has left, I assume you stop updating the standards to reality and cause this variance. I suggest you raise the standard payroll rate and do the analysis in the future in case of confusion.
The labour efficiency variance shows a a unfavourable variance of 170k, which means your real labour volume spent on each project is higher than the your expectation and cause $170k dollar value of labour cost higher than your projected. Although this may also caused by the outdated budget, I believe this is more likely due to the increased complexity of the new construction projects you are taking. Try to write in shorter paragraphs so it is easier to read (and mark) your report. Please go further to find out whether your employees are lacking of skills to perform as efficiently as you planned or the they are simply not performed at their best in work. Based on the reasonable you find out, you can further implement some new rule such as hiring more skilled employees and better trained your employees to adapt to the more complicated construction work you are undertaking, or redesign the employee compensation system to enhance the morale and work efficiency.
• Sales variance
The sales price variance shows a unfavourable variance of 7787k, which means your underestimate your sales price, and cause a decrease of $7787k in total sales.
However, at the same time, the sales volume variance shows a favourable variance of 2662k, which means you sales volume is higher than budgeted and cause a 2662k higher income.
Combine the effect from above variance, I assume you have adopted a low price sales policy to attract more customers and thus increase your overall income. This may because you want to meet the $2500k income covenants from your share sales agreement. However, this strategy is not working as the combined variance is unfavourable than you have expected. Thus, I suggest you discontinue this strategy and reset your sales price to enhance your revenue.
• S5/S6 Budget for 2013 and 2014
The budget I made is adjusted based on the information you have provided (exhibit 3), which shows a income level higher than your forecasted income statement. However, in order to meet the share sale agreement covenant, a higher income level is required ($2500). As is shown in my calculation, whether to adopt IFRS in 2013 or 2014 makes a huge difference. Please see the analysis below:
S7 Timing of adoption of IFRS
As you are concerning about the time of adoption of IFRS, here is my analysis:
Please refer to my calculation in exhibit 3.
The adoption of IFRS increase your operating income by recognizing the net income generated from construction contract on hand before the construction is completed (based on the percentage you have completed). Since currently, all the construction you are taking have projected revenue higher than projected cost, the transition into IFRS will have positive effect on your operating income. Incorrect conclusion. The choice of year to introduce the new accounting standards is critical
According to my calculation, either way, meeting the current line of credit and bank loan covenant (2.5:1 debt service coverage) seem not to be a problem. However, there is a huge difference in meeting the share sales agreement covenant.
According my calculation, adopting IFRS in 2013 will let you meet the covenant incorrect conclusion, whereas adopting in 2014 incorrect conclusion will not let you meet the $2500 operating income covenant in 2013. And considering the inappropriate sales policy I mentioned before, it is likely that if you change your sales policy, the 2014 operating income will be further enhanced as meet the covenant, as there is huge revenue increase potential there.
You understood the implications of not meeting the target but your related financial analysis is incorrect. On the other hand, if you adopt IFRS in 2014, it is sure that there is a difficulty meeting the covenant in 2013. This would cause you to issue another 168 voting shares to GI. Combined 501 (333+168) common shares would means that 56.8% (568/1000) of ownership in Bidlow. Thus, GI would become the majority shareholder, and have enough power from the board to control Bidlow's overall strategy and operation. According to IFRS, based on these implications, a control is likely exist. A series of implication could be caused based on this fact:
• This is not relevant. You are advising the CFO of Bidlow. You are not advising GI. GI would consolidate Bidlow's financial statement line by line as it becomes GI's subsidiary. Extra accouting costs could be generated as GI will request a component annual audit from Bidlow, which would be more complicated and time consuming than the current engagement as the situation and information user is changed, thus risk and materiality need to be reconsidered. (will be further discussed later)
• S8 It is sure that the current shareholder would lose come interest since GI would have the power to influence the dividends policy.
• It is likely that further strategy-changing and maybe structure-changing action would be taken by GI that will drift Bidlow from its original planned developing path. i.e. GI may offer to buy out currently shareholder's share or maybe conduct an merge or amalgamation.
• S12 A series of tax issues would also be implied and negative tax effect could be triggered on current shareholders, as discussed below. You were asked to discuss corporate tax issues; not personal tax issues
S8 As there is a huge potential that GL will take over the business, if Bidlow refuse to adopt IFRS in 2013, I suggest you to consult with the shareholders about their further plan of the business. Since one of the shareholder shows less interest in the existing business (as he is helping his son), maybe sale additional 168 shares is not a bad option to him. Otherwise, you should thinking adopting IFRS in 2013 to ensure Bidlow do no breach the covenant this is incorrect conclusion and remains it operation.
S12 Tax implication of the share sales agreement
As I have discussed before, if additional 168 shares are acquired by GI, the control over Bidlow will be shifted over from the current shareholders to GI. Thus, besides from the normal tax consequences from share disposal, there is other effects that will be caused on the existing sharehodlers.
• Acquisition of control
There will be an acquisition of control as GI is taking over Bidlow. According to ITA, Bidlow will have a deemed year end which result in:
1. Net capital loss will be denied after the acquisition. Neither GI or Bidlow will allow to use this loss if future net capital gain generated from their operation
2. Non capital loss will be restricted. Bidlow or GI would only be allowed to utilize the non capital loss against income generated from same line of business, which will be earthmoving business in this case, given the condition that Bidlow is making or expected to generate profit from its operation
3. If there is any non capital loss carrying by Bidlow, the loss expiration will be accelerate, as there is an estra deem year end on the acquisition of control. This will limit its ability to use this loss against taxable income generated in the future. You are getting lost in the detail. If GI controls Bidlow, the company will lose its status as a CCPC
4. The contruction in progress (likely has value between 6 million to 10 million), which considered as inventory for Bidlow (which is a contruction company), will be deemed sold at fair market value and likely to generate a big business income, which is taxable to Bidlow.
To quantify this income, use contract price as indication of fair market value: contracts started in 2012 and completed in 2013: 25300-11814 = 13486 contracts started in 2013 and completed in 2014: 29000/12*5-6293/9*5=8587 Total business income 22073
This 22 million business income would be taxed promptly to the acquisition. This detail is not what you were expected to discuss. How will things change if GI controls Bidlow?
5. All assets and liabilities will remains at its current tax base, unless GI want to utilize the net capital loss by selecting to realize some capital gain on value appreciated assets, likely to be leasehold improvemenet.
• Futher restructure
1. GI may tend to further amalgamate GI and Bidlow to utilize Bidlow's loss, by offering shares from the amalgamated corporation to exchange Bidlow's other common share. These new share will have the same tax basis as those of Biglow's old share (PUC)
2. GI may want to conduct share exchange under section 85.1, which will automatically gives stop and think about the case facts before you jump in to discussion of this unrelated technical
S11 Accounting software change
I definitely suggest you to change the operation of the accounting system as it is not functioning efficiently right now and is not helpful in facilitating the management accounting anaysis, such as the variance analysis.
You need to talk about the pros and cons of each alternative • Advantage
1. To compensate the currently shortage of the accouting system, more labour is requiring, for example the controller is needed to do extra mannual work, which would be conducted by the system. Considering you are cutting the cost to meet the share sales agreement covernant, it maybe more advantageous to change the accounting system, as it helps you save the payroll expenses, especially the controller's salary
2. Could utilize the proceeds generate from the share sale to invest in the system changing. Although this alternative may require the shareholders to lend the proceeds to Bidlow as a shareholder loan, as the proceeds are paid to the shareholders not Bidlow. This is feasible, as Bidlow could use the future dividends issued to the shareholder to repay the loan
3. This will help you better management your income and cost, thus enhance the future profitability of Bidlow. This is more of the case, as noticed from the variance I calculated, there are problems with sales price setting and cost price and volume management. You are talking in general terms. Use case facts to explain why the company needs a new system (the current one can’t handle percentage of completion which is required under IFRS).
• Disadvantage • Judging from your currrent working caputal situation (which is negative on 2012 F/S), you may not have the capital for this investment. • New capital cost will be spent on the change, which will generate amortization costs and lower the income • Increase the IT risk and need continuous technical support for the new accounting system.
In order to compare which option should we choose for the change, I have consideration as stated in exhibit 4:
Option 1;
Advantage
• PV of the total costs are lower, which is better for Bidlow's financing pressure and income generating goal. Use the case facts to discuss the pros and cons of each option. Your financial analysis is not a qualitative factor.
Disadvantage • However, this option may not be as effective as the second option since the usefulness of the system is not proved.
Option 2:
Advantage
More integrated ERP system use case facts to support your comment that this system is most integrated indicates less IT risk in the future
Disadvantage
Costs are higher, which is not as efficient as the first option
S8 Changing of process for formal business plan • I agree that you should discuss with the shareholder and re-discuss the company structure and design the process for business plan and objectives. A few suggestions about the management issue are listed below:
• You should consider to restructure the board and ensure it functions properly how would the company do that?.
As the board member only cares about the dividends issuance and ignore the operating management, it is clear that the board is now not functioning properly. I suggest you reset the principle that the board should follow to discipline the board member to conduct their responsibility what does that mean?.
• S17 Instead of a controller, I suggest Bidlow set up an audit committee or at least appoint some personnel with expertise in financial management and public accounting into the board to supervise the operation of the business and financial reporting on the transit from ASPE to IFRS • I suggest the board to renegotiate the share sales agreement what terms would be up for renegotiation? as there is some obvious unfair terms that is unfavorable to Bidlow.
S15 Impact on audit engagement • Risk: The audit risk is increased for 2013 year end audit as the financial frame work is changed from ASPE to IFRS.
Implication; You need to make sure the auditor has the competency to conduct the audit of financial statement, which is following IFRS.
• As new user, GI, is added to the information users base, the materiality would be changed (likely based on the operating income as this is part of the covenant). It is likely that thef materiality will decrease, and extra audit work will be conducted due to the change. It is reasonable that the auditor will charge more for the engagement the lower materiality should be tied to the company’s debt covenant or share purchase agreement as the users would demand more precision • As GI could consider equity method or consolidation (if control exist from the acquisition of additional share) to report income from Bidlow, it is possible that auditor of GI (group auditor) would contact your auditor (component auditor) for the working details they have conducted. This is not relevant • If the accounting system change is made, the new control test would be conducted as the auditor need to make sure the new control works. Additionally, risk assessment associated with IT system could be complicated. • Likely, the auditor will conduct a substantive approach on this audit as the change from ASPE to IFRS require different reporting treatment, and lots of specific work could be done on this. • D14 Auditor would likely to include external expert for auditing construction percentage, as this has significant impact on assets (construction in process) and revenue, expenses valuation assertion.