Capilano Forest Company Ltd. (CFCL) has been owned and managed by an experienced forester, Don Strom, for 20 years. The company has performed well in the last few years, but the industry is cyclical. In the interior of British Columbia, CFCL manufactures lumber of all grades from raw logs. A small lumberyard and sales office are located in Vancouver.
Your firm has been re-appointed auditor for CFCL, and you, a CA, the senior on this engagement, have been going over some issues with the recently hired controller of the company, Everett Green. CFCL had been searching for a controller for several months. Green agreed to accept the position with the condition that his compensation package include a bonus based on net income. Strom finally agreed to this form of remuneration, despite initial resistance.
A large Japanese lumber importer has recently expressed an interest in purchasing CFCL. Therefore, Green proposes to make changes to CFCL's accounting policies, which he believes will maximize the value of the company.
During the year, CFCL was granted, by the Ministry of Forests, the right to log a large area of standing timber on Crown land. Although CFCL does not own the land, it does have the right to log all the timber on it, subject to an allowable annual limit. This right was granted to the company at no initial cost. However, a fee is paid to the Ministry based on the number of logs removed from the forest. Shortly after CFCL received this right, the Ministry announced that all holders of logging rights over Crown land are responsible for reforesting the lands at their own cost; the rul ing applies to all rights granted in the last five years. After eight months of logging, CFCL has still not carried out any reforestation. The controller is proposing that CFCL record receipt of this right at fair value. In addition, he would like to include in the financial statements the fair value of rights received from the Ministry two years ago. These rights do not currently appear on the company's balance sheet.
Remul can purchase all the chips produced by CFCL. CFCL would have plenty of willing customers, given the current market demand, for any chips that Remul did not take. CFCL transports the chips by truck and rail car. The truck drivers have been on strike for the last two weeks. Green does not see this strike lasting much longer, and he would, therefore, like to recognize the revenue on the chips as they are produced.
The partner on this engagement has asked you to prepare a memo discussing the accounting alternatives and to make recommendations for the issues raised with the controller.
Prepare the requested memo.