Question

Northern Energy Limited ( NEL) is a large Canadian private company organized in three operating segments: propane operations, trucking, and mineral explorations. Financial statements have not been audited, and NEL has simply used the cost method for its invest-ments. NEL is now considering issuing debt in a public offering, which would mean adoption of IFRS. You, a public accountant consulted on reporting issues, have been asked to prepare a report for circulation to the Board of Directors and shareholders, to help them understand the implications of this potential shift. They specifically wish to understand what financial statement elements might change with revised investment reporting.
Investments reported on the 20X6 statement of financial position:


Additional information is contained in Exhibit 5.

Required
Prepare the report.
EXHIBIT 1
NEL INVESTMENTS
Later Corp., Common Shares
Later Corp. ( LC) is a nationwide courier company, whose shares were acquired by NEL in 20X2. NEL purchased 57.4% of the outstanding shares from the founder of LC on his retirement; the remaining shares are owned by management and two family members of the founder. LC had real estate assets that were significantly undervalued in its financial statements, prompting NEL to pay a significant premium over book value for the company. The LC Board of Directors consists of 14 members. NEL has the right to appoint eight directors, but to date has nominated only four individuals. The other four slots of NEL are filled by continuing members whom NEL found acceptable.
Nico Investments Ltd.
NEL owns 80% of the common shares of Nico Investments Ltd. ( Nico), which manufac-tures and distributes aluminum wheels. The remaining shares are owned by Frank Nico, the founder. Nico has had persistent challenges with its product and markets and has achieved breakeven results at best since NEL acquired the shares in 20X0, although pros-pects are positive. Nico reports a deficit on its financial statements but is solvent. Nico has never declared dividends. NEL has guaranteed loans of Nico. Nico has a nine- member Board of Directors, of which NEL appoints seven members, including the chair, who is Frank Nico. According to the terms of signed shareholder agreements, Mr. Nico can veto certain decisions of the Board dealing with operating and financing issues. Trufeld
Trucking Ltd., 8% Bonds
These 8% bonds pay interest semi- annually and mature in 20X14. The par value is $ 275,000. NEL provided this debt financing to Trufeld, a long- time “friendly” competitor in NEL’s trucking business. The two companies often enter joint bids for long- term hauling contracts, and take on freight for the other if overbooked. The bonds are secured against assets in Trufeld’s trucking fleet. NEL has one member on the Trufeld Board of Directors as a result of the bond investment. NEL expects to collect interest and principal on the bond, and will not resellit.


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  • CreatedFebruary 17, 2015
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