Kitchener Mechanical Incorporated is looking to expand its manufacturing facilities and buy more equipment to meet raised customer demand. The company's strategy is to build an add-on to the current facility, and bring in new equipment that will increase the efficiency of the production line, and subsequently phase out the old, less-efficient equipment in the current facility. While the new facility and equipment is being constructed, the current facility will continue to manufacture product to meet current demand. However, the company has experienced some cash flow difficulties, due to delayed and non-payments from its largest customer. The company also has a debt to equity ratio stipulated by Nexis Bank for its current line of credit of 1:2. As a result, Kitchener Mechanical has been reluctant to expand, because it would require additional debt financing, worsening the debt to equity ratio and increasing its cash flow demands. Instructions The president of Kitchener Mechanical, Jayden Besker, approached the president of Magmum Production, its major customer, and asked for prompt payment of all outstanding debts. Jayden indicated that Kitchener cannot continue to fund Magmum's cash flow, and it would not sell any more product until all amounts are paid. Magmum's president apologized for the delayed payment, saying it was not intentional. Magmum had issues with its controller, who was recently fired, and Magmum would make all payments the next day. Jayden also mentioned the company's cash flow issues, and Magmum's president said he may be able to help. After some discussion, a two-part plan was worked out. First, Magmum would build the additional facility next to Kitchener's current facility, and the plant would initially belong to Magmum. Second, Kitchener would sign a 20-year lease agreement to lease the facility from Magmum. The lease payment would be based on a flat amount plus a percentage of the additional revenue earned through the new facility. After 20 years, Kitchener would buy the facility from Magmum for 1.2 times market price at that time.
Instructions
Adopt the role of the controller and discuss the financial reporting issues. The company is a private company. Because the company is considering going public in the future, where IFRS and ASPE differ, these differences should be highlighted to the controller?