Financial Reporting Issues

Security Plus
Multiple Deliverables
Issue: there is an arrangement to deliver multiple products and services
o The first product is
o The second product is
Analysis:
o Revenue recognition criteria will need to be applied separately to A and B
o In order to record revenue separately, need to determine the FV of each
identifiable component of the arrangement
Conclusion

Principle vs. Agent

HB 3400.23, HB 3400.24

Dunstan Electric
Inventory
Obsolete inventory
o Needs to be backed out of inventory

Royal Design
Deposit (design fee)
Treated as a deposit and deferred
Unearned revenue on projects that proceed should be debited once project revenue
is recognized

Percentage of completion
Appropriate measures e.g. cost of materials or estimated labour hours which better
represents amount of work performed by RDI

Investment in Redwood Mills

RDIs 25% interest significant influence
HB 3051
o Choice between
Equity method Results in inclusion of its share in investments result
in financial statements
Cost method Show investment at cost on B/S

Related Party Transactions

HB 3840
A monetary related party transaction or non-monetary related party transaction
that has commercial substance shall be measured at exchange amount when it is in
normal course of operations
Inventory
Inventory of WIP and finished goods only take into account cost of raw material and
labour
o HB 3031 should include ALL costs of purchase, costs of conversion, and
other costs (including overhead)
o Variable general expenses utilities and maintenance
o Fixed production overheads amortization of equipment, management costs,
supervisory salaries
Lower of cost and net realizable value

Pharmex
Accounted for as Separate transactions or together?
Option 1: Single, non-monetary exchange
o Measured at fair value of assets received if can be reliably measured then
fair value of assets given up
Option 2: Accounting as separate transactions
o Record at FV if can be determined or carrying amount
o Non-exclusive research rights would be considered non-monetary
government grant and recorded at nominal amount (since we cant
determine fair value)

Super Sports Limited

Inventory
Lower of cost and net realizable value
o Net realizable value = estimated selling price in ordinary course of business
less estimated costs of completion and estimated costs necessary to make
sale
o Retail method Section 3031 only appropriate to approximate cost and
impractical to use other costing methods
Cost formulas (FIFO or WA)
o Consistency over time is important

Layaway transaction
Was sale booked prior to date?
HB 3400 revenue recognized when performance is complete
Client did not commit to a sale and had not signed an agreement obligating purchase
of items at later date
o Therefore no risk of goods has transferred and risk of ownership still lies
with SSL
Deposit amount is the liability which is correct accounting treatment
Disputed accounts payable
Dispute was resolved and liability was established at $80,000 at date of August 25
Settlement is a subsequent event that provides evidence of conditions that existed
AT financial statement date financial statements properly adjusted to reflect this
information
Allowance for Doubtful Accounts
Bankruptcy announced September 4 did not occur until after sale date August 10
Announcement after audit completion date of August 31 BUT financial statements
have not been approved yet
Amount is material and impact on results should be disclosed in notes as
subsequent event

Goodwill and intangibles

Goodwill must be purchased goodwill to be recorded on balance sheet
Amount of goodwill on balance sheet has nothing to do with Carl and likely due to
recent acquisition of company that distributes winter products
Remaining distribution licenses will have value as long as SSL holds them
o Auditor appears to have done impairment test at August 10 and has made
necessary ASPE adjustments to reflect FV of licenses

BioVentures
Revenue Recognition Licensing
Separately identifiable components?
o HB 3400.11
o Without hour of consultation, ZP could not development technology and
benefit from initial licensing fees
o BV continues to be involved with technology through R&D makes it hard to
measure FV of components individually
o Two transactions deal with together
Recognition
o Currently immediately recognizes
o BV must provide consulting services over two year period 500 hours
o Upfront fee and milestone payment should be deferred and revenue
recognized based on measure of progress toward completion based on actual
hours provided

Research and Development

HB 3064
In order to capitalize development costs
o Technical feasibility has been proven as evidenced by regulatory approval for
commercial sale.
o The intention to complete the drug, the ability to sell the drug as well as the
existence of a market are evidenced by the licensing agreement with ZPI
o Adequate financial resources exist given the bank financing expected in 2015
(assuming no going concern issue).
o BV has tracked the development costs attributable to BIO-400.
Amortize over its market life
Government Grant
Grant received for trials that have not started yet
Should be recorded as deferred government grant
HB 3800
Deferred grant should be amortized when labour costs associated with Phase III
clinical trials are incurred in 2015

Lawsuit
HB 3290 Contingencies
2.5 million gain needs to be reserved as it is a contingent gain
If determined likely that lawsuit will be won and BV will be awarded with damage,
disclosure of gain in notes would be appropriate