Lots Lumber Limited is a private company that operates in the forestry sector and owns timber lots. The company produces specialty lumber and sells to distributors and retailers. Currently, Lots uses ASPE when pre- paring its financial statements. It has an October 31 year end. The company has a management bonus plan, which is based on net earnings and gross profits.

In the past, the company estimated decommissioning costs related to its sawmill facility and recorded them as a liability, with an offsetting increase to the cost of the plant. Since the production period can be fairly long, including the curing and special treatments applied to the lumber, the company has had to borrow to finance the production process. Lots' borrowings are primarily from a private investor, who has set two key requirements in the loan agreement. The agreement requires Lots to maintain a certain debt to equity ratio and to submit audited financial statements prepared using GAAP. The audited financial statements are due within 60 days of the year-end date. Historically, the company has expensed this interest for borrowings from the private investor.

The company has a purchase commitment to buy a minimum amount of specialty resins used to treat the lumber. This is a five-year contract at a fixed price. At the time the contract was signed, Lots was very excited about it, but now, early in the fourth year of the contract, the company has realized that it will not need the volumes that it committed to buy, because it has developed a new technique that is cheaper and that uses a different solution to treat the wood. In fact, it looks as though the company will have to pay for items that will not be required. Lots is trying to decide whether to break the contract or remain with the contract and just pay for the items but not take delivery. There are two years remaining on the contract.

Instructions

Lots Lumber Limited has just hired you as its new controller. It is trying to decide whether to adopt IFRS or continue to report under ASPE. Provide the president with a report that details the impact of reporting under IFRS on the company's financial results, management bonus plan, and debt covenant, giving consideration to the issues indicated above.