Nimble Health and Racquet Club (NHRC) is a public company that operates eight clubs in a large city and offers one-year memberships. The members may use any of the eight facilities but must reserve racquetball court time and pay a separate fee before using the court. As an incentive to new customers, NHRC advertised that any customers who are not satisfied for any reason can receive a refund of the remaining portion of their unused membership fees.
Membership fees are due at the beginning of the individual membership period; however, customers are given the option of financing the membership fee over the membership period at a 15% interest rate. In the past, some customers had said they would like to take only the regularly scheduled aerobic classes and not pay for a full membership. During the current fiscal year, NHRC began selling coupon books for aerobic classes only to accommodate these customers. Each book is dated and contains 50 coupons that may be redeemed for any regularly scheduled aerobic class over a one-year period. After the one-year period, unused coupons are no longer valid.
During 2014, NHRC expanded into the health equipment market by purchasing a local company that manufactures rowing machines and cross-country ski machines. These machines are used in NHRC's facilities and are sold through the clubs and mail-order catalogues. Customers must make a 20% down payment when placing an equipment order. Delivery is in 60 to 90 days after an order is placed. The machines are sold with a two-year unconditional guarantee.
Based on experience, NHRC expects the costs to repair machines under guarantee to be 4% of sales.
NHRC is in the process of preparing financial statements as at May 31, 2014, the end of its fiscal year. James Hogan, corporate controller, expressed concern over the company's performance for the year and decided to review the preliminary financial statements prepared by Magda Bambenek, NHRC's assistant controller, for the company's bankers. After reviewing the statements, Hogan proposed that the following changes be reflected in the May 31, 2014 published financial statements:
1. Membership revenue should be recognized when the membership fee is collected.
2. Revenue from the coupon books should be recognized when the books are sold.
3. Down payments on equipment purchases and expenses associated with the guarantee on the rowing and cross country machines should be recognized when they are paid.
Bambenek told Hogan that the proposed changes are not in accordance with IFRS, but Hogan insisted that the changes be made. Bambenek believes that Hogan wants to manipulate income to delay any potential financial problems and increase his year-end bonus. At this point, Bambenek is unsure what action to take.
Instructions
Discuss the financial reporting issues and how any ethical issues should be handled.