Buy Cartier Ltd. (BCL) is a Canadian public company that operates primarily in the commercial and recreational transportation sector. Worldwide, the commercial transportation business is growing strongly, fuelled in part by rapid rates of urbanization. Traffic congestion, pollution, and commuting times are rising in major cities. Rail transportation represents an efficient, cost-effective solution to these problems. Analysts expect that the global passenger rail equipment market will grow at a compounded annual rate of more than 5%. Constraints on government ability to finance new transportation systems have resulted in the contracting of services to private companies such as BCL.
BCL has three divisions. The rail and transit operation offers a full range of urban, sub-urban, and intercity vehicles as well as complete rail transit systems. The recreational products division designs, builds, and distributes personal recreational transportation vehicles such as snowmobiles and watercraft. The capital services division oversees the financing activities for the company and provides secured financing for customer purchases of recreational product inventories and railcar leasing and management services for commercial customers.
Despite an uneasy economy, BCL has expanded its operations considerably in fiscal year 20X5. This expansion is consistent with management’s published objective to double the corporation’s revenues, profits, and earnings per share over the next five years.
It is now June 20X5 and BCL’s fiscal year ends on September 30. You, CA, have recently accepted the position of assistant to the chief financial officer of BCL, Dave Butler. Your duties at BCL include overseeing the external reporting process and coordinating the external audit function.
BCL is an audit client of Rankin & Rankin (R& R), your previous employer. Mr. Butler has scheduled a meeting with the R& R audit partner and manager. In preparation for this meeting, Mr. Butler has asked you to prepare a report that discusses the major accounting and audit issues that might arise during the meeting with respect to the rail and transit division. Mr. Butler has provided you with information about new developments in this division (see Exhibit A). Mr. Butler would also like to know what information should be gathered to help the audit go as smoothly as possible. He is hopeful that your previous experience as an auditor at R& R will help reduce disagreements (which have been a problem between management and the auditors) and the current year’s audit fee.

Required
Prepare your report for Mr. Butler.
Exhibit A Current Activities in Rail and Transit Division
1. On May 1, 20X5, BCL announced that it had signed an agreement to purchase all of the shares of Alltrans Rail Systems Inc., a US transportation company, for US$ 300 million (approximately C$ 500 million). A summary of the SFP items of Alltrans at April 30, 20X5 (in thousands of US$), is as follows:
Assets
Receivables............................ $ 80,500
Inventories............................. 100,200
Capital assets............................ 500,100
Goodwill............................. 20,000
Other assets............................ 50,000
................................ $ 750,800
Liabilities
Short-term borrowings....................... $ 20,500
Accounts payable and accrued liabilities................ 62,300
Long-term debt........................... 330,000
Deferred income taxes........................ 80,200
................................. $ 493,000
Alltrans has a contract with a US city to provide inter- city bus transit until December 1, 20X9. To ensure adequate continuation of services, key members of Alltrans have been retained under management contracts, which provide bonuses for the next two years based on Alltrans’ operating results. The fiscal year- end of Alltrans is June 30. Management of Alltrans does not want to change the year- end and wishes to retain its current auditors, Patterson & Cole.
The Alltrans purchase is the single largest acquisition in BCL’s history. As a result of this acquisition, US operations are now the largest part of BCL’s global operations. Management has decided to report its financial statements in US dollars. The existing cumulative foreign exchange gain on other US operations of $ 16 million was transferred to retained earnings because reporting in US dollars means there is no longer any exposure to the Canadian/ US dollar exchange rate.
2. In accordance with its intention to position itself in the growing international markets, BCL incorporated a company in Peru, South America, Transcom SA. The intent is to develop a citywide transit system in the country’s capital city, Lima. To secure government approval and licenses for the system, BCL agreed to invest C$ 50 mil-lion in the company. The government has agreed to provide subsidies for the purchase of the transit vehicles. These subsidies will become repayable if Transcom SA does not meet government- imposed quotas for hiring local employees to service the rail system.
BCL engineers will design the transit system and BCL will provide the transit vehicles. BCL engineers have been seconded to oversee the design stage of the project. The engineers are working with local government officials and construction of the rail system and manufacture of the transit vehicles is expected to commence in February 20X6. The local government must approve all stages of the rail system design and will also approve the design of the transit vehicles. Once the system is complete, Transcom SA will operate it; however, the services provided would be rate- regulated by local government. The local government will also approve transit schedules. BCL agreed to allow government officials to review all books and records of Transcom SA at the convenience of the government. BCL expects that Transcom SA will incur losses in the start- up of the operations. Management of BCL has recorded its $ 50 million investment in Transcom SA using the cost method.