Forestry Limited (FL) is a private company incorporated in Canada. Its head office is in Toronto...
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Forestry Limited (FL) is a private company incorporated in Canada. Its head office is in Toronto but its primary operations are in China and include owning and managing tree plantations, sales of trees and logs, and manufacturing of wood products. In addition to the above, the company also holds tree-cutting rights for several large areas of government-owned forest. The company is currently at the centre of a major media debate. Another company has accused them of grossly overstating their estimated land and forest holdings. FL is denying all charges and maintains that it had qualified consultants estimate the value of the holdings. Due to an economic recession, sales are down this year. In order to maximize the quality and quantity of trees harvested from the plantations, the company must manage the forest, including feeding the trees, using herbicides where necessary, managing water supply to trees, and thinning out trees so that the remaining trees have sufficient light and space to grow. In order to manage the water supply, the company builds terraces on the land on which the trees are standing. This helps hold the water but is very labour intensive and costly as it must be done by hand. All the materials needed must be trucked in and then carried to the worksite for installation. The trees are less susceptible to damage from bugs and/or other insects when they are well watered. It has been a very dry year and 25% of the forests are suffering from drought and insect infestation. FL is hopeful that with additional care, it can reverse any potential damage from this so that the value of the wood is not affected. FL has just purchased the rights to cut down trees in a large forest in Northern China. The agreement allows it to harvest the trees for a five-year period. Although not written in the contract, it is understood that it will replant the area when finished. In order to access the trees, the company has had to build a major road into the forest. After the harvest is completed, the road will not be used by FL but the government has indicated that it would like to consider buying the road. The acquisition was financed by the issuance of noninterest- bearing convertible debt to an institutional investor. Under the terms of the debt, FL must maintain a debt to equity ratio of no greater than 2:1. On December 31 (year end), the company signed an agreement to buy a plantation in New Zealand for $20 million from NZL. Immediately thereafter, FL agreed to sell the property to Gray Trees Limited (GL) for $22 million. GL had been unsuccessful in acquiring the plantation directly and had enlisted FL to negotiate on its behalf. In the December 31 financial statements, FL has booked the transaction as two separate transactions: a purchase and a sale (resulting in revenues for the current year showing a significant increase). The deal with GL closes on January 1 and GL will pay cash of $22 million to FL at that time. The $20-million payment to NZL is due January 1. GL is an established company that deals with FL all the time. GL is very profitable. On December 15, FL signed an agreement with Logs Limited (LL) under which FL will harvest timber from a forest owned by LL and "“sell” the logs back to LL. The agreement is worded such that FL "buys" the cutting rights for $7 million and then sells the cut logs for $14 million (market price). No money will change hands until the job is done, at which point, LL will pay FL the net amount of $7 million upon delivery of the logs. The harvesting was completed by year end and FL booked $14 million as revenues. FL is not sure whether it should follow IFRS or ASPE. 1. Introduction: Establish the landscape of the case. Users Who are the main users of the case? Consider any key internal and external users of the financial information. Objectives . What are the user objectives? What do the users really care about? For example a bank is a typical user and they care most about receiving the scheduled interest payments. What is your role in the case? This should be reasonably clear in the case but may be overlooked if not. GAAP Standards What GAAP is appropriate in the case? Determine whether ASPE or IFRS is used or perhaps both need to be applied to the case. Big Picture Items Is there a Big Picture item in the case? For example there may be a debt covenant imposed by the bank for financing. This covenant will likely be based on maintaining a certain financial ratio, such as current ratio or debt-to-equity ratio. As you identify issues in the case and recommend adjustments, this ratio will also require adjustment that could either better or worsen the ratio. Other common big picture items could be fraud, business acquisition/valuation, bonus payments, etc. 2. Analysis: Accounting Issues Identify EACH accounting issue in the case using the following format: ISSUE #1 - ..... State the accounting issue and how it is currently being accounted for. Identify any possible alternative ways to account for the issue such as to capital or expense. Discuss the appropriate GAAP criteria that should be applied such as the definition of a capital asset. Try to provide a balanced analysis if alternatives do exist. For example, do not only provide facts to support capitalization, try to also discuss points that support the expensing option. Activ Go to PA Apply case facts to the noted GAAP criteria. This will support the criteria and ultimately provide the support needed for a recommendation. Recommend how the issue should be accounted for. Quantify the financial statement impact of each adjustment to correct or account for the issue. If numbers are not provided simply discuss the general financial statement impact. ISSUE #2 - ..... ● . ● State the accounting issue and how it is currently being accounted for. Identify any possible alternative ways to account for the issue such as to capital or expense. • Apply case facts to the noted GAAP criteria. This will support the criteria and ultimately provide the support needed for a recommendation. Recommend how the issue should be accounted for. Quantify the financial statement impact of each adjustment to correct or account for the issue. If numbers are not provided simply discuss the general financial statement impact. . Discuss the appropriate GAAP criteria that should be applied such as the definition of a capital asset. Try to provide a balanced analysis if alternatives do exist. For example, do not only provide facts to support capitalization, try to also discuss points that support the expensing option. Activ 3. Conclusions and Big Picture Issue • Based on the big picture issue noted in Step 1, discuss and quantify the overall impact (if possible) of the adjustments required from the accounting issues. What does this mean for the company? For example, if there is a restrictive covenant and after the suggested adjustments it appears to be in breach, then the underlying bank debt would be repayable immediately! Forestry Limited (FL) is a private company incorporated in Canada. Its head office is in Toronto but its primary operations are in China and include owning and managing tree plantations, sales of trees and logs, and manufacturing of wood products. In addition to the above, the company also holds tree-cutting rights for several large areas of government-owned forest. The company is currently at the centre of a major media debate. Another company has accused them of grossly overstating their estimated land and forest holdings. FL is denying all charges and maintains that it had qualified consultants estimate the value of the holdings. Due to an economic recession, sales are down this year. In order to maximize the quality and quantity of trees harvested from the plantations, the company must manage the forest, including feeding the trees, using herbicides where necessary, managing water supply to trees, and thinning out trees so that the remaining trees have sufficient light and space to grow. In order to manage the water supply, the company builds terraces on the land on which the trees are standing. This helps hold the water but is very labour intensive and costly as it must be done by hand. All the materials needed must be trucked in and then carried to the worksite for installation. The trees are less susceptible to damage from bugs and/or other insects when they are well watered. It has been a very dry year and 25% of the forests are suffering from drought and insect infestation. FL is hopeful that with additional care, it can reverse any potential damage from this so that the value of the wood is not affected. FL has just purchased the rights to cut down trees in a large forest in Northern China. The agreement allows it to harvest the trees for a five-year period. Although not written in the contract, it is understood that it will replant the area when finished. In order to access the trees, the company has had to build a major road into the forest. After the harvest is completed, the road will not be used by FL but the government has indicated that it would like to consider buying the road. The acquisition was financed by the issuance of noninterest- bearing convertible debt to an institutional investor. Under the terms of the debt, FL must maintain a debt to equity ratio of no greater than 2:1. On December 31 (year end), the company signed an agreement to buy a plantation in New Zealand for $20 million from NZL. Immediately thereafter, FL agreed to sell the property to Gray Trees Limited (GL) for $22 million. GL had been unsuccessful in acquiring the plantation directly and had enlisted FL to negotiate on its behalf. In the December 31 financial statements, FL has booked the transaction as two separate transactions: a purchase and a sale (resulting in revenues for the current year showing a significant increase). The deal with GL closes on January 1 and GL will pay cash of $22 million to FL at that time. The $20-million payment to NZL is due January 1. GL is an established company that deals with FL all the time. GL is very profitable. On December 15, FL signed an agreement with Logs Limited (LL) under which FL will harvest timber from a forest owned by LL and "“sell” the logs back to LL. The agreement is worded such that FL "buys" the cutting rights for $7 million and then sells the cut logs for $14 million (market price). No money will change hands until the job is done, at which point, LL will pay FL the net amount of $7 million upon delivery of the logs. The harvesting was completed by year end and FL booked $14 million as revenues. FL is not sure whether it should follow IFRS or ASPE. 1. Introduction: Establish the landscape of the case. Users Who are the main users of the case? Consider any key internal and external users of the financial information. Objectives . What are the user objectives? What do the users really care about? For example a bank is a typical user and they care most about receiving the scheduled interest payments. What is your role in the case? This should be reasonably clear in the case but may be overlooked if not. GAAP Standards What GAAP is appropriate in the case? Determine whether ASPE or IFRS is used or perhaps both need to be applied to the case. Big Picture Items Is there a Big Picture item in the case? For example there may be a debt covenant imposed by the bank for financing. This covenant will likely be based on maintaining a certain financial ratio, such as current ratio or debt-to-equity ratio. As you identify issues in the case and recommend adjustments, this ratio will also require adjustment that could either better or worsen the ratio. Other common big picture items could be fraud, business acquisition/valuation, bonus payments, etc. 2. Analysis: Accounting Issues Identify EACH accounting issue in the case using the following format: ISSUE #1 - ..... State the accounting issue and how it is currently being accounted for. Identify any possible alternative ways to account for the issue such as to capital or expense. Discuss the appropriate GAAP criteria that should be applied such as the definition of a capital asset. Try to provide a balanced analysis if alternatives do exist. For example, do not only provide facts to support capitalization, try to also discuss points that support the expensing option. Activ Go to PA Apply case facts to the noted GAAP criteria. This will support the criteria and ultimately provide the support needed for a recommendation. Recommend how the issue should be accounted for. Quantify the financial statement impact of each adjustment to correct or account for the issue. If numbers are not provided simply discuss the general financial statement impact. ISSUE #2 - ..... ● . ● State the accounting issue and how it is currently being accounted for. Identify any possible alternative ways to account for the issue such as to capital or expense. • Apply case facts to the noted GAAP criteria. This will support the criteria and ultimately provide the support needed for a recommendation. Recommend how the issue should be accounted for. Quantify the financial statement impact of each adjustment to correct or account for the issue. If numbers are not provided simply discuss the general financial statement impact. . Discuss the appropriate GAAP criteria that should be applied such as the definition of a capital asset. Try to provide a balanced analysis if alternatives do exist. For example, do not only provide facts to support capitalization, try to also discuss points that support the expensing option. Activ 3. Conclusions and Big Picture Issue • Based on the big picture issue noted in Step 1, discuss and quantify the overall impact (if possible) of the adjustments required from the accounting issues. What does this mean for the company? For example, if there is a restrictive covenant and after the suggested adjustments it appears to be in breach, then the underlying bank debt would be repayable immediately!
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1 Introduction Establish the Landscape of the Case Users The main users of the case include internal stakeholders such as management employees and possibly the board of directors External users could ... View the full answer
Related Book For
Intermediate Accounting Volume 1
ISBN: 9781260306743
7th Edition
Authors: Thomas H. Beechy, Joan E. Conrod, Elizabeth Farrell, Ingrid McLeod Dick
Posted Date:
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