The provincial government (50%) and three private companies (16.67% each) own Access Records Limited (ARL), which commenced operations on April 1, Year 1.
The provincial government currently maintains, on a manual basis, all descriptive information on land in the province, such as information on ownership, legal descriptions, etc. ARL's mandate is to computerize this information and to provide additional data not available from the manual system. The conversion of the manual system for several geographical regions of the province commenced on May 1, Year 1, with a targeted completion of all regions by September Year 3. The manual systems for each region will be maintained by ARL until each regional computerized system is operational.
The computer files are to be available to online users; others not online must obtain the information they need by going to designated government offices for hard copies. The prime users are market research firms, publishers of databases, real estate companies, and a variety of individuals and corporations. ARL charges the users a fee based on the information obtained. Computerization will permit additional descriptive information to be added to the database. As a result, user fees will increase as a region is computerized. No other organization provides this information.
In calculating the pre-tax income of ARL, the following items must be taken into account:
• In return for providing the original information, the provincial government receives a royalty for revenue generated from information that was previously available from the manual system. Two of the private companies receive a royalty for revenue generated from any new information that they gather and enter into the database. The computer system automatically identifies charges for previously available information and charges for the new information.
• The three private companies are to receive, for 10 years, a 20% rate of return on the original cost of the computer equipment and technology they were required to provide to ARL. At the end of 10 years, the computer equipment and technology will become the property of ARL.
• One of the three private companies entered into a 10-year agreement to provide the land and building from which ARL operates. It receives a 12% rate of return per year on its investment in the land and building. All operating costs, including repairs and maintenance, property taxes, and necessary improvements, are to be paid by ARL.
• The shareholders of ARL are to receive interest at the rate of prime plus 1% on any funds lent to ARL.
If the private owners, in operating ARL, do not meet certain specified performance standards, the provincial government can acquire their shares at cost.
It is now September Year 1. Your employer, Martin and Partners, Chartered Accountants, has been engaged by ARL as consultant for the fiscal year ending March 31, Year 2. Martin and Partners has been asked to submit a detailed report addressing significant accounting matters.
You obtain the following information:
1. The cash contribution of the four owners totals $40 million. Another $30-50 million will be needed to complete the computerization. ARL will borrow the additional cash from a chartered bank, using ARL's assets as collateral.
2. Most of the total conversion cost of $70-90 million is for the costs of map ping, aerial photography, and computer graphics.
3. At the end of 10 years, the government is entitled to acquire, at fair value, the 50% of the shares that it does not own. The private companies are entitled to a reduced royalty if the provincial government acquires their shares.
4. The user-fee schedule is set by the provincial government.
5. Discounts are offered to volume users.
6. ARL intends to sell its technology to other provinces.
7. The province's auditor is permitted access to ARL's financial records.
Required:
Prepare the report.