Reference no: EM132815583

Question - Big Bath Emporium (BBE), a private company based in Toronto, is the city's largest manufacturer and vendor of bathtubs, showers, and sinks. The company sells products direct to consumers, and also sells wholesale to other retailers.

BBE is owned by Bob Bresher, who runs the operations side of the business. His brother, Thomas Bresher, manages all of the accounting functions. Bob performed market research and determined that the next step for BBE is to expand sales to Quebec. BBE has slowly reduced its debt load over the years, but still relies on creditors and bankers to finance its operations. BBE went to the bank to obtain additional financing to expand to Quebec. The bank agreed to provide $1.5 million in financing at face value, at a rate of 9%, interest payable annually. The bank indicated that audited financial statements would be required this year, and BBE would need to maintain a debt to equity ratio of 1:1, where debt is defined as all liabilities in accordance with their accounting framework.

Brayden LLP is a local audit firm engaged to perform the December 31, 2020 year-end audit to satisfy the bank requirements. You are the senior accountant assigned to this audit engagement. It is January 2021, and Thomas Bresher has asked that the work be performed as soon as possible. You meet with Bob and Thomas and note the following transactions that occurred during the year.

1. During 2020, BBE sold 100 warranties for $5,000 each on its bathtubs. The warranty period is five years. Historically, the warranties have resulted in a cost of approximately $500 each per year. BBE uses the cash basis to recognize the warranty expense and revenue. During 2020, no warranty costs were incurred.

2. On December 31, 2020, BBE was notified that it will need to perform a cleanup every 10 years of the area surrounding its plant. BBE estimated that the costs of the cleanup will be approximately $500,000 in 10 years. Thomas indicated that, because the amount is not due for years, there is no need to recognize anything at this point. However, the company also publicly pledged they would spend another $50,000 to landscape and enhance the area around their plant.

3. BBE bought inventory on January 1, 2020. The purchase was financed through an interest-free vendor take-back loan, with a promise to repay $200,000 in two years. Thomas recorded the loan on the balance sheet at $200,000. Assume that at December 31, 2020, all of the inventory is still held. As at December 31, 2020, the inventory's net realizable value was $100,000.

4. On June 30, 2020, an employee launched a wrongful dismissal suit against BBE for $150,000. BBE's lawyers have indicated that they expect a payment of $100,000 to $120,000, but the lawsuit is still in court proceedings. It is probable that BBE will owe some amount to the employee Thomas didn't recognize any amount for this because he believes that BBE will be able to successfully defend the suit.

5. BBE has an intangible asset on its balance sheet (a website) with a remaining useful life of 6 years. Its book value is currently $150,000. As customers have started to use the mobile application instead, fewer and fewer sales are occurring through the website. Management is considering a change to the website's use and believes an impairment test should be performed. The website's estimated future net cash inflows for the next 6 years are $30,000 annually. The fair value is currently $125,000 (there would be no selling costs).

BBE's balance sheet shows that the company has $1.3 million in debt and $2.4 million in equity. Because the equity is so much higher than the debt and the debt to equity ratio is easily met, Bob indicated that a dividend will be declared this year for $800,000.

Assume that BBE applies ASPE, but is potentially interested in going public in the future, and therefore would like to know where there are differences for those issues under IFRS. You may calculate certain figures under IFRS rules in order to provide more useful analysis, but do not prepare journal entries or analyze the debt-equity covenant under IFRS.

Required - Provide a memorandum to your manager indicating the issues to accounting you anticipate facing once the audit begins, and their impact on the company and its new reporting requirements. Indicate in your memorandum where there are differences between ASPE and IFRS. Hint: If there are issues that are new, use the conceptual framework to help support your analysis with solid reasoning.

Submissions should be in Word or written note Calculations, schedules, and journal entries should be prepared in Excel or Word and attached as an Appendix to the memorandum. The Appendix should be written.

Your submission should include the following approximate structure:

1) Overview / summary of reporting issues for the company as a whole, including relevant users of the financial information and any new reporting concerns

2) Discussion of accounting issues

3) Summary of impact of accounting issues on reporting and users - analyze the adjustments and their impact on the total liabilities, total equity, and the debt to equity ratio

When analyzing accounting issues in memorandum format, the following structure is recommended:

1) Explain the issue and current accounting treatment.

2) Explain the relevant handbook accounting guidance and/or criteria.

3) Explain why the current accounting treatment is or is not in accordance with the relevant accounting guidance.

4) Concludes on accounting treatment that should be used, based on the relevant framework, and explain any alternatives for accounting policy choices, where applicable.

5) Include any necessary journal entries that will affect the December 31, 2020 year end, as well as details for any supporting calculations as necessary.

This is professional memo provided to manager, who has significant knowledge of IFRS and ASPE. The terminology, tone, and level of detail provided might be different if you were preparing the memo for Bob Bresher, who doesn't necessarily understand accounting standards. Accordingly, your manager will be looking for professional language and technically accurate discussions of the accounting issues in order to utilize your memo as evidence for the audit file.