Baker Company Limited (BCL) was founded in 2023. Its first year of operations turned out to be a good one, as far as start-up years go. The company not only broke even but actually showed a very small profit. However, just as the company was establishing itself in the market, a recession hit in 2024, which had devastating effects. Demand for BCL’s retail products declined as consumers tightened their purse strings. Through the use of tight cost controls BCL managed to still record a small profit in 2024.

While the recession only lasted until the end of 2025, BCL was unable to remain profitable and suffered large operating losses in that year. In fact, the losses were significantly greater than the profits that were reported in the previous two years. Despite this, BCL management was not overly alarmed and made the following comments:

The losses were expected given the widespread recession. Since the bulk of our sales are in retail markets, and with unemployment levels being at record highs, it is not surprising that consumer demand has fallen off. If BCL is compared with the industry, you will see that it did much better than its competitors, some of whom went bankrupt.

Keep in mind that BCL is a relatively new company and managed to record a profit in two out of its first three years. This is attributed to the strong management team and the ability as a streamlined company to react to the recession with cost control measures and an aggressive yet flexible sales staff.

The management team believes that the company is positioned for a new growth spurt given that the economy seems to have recovered and a lot of “deadwood” (competition) has been cleared out. In that regard, the recession will have a positive impact on the company’s short-to mid-term growth potential.

BCL is on the verge of introducing two new products that will revolutionize the industry and assure a solid earnings base for the future. These products will be introduced in 2026 with sufficient buyers identified to facilitate a break-even in terms of net income for 2026. This is a very conservative forecast.

Although the effects of the recession were lessening, unemployment was still high in early 2026 and consumer spending had not increased significantly. Some economists were predicting that it would take two or three years for consumer confidence and spending to pick up to pre-recession levels.

Instructions

Adopt the role of the company’s auditor and determine whether BCL should recognize the benefits of the losses suffered in the 2025 financial statements. Assume BCL is a private company. Note any differences between IFRS and ASPE, and keep in mind that the role of the auditor is to ensure transparency in the financial reporting of the company.