Alliance Appliance Ltd. (AAL) is an assembler and distributor of household appliances: primary kitchen equipment as well as washing machines and driers. AAL assembles the appliances from components received mainly from Germany and some also provided by Japanese parts manufacturers. AAL does not sell directly to end- users.
The company’s direct customers are retail appliance sales dealerships across Canada and, to a lesser extent, in the northern United States. Although the dealers sell primarily to homeowners, they also do contract work for institutional purchasers. Such institutional purchasers primarily are real estate developers who are building new or re- equipping existing apartment and condominium buildings. AAL works closely with such developers to meet their needs at a reasonable cost. Alliance Appliance is based in Windsor, Ontario, where it operates its assembly plant and also has its principal warehousing facilities.
The company has a second distribution centre in Vancouver for western Canada. AAL also has a distribution centre near Detroit, Michigan, to serve its customer base in the northern United States. The Michigan distribution centre is deemed essential for quick delivery to customers in the United States— rapid delivery is important, but shipments across the United States– Canada border can be delayed by security and customs procedures, which leads to a backup of shipments waiting to cross the border.
Each distribution centre stocks AAL’s most popular models. High- end models, all customized models, and all orders from institutional purchasers are assembled (and customized, if necessary) to order in the company’s assembly plant. Each distribution centre also stocks spare parts that can be shipped to firms that are licensed to repair AAL appliances either under warranty or post- warranty.
All of AAL’s common shares are owned by the company’s CEO, Douglas Beck, an engineer who migrated from Hungary to Canada 34 years ago and built up the business over three decades. Substantial external financing comes from two sources:
• International banking company HSBI provides ongoing banking services via operating loans secured by AAL’s accounts receivable, inventory and capital assets. HSBI also facilitates AAL’s international transactions with the United States, Germany, and Japan.
• Toronto- based private equity firm Oxwell Inc. holds convertible preferred shares in AAL, shares that had been issued to provide financing for a plant upgrade in 20X3 and the 20X5 investment in the Michigan warehousing facility. These are voting shares that Oxwell can be converted into common shares at any time. As a Canadian private enterprise, AAL reports on the basis of ASPE. The company’s annual financial statements are submitted to the AAL Board, to HSBI, and to Oxwell Inc.
The Board and Oxwell also receive AAL’s unaudited quarterly statements. HSBI does not receive the quarterly statements, but the bank requires a monthly update on the balance of accounts receivable and inventories because the bank’s operating loans cannot exceed the sum of 75% of accounts receivable plus 50% of inventory. It now is April 20X8. At some time over the next four or five years, Oxwell expects to convert its shares to common and then sell them to one or more investors. One potential option is that if the stock market is strong, Oxwell might choose to sell the shares through an initial public offering (IPO). If such an option were to be chosen, AAL would need to restate its accounts on the basis of IFRS. Even if other private investors acquire the Oxwell shares ( i. e., instead of through an IPO), the potential pool of buyers would be increased if AAL used IFRS. Therefore, in early 20X8, the AAL Board commissioned a review of how a change to IFRS would impact AAL’s 20X7 financial reporting. AAL’s CFO contacted Henry & Higgins, the company’s auditors, and asked them to provide a well- qualified person to assess the impact of any change. In response to the request, H& H assigned a senior staff auditor, Maxwell Davies, to prepare a report that provides the information requested by AAL. After extensive review of AAL’s accounting records, Maxwell has assembled the following information that may be relevant to the assignment:
a. AAL uses the titles “Balance Sheet,” “Statement of Income,” “Statement of Cash Flows” and “Statement of Retained Earnings” for its primary financial statements.
b. The company’s income statement has no sub classifications of expense items; all expenses (including income tax expense) are listed in summary fashion with no subtotals— just a final amount for “net income.” The company does not report earnings- per- share amounts.
c. Preferred dividends paid to Oxwell Inc. are reported only in the retained earnings statement.
d. AAL provides a one- year full guarantee on its products when sold to the final user. The company estimates the approximate future cost of making good on the guarantees, an estimate that is adjusted at every year- end. AAL also guarantees the bank loans of the Michigan facility.
e. AAL has a high volume of foreign- currency transactions for purchases (in euros and in yen) and a somewhat lesser volume relating to sales and related costs in U. S. dollars. The foreign currency gains and losses (due to currency fluctuations between the transaction date and the payment or settlement date) are included as part of “finance expense” on the income statement.
f. The company has a three- year parts contract with the Canadian subsidiary of a Japanese company. The contract commits AAL to acquire 2,400 units per year of a certain type of washing machine motor at a cost of Cdn$ 150 each. The motors are manufactured in Japan. When the contract was entered into at the end of October 20X5, the value of the Japanese yen was increasing, and AAL management wished to protect the company from further price increases. During 20X6, however, the yen unexpectedly began to drop in value. As a result, identical motors are now available directly from Japan at a price equivalent to Cdn$ 130. AAL has attempted to reopen negotiations with the sup-plier but to no avail.
g. In 20X5, the company wrote down the carrying value of its entire inventory of 25- inch and 27- inch wall ovens due to increased consumer interest in 30- and 36- inch ovens. In late 20X6, however, company line managers reported that the builders of new high-rise centre- city condominium buildings were installing the narrower ( i. e., “ European design”) ovens due to the small kitchen spaces in new buildings as well as to many downtown tenants’ lack of interest in cooking.
h. During 20X6, AAL exchanged a disused building in the outskirts of Ottawa (previously a local distribution terminal, no longer in use) for an empty lot near its assembly plant.
The acquired land will be used for parking for its delivery vans. AAL recorded the trans-action at the value of the lot received because the value of the land was more reliably measureable than was the value of the building given up. The transaction had commercial value.
i. The Michigan distribution centre is legally owned by a wholly owned subsidiary of AAL. The subsidiary conducts its operations in U. S. dollars. The cumulative annual gains/ losses on translating the net assets of the subsidiary from US$ to Cdn$ are reported as a separate component of shareholders’ equity, as required by ASPE.
j. AAL ships its finished products from Windsor to Vancouver by train. In late 20X6, AAL’s Board of Directors approved moving the Vancouver distribution centre to a location with better rail access. The move will occur in mid- to late- 20X7. Therefore, in its 20X6 balance sheet, the company wrote down the soon- to- be- vacated building to its estimated recoverable value and reclassified it as a held- for- sale asset (long term).

Assume the role of Maxwell Davies, and prepare the report requested by AAL.

  • CreatedFebruary 17, 2015
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