Identifying Operating Income Components Headquartered in Ottawa, Ontario, Canada, Mitel Networks Corporation is a high-tech company that provides unified communications solutions for business. The company focuses almost entirely on Voiceover-

IP (VoIP) products. Mitel has partners and resellers worldwide and is listed on the NASDAQ; its income statement follows.

MITEL NETWORKS CORPORATION Consolidated Statement of Operations Data For Year Ended December 31 (in U.S. dollars, millions) 2015 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,157.7 Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 543.8 Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 613.9 Expenses:

Selling, general and administrative. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 363.0 Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131.4 Special charges and restructuring costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54.6 Amortization of acquisition-related intangible assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 75.1 624.1 Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10.2)

Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (32.4)

Debt retirement and other debt costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9.6)

Other income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.9 Income tax recovery. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.6 Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (20.7)

Required

a. Identify the components considered operating for each year.

b. Identify the nonrecurring items for 2015 and explain how financial analysts would treat each item.

D5-60. Managing Foreign Currency Risk Fluctuations in foreign currency exchange rates can result in increased volatility of revenues, expenses, and profits. Companies generally attempt to reduce this volatility.

a. Identify two possible solutions to reduce the volatility effect of foreign exchange rate fluctuations.

b. What costs would arise if you implemented each of your solutions?
D5-61. Ethics and Governance: Revenue Recognition GAAP revenue recognition standards are based on broad principles rather than bright-line rules. This creates a certain amount of latitude in determining when revenue is earned. Assume a company that normally required acceptance by its customers prior to recording revenue as earned, delivers a product to a customer near the end of the quarter. The company believes customer acceptance is assured but cannot obtain it prior to quarter-end. Recording the revenue would assure “making its numbers” for the quarter. Although formal acceptance is not obtained, the salesperson records the sale, fully intending to obtain written acceptance as soon as possible.

a. What are the revenue recognition requirements in this case?

b. What are the ethical issues relating to this sale?

c. Assume you are on the board of directors of this company. What safeguards can you put in place to ensure the company’s revenue recognition policy is followed?