Question

Temple Limited is in the real estate business. After several years of economic growth, most of the company’s assets are now worth significantly more than the amount that is recognized on the financial statements. Wanting to capitalize on this positive trend, the company is ready to expand and is looking at developing a new property in the Bahamas that will cost $300 million. Currently, the company’s debt-to-equity ratio is 5:1 and the company needs to raise funds for the expansion. Lendall Bank, the company’s primary lender, understands that there is hidden value in the balance sheet and is willing to finance the project.
Temple is now concerned about how the capital markets will react to this increase in debt. The company’s shares list on the TSX and, therefore, GAAP is a constraint. Terry Temple, the company’s CEO, attended a conference on international GAAP where the speakers noted that Canadian companies that are publicly accountable will move to IFRS for fiscal years beginning on or after January 1, 2011.
Under IFRS, fair value accounting is permitted for real estate as an accounting policy choice. The following handout was given to conference attendees. It represents a tentative timeline for the rollout of international standards in Canada for Canadian companies (the handout was modified and taken from a publication issued by the CICA on transitioning to IFRS).
December 31, 2008 Possible disclosure of an enterprise’s plan for convergence and what effects the enterprise anticipates will arise with the change to IFRS.
December 31, 2009 Same disclosure required as in 2008, but with a greater degree of quantification of the effects of the change to IFRS.
January 1, 2010 First year for collection of comparative information for inclusion with 2011 financial statements under new IFRS-based requirements. Opening balance sheet for 2010 on IFRS basis required.
Valuations on certain items may be advisable for the opening balance sheet preparation, depending on accounting policy choices under IFRS 1.
December 31, 2010 Last year of reporting under current Canadian GAAP.
January 1, 2011 Changeover. First year reporting under new IFRS-based standards. Opening balance sheet for 2011 on IFRS basis required.
March 31, 2011 Enterprises issuing interim financial statements prepare their first IFRS-based statements for the three months ended March 31, 2011
December 31, 2011 End of first annual reporting period in accordance with new IFRS-based requirements including IFRS-based comparatives for 2010.
Instructions
Adopt the role of Temple Limited’s controller and write a memo to address the CEO’s concerns. Hint: review Chapters 10 and 11 regarding asset valuation. You might also wish to review IFRS 1 to see what choices the company has regarding valuing its assets at January 1, 2010 (opening balance sheet date for comparative balance sheet for 2011 financial statements).


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  • CreatedAugust 23, 2015
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