Question: You, CPA, have been working for Plener
You, CPA, have been working for Plener and Partners, Chartered Professional Accountants (P&P), a mid-size CPA firm, for three years. You have been assigned a new project for a long-term client of your firm, Oxford Developments Inc. (ODI). Information on ODI's operations and the property development industry can be found in Exhibit III.
It is now September 5, Year 11. You and Wendy Yan, the engagement partner, just sat down with Mike D'Silva, Chief Executive Officer of ODI. Mike came in to discuss a new business opportunity that ODI has recently undertaken.
"At ODI, we are always searching for new opportunities related to property development. ODI's focus is on providing a superior return on investment for its shareholders. ODI leverages existing equity with an appropriate amount of debt to acquire and develop properties for resale. As I've mentioned to you before, we have been thinking of getting into the hotel market for a couple of years now, but we were unsure how to get started. A little while ago, I had a chance meeting with Linda Kim, the general manager of Hospitality Management Inc. (HMI). After many meetings and much research, we decided that ODI and HMI are a good fit, and we have started working together on the development and operation of a boutique hotel. Our hotel will have a special feature-the hotel rooms will be sold to individual investors.
"We have established a separate company, Genuine Investments Inc. (GI), for this unique project. HMI agreed to contribute cash and ODI contributed the land and the building. To be successful and profitable, the hotel will require excellent marketing and management. HMI has a good track record in these areas, and I'm confident they will be able to achieve similar results for this property. HMI will operate the hotel under a management contract. I've provided some excerpts from the finalized agreement between ODI and HMI (Exhibit IV).
"After Mike leaves, Wendy says to you, "It is likely that we will also be asked to perform the annual audit engagement of Gl's financial statements in accordance with IFRS, so I would appreciate your analysis of the accounting implications for the initial transactions and ongoing operations of Gl. I had a chance to meet with ODI's Chief Financial Officer, Amber Wolfe. My notes from that conversation are attached (Exhibit V).
Exhibit III:
Exhibit IV:
Exhibit V:
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Oxford Developments Inc. (ODI) is a mid-size real estate development and sales company. It was founded by a small group of individuals who felt there was a significant amount of money to be made in real estate, and it has been in business for 10 years. As the company grew, it brought in additional investors, and it is now owned by 25 individual shareholders. The investors have never been involved in the day-to-day management of the company; rather, it is professionally managed. Over the past several years, ODI has acquired over 100 commercial and industrial proper- ties all over Canada, which showed significant potential. ODI has renovated these properties and resold them, usually for a substantial gain. The average time between acquisition and sale of the properties has been 12 months, and the average profit margin has been over 12%. Between Year 2 and Year 10, the Canadian real estate industry has been strong. The aver- age annual increase in the value of commercial real estate has been 8.2% over this time period, compared with the historical annual rate of 4.6% in the previous 20 years. ODI has been able to achieve a profit margin of over 12% due to its strategic acquisitions and its strong control of the renovation costs associated with these properties. The hotel industry in Canada is fragmented, and significant differences exist between the vari- ous geographical areas of the country as well as the quality of hotel properties. Overall, the industry has achieved an occupancy rate of 76% over the past decade. This percentage has been steadily increasing over the past 10 years, with the occupancy rate going from 72% in Year l to 79% in Year 10. More recently, the Canadian economy has slowed. The difficulties in the U.S. housing mar- ket, as well as the uncertainties surrounding the financial industry in the U.S., have precipitated a worldwide economic slowdown. Canada is not immune to these events. ODI believes it is well situated to take advantage of the opportunities that a declining real estate market may present. ODI's strategy is to maintain a strong balance sheet, purchase strate- gic properties at distressed prices, renovate these properties at low costs using well-priced labour and construction materials, and resell the properties as the real estate market starts to recover. Incorporation Genuine Investments Inc. (GI) was incorporated on December 1, Year 10, to develop and operate a boutique hotel known as "The Genuine Hotel." The financial year-end for Gl will be November 30. Authorized Share Capital of GI There are two classes of shares, as follows: • Class A voting common shares-20,000 shares authorized • Class B non-voting shares-an unlimited number of shares authorized Contributions Oxford Developments Inc. (ODI) will contribute the land and building and $1,000 in cash to Gl in exchange for 1,000 Class A shares and 100,000 Class B shares. The building is expected to have a useful life of 40 years. Hospitality Management Inc. (HMI) will contribute cash equal to the fair value of the land and building contributed by ODI plus $1,000 in exchange for 1,000 Class A shares and 100,000 Class B shares. Restriction on Share Sale Shares in Gl cannot be sold or traded without the approval of both ODI and HMI. Both companies agree to hold the shares for five years. After that period, if either party wants to sell, the other party will have the right to pur- chase the shares at 90% of the market value at the time of sale. Loans ODI and HMI may periodically loan funds to Gl. If funds need to be advanced to GI, both investors will provide an equal amount. Any funds advanced will bear interest at the prevailing market rate, and will be repayable on demand at the request of either ODI or HMI. Board of Directors ODI and HMI will each appoint two individuals to the board of directors of GI. A fifth member, who will act as board chair, will be jointly appointed by ODI and HMI. Profit Distribution GI will distribute 90% of its net earnings on an annual basis provided there is cash available. The distributions will be performed on a tax-effective basis in the form of either dividends or management fees. If the company is wound up or dissolved for any reason, the final distribution of any amounts remaining shall be made in propor- tion to the Class B shareholdings of each investor. Operation Operation of The Genuine Hotel will be contracted to HMI at a fee approximating the current market rate for man- agement fees. HMIl will be responsible for reservations, guest services, housekeeping, regular ongoing mainte- nance of the hotel, and security. Gl will be responsible for general administration. The contract will be renegotiated every five years. The management fee for the first five years is set at $75 per night per occupied hotel room. "Thanks so much for meeting with me. Ever since this project began, I've had more work than I can handle. GI has minimal staff right now, including a manager looking after the construction and some secretarial and admin- istrative support, so I've been helping out. As a result, I have questions about both ODI and Gl. "I'm hoping that P&P can take over the day-to-day bookkeeping for the next several months until GI can hire an experienced controller. On the bright side, a marketing person was recently hired, and we are actively hiring additional staff as required. "Extensive renovations were required on the building, and they are now complete. Most of the furnishings, fix- tures, and equipment have been installed, and we are busy planning for the grand opening. Since we wanted to get the project started quickly, ODI and HMI provided all of the initial financing. However, in the future, we would like Gl to obtain its own bank financing. If Gl does obtain financing, it would like to repay the amounts owing to ODI and HMI and repurchase 50% of the Class B shares held by each company at carrying amount. I have brought along some financial information related to GI (Exhibits VI and VII). "Given that this investment is new and unique for ODI, it could become a model for future investments. Our shareholders are therefore very interested in how the accounting for our investment in Gl will affect ODI's financial statements for the November 30, Year 11, year-end and in the future. I expect the gain on the sale of the land and building transferred to Gl to improve ODI's overall financial position and increase its net income. I think it should also increase ODI's net assets, which is a key financial indicator reported to ODI's shareholders and OD's bank. "I think that's it for now. Again, thanks for your help with all of this, as my time seems to be at a premium these days."
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> On December 31, Year 2, PAT Inc. of Halifax acquired 90% of the voting shares of Gioco Limited of Italy, for 690,000 euros (€). On the acquisition date, the fair values equaled the carrying amounts for all of Gioco's identifiable assets
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> Distinguish between unrestricted and restricted contributions of a charitable organization.
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> Briefly explain why the Canadian AcSB decided to create a separate section of the CPA Canada Handbook for private enterprises.
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> On December 31, Year 7, Maple Company issued preferred shares with a fair value of $1,200,000 to acquire 24,000 (60%) of the common shares of Leafs Limited. The Leafs shares were trading in the market at around $40 per share just days prior to and just a
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> How are translation exchange gains and losses reflected in financial statements if the foreign operation's functional currency is the Canadian dollar? Would the treatment be different if the foreign operation's functional currency were not the Canadian d
> What translation method should be used for a subsidiary that operates in a highly inflationary environment? Why?
> What difference does it make whether the foreign operation's functional currency is the same or different than the parent's presentation currency? What method of translation should be used for each?
> What should happen if a foreign subsidiary's financial statements have been prepared using accounting principles different from those used in Canada?
> Define a foreign operation as per IAS 21.
> How are gains and losses on financial instruments used to hedge the net investment in a foreign operation reported in the consolidated financial statements when the PCT method is used to translate the foreign operation?
> Explain how the acquisition cost is determined for a reverse takeover.
> Why might a company want to hedge its balance sheet exposure? What is the paradox associated with hedging balance sheet exposure?
> What are the three major issues related to the translation of foreign currency financial statements?
> Would hedge accounting be used in a situation in which the hedged item and the hedging instrument were both monetary items on a company's statement of financial position? Explain.
> If the sales of a foreign subsidiary all occurred on one day during the year, would the sales be translated at the average rate for the year or the rate on the date of the sales? Explain.
> When translating the financial statements of the subsidiary at the date of acquisition by the parent, the exchange rate on the date of acquisition is used to translate plant assets rather than the exchange rate on the date when the subsidiary acquired th
