Question: Janson Inc JI is in the real estate development business

Janson Inc. (JI) is in the real estate development business. It buys and sells land and also buys and develops land that it sometimes subsequently sells. The company's shares trade on the Canadian Stock Exchange (CSE) and the com pany is governed by the Canadian Securities Commission (CSC). The CSC has announced that all Canadian companies that have shares that trade on the CSE will have to follow IFRS for years beginning January 1, 2011. JI's controller is concerned about this and would like to start identifying significant differences that might affect the preparation of the company's financial statements. He is not looking for a list of all differences between PE GAAP and IFRS but rather would like to identify potential alternative accounting treatments under IFRS for major accounting issues that have occurred this year.
During the year, the company purchased several acres of land that it plans to hold for future development or sale pur poses. At the purchase date, JI managers were undecided as to intent and thought that they might just wait and see what the market was like. They had architectural plans drawn up during the year that they might use for development of a shop ping centre on some of the land. The purchase of the land was financed by a bank loan that included a covenant requiring that the company's annual debt-to-equity ratio not exceed 3 to 1. The company has been paying property taxes on the land, which are quite high. As at year end, JI had a potential buyer who indicated that he might be interested in buying the whole parcel of land. The company would potentially generate a loss if sold to the potential buyer. Negotiations were therefore underway. If the deal went through, it would do so within two months of year end. JI was considering taking the loss since it was worried about a further weakening of the real estate market in that particular area.
JI has several other properties that it has constructed or developed including its head office and several apartment buildings. These were constructed and completed several years ago. Recently, the company received a letter from the ten ants' association in one of the buildings noting that radon (a toxic gas) was seeping into the apartments and making the tenants very sick. They were demanding that the problem be fixed or that they be given three months of free rent so that they would have time to look for a new apartment and move out. JI had hired some engineers to assess the problem. The engineers were not sure where the gas was coming from but agreed that they could insulate the building sufficiently such that the gas would not be able to seep in anymore. This would be at a substantial cost. The engineers felt also that the problem might be coming from a building across the road. Their study was inconclusive. JI had its lawyers draft a letter threatening litigation to the owners of the building across the street.
The company has just issued some new financial instruments. The instruments have a maturity date of 2019 and pay interest that is based on company earnings; i.e., the company pays a percentage of after-tax profits. If the company suffers a loss, no interest is payable. The instruments are convertible at the option of the holder to common shares of JI at any time before maturity.
Assume the role of an external advisor to the controller and discuss the financial reporting issues.

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  • CreatedAugust 23, 2015
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