Prepare a revised statement of financial position

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Reference no: EM13489762

Annapolis Group Ltd. (AGL) designs, develops, manufactures, and sells photonics-based solutions, including lasers, laser systems, and electro-optical components. The company has manufacturing operations in British Columbia, Ontario, and Nova Scotia, and sells primarily in North American markets.

In the past, the company has prepared its financial statements in accordance with ASPE, but is looking to comply with IFRS for the 2012 financial statements, in conjunction with a planned public offering. The public offering is still being negotiated, and depends on the stability of financial markets. However, the company has decided to draft financial statements that comply with IFRS to ensure that they are prepared for the eventuality.

The company has prepared a draft statement of financial position (Exhibit 1-1) and is satisfied that the format of this statement is compliant with IFRS. However, some differences in measurement between ASPE and IFRS have yet to be recorded (Exhibit 1-2). Additional information on financial statement elements is provided in Exhibit 1-3.

At this stage in the analysis, the company is concerned only with the statement of financial position, not earnings. AGL is required, as part of its bond agreement, to maintain a minimum current ratio of 1-to-1 and a maximum debt-to-equity ratio of 5-to-1. (Debt in this ratio is defined as "total liabilities.") Since a number of the outstanding items affect debt and/or equity, the CFO wants to ensure that these key financial targets continue to be met.

AGL's current concern is covenant compliance in 2012. Because the focus is on the statement of financial position, all of the impact of any adjustment to earnings, whether related to the current year or a prior year, will be recorded as an increase or decrease to retained earnings. AGL will further analyze these changes and restate comparative numbers for 2011 at a later date.

Required

Assume the role of the CFO for AGL and do the following:

1. Prepare journal entries to account for the transactions and information described in Exhibits 1-2 and 1-3.

2. Prepare a revised statement of financial position after the journal entries prepared in Required 1 have been recorded.

3. Evaluate the key financial targets and suggest action for the coming year, if there are any concerns.

Exhibit 1-1: Annapolis Group Ltd. - Draft Statement of Financial Position as at December 31, 2012 (in thousands)

ANNAPOLIS GROUP LTD.
Statement of Financial Position

December 31, 2012
(in thousands)

ASSETS

 

December 31, 2012

Current assets:

 

Bank: Current account

1,240 

 

Accounts receivable

35,350 

 

Inventory

45,400 

 

Prepaid expenses and deposits

   2,820 

 

84,810 

Non-current assets:

 

Capital assets net

29,300 

 

Intangible assets

  21,643 

 

  50,943 

Total assets

135,753 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

Current liabilities:

 

Accounts payable and accrued liabilities

31,742 

 

Dividends payable

1,060 

 

Current bank loan

  38,760 

 

71,562 

Non-current liabilities:

 

Long-term debt

50,000 

 

Discount

  (9,010)

 

40,990 

Equity:

 

Share capital - common shares

7,350 

 

Stock options outstanding

1,660 

 

Retained earnings

  14,191 

 

  23,201 

 

Total liabilities and equity

135,753 

 Exhibit 1-2: Annapolis Group Ltd. - Outstanding items

Note: Amounts are in thousands.

1. The $50,000 bond payable was issued on July 1, 2010. It was a 7.6%, 20-year bond that paid interest semi-annually on December 31 and June 30. The bond was sold to yield 10%. Straight-line amortization of the discount is reflected in the financial statements, over the 40-period life of the bond, but IFRS requires use of effective interest amortization.

2. During 2012, the company discovered an environmental issue at their manufacturing site in Nova Scotia. After consultation with environmental engineers and the relevant government departments, the company learned that it would cost approximately $300 per year for four years to remediate the site. AGL also learned that remediation is not required under government legislation. However, in late 2012, AGL announced plans to remediate the site, beginning in January of 2014. Planning has begun, and the community affected has been involved in consultation and the planning process. Under ASPE, no liability needed to be recorded, but this situation creates a constructive liability under IFRS.

3. AGL leases equipment under operating leases. Analysis indicates that one of these lease contracts, signed on March 1, 2012, is a financial lease under IFRS, because the lease is for (specialized) equipment using technology under patent with AGL. Accordingly, the lease must be capitalized under IFRS even though it was not a capital lease under ASPE. Payment of $3,150 was made on this lease in March 2012, of which $525 is recorded as a prepaid asset on the SFP at the end of 2012. Details of the lease are in Exhibit 1-3.

4. Interest on both general borrowing and the bond is expensed; this expense is $6,405 in 2012 before any adjustments. In early August of 2012, the company placed a $1,400 deposit on manufacturing equipment that will be delivered in 2013. A long-term prepaid account was created for $1,400 and grouped with capital assets on the statement of financial position. (Separate disclosure will be provided in the disclosure notes.) The $1,400 payment was financed out of general borrowing. Under IFRS, related interest must be capitalized.

5. Compensation expense of $320 was recorded with respect to stock options outstanding in 2012. All stock options are held by senior administrative staff. Under IFRS, forfeiture is estimated in advance, and, as a result, the compensation expense recorded annually is lower. Valuation models indicate that the amount of compensation expense recorded for 2012 should be reduced to $275.

6. IFRS requires depreciation of capital assets by component, whereas ASPE deals with whole assets. The approach to impairment tests is also different. The accounting group of AGL has ascertained that an additional $620 of accumulated depreciation and $2,200 of impairment of intangible assets are required.

Exhibit 1-3: Annapolis Group Ltd. - Additional information

Note: Amounts are in thousands.

1. Lease obligation

The following terms are associated with the lease:

Inception date

March 1, 2012

Lease term #1 (first 2 years)

 

 

Duration

2 years

 

Annual lease payment due at the beginning of each lease year

$3,150

Lease term #2 (remainder of lease)(renewed at option of lessor)

 

 

Duration

1 year

 

Annual lease payment due at the beginning of each year

$1,050

 

 

Residual value at the end of lease

Unknown; leased asset reverts to lessor

Implicit interest rate

6%

Annual maintenance costs, paid by lessor in each of years 1-3

$75

Notes: A formal entry is needed to reclassify part of the lease liability as a short-term liability at December 31, 2012. Include the short-term amount in accrued liabilities.

The company uses straight-line depreciation for all manufacturing assets and claims a full year of depreciation in the year of acquisition and no depreciation in the year of disposal.

Reference no: EM13489762

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