Unlimited Possibilities Limited (UPL) is finalizing the financial statements for 20X5. The company’s managers are uncertain how each of the following events and situations should be reported:
a. UPL is the guarantor on a $ 10 million bank loan that was obtained by another company controlled by the same shareholders who control UPL. The amount of the guaranteed loan is a material amount for UPL.
b. UPL has a subsidiary in Japan. UPL has reached agreement to sell the Japanese subsidiary to a Taiwanese company, subject to approval by regulators in Japan. When the sale closes, UPL will realize a profit of $ 20 million as the purchase price is $ 20 million higher than the subsidiary’s net book value. Approval is expected, but it will be at least six months before the regulators issue their final ruling.
c. A minority shareholder alleges that UPL’s controlling shareholders entered into transactions that had the effect of reducing the non- controlling shareholder’s equity in the company. (In securities legislation this type of action is known as “shareholder oppression.”) The non- controlling shareholder filed a complaint with the provincial securities commission, claiming damages of $ 50 million. The securities commission ruled in favour of the non- controlling shareholder. UPL is appealing the case and UPL’s lawyers are confident that the court will overturn the ruling in approximately one year.
Discuss the appropriate reporting for each of these three items on UPL’s 20X5 financial statements.