Lalani Couture Limited (LCL) is a privately held company headquartered in Montreal. The company operates a chain of retail clothing stores in major cities across Canada, although the bulk of the company stores are in Ontario and Quebec. LCL manufactures most of its apparel in its facility in Montreal, although some manufacture is also contracted out to other manufacturers, principally in Quebec. The company prides itself on getting the latest fashions to its stores in a very short time, usually within a couple of weeks after a particular fashion trend has been detected. Because of the chain's quick response to the market, the company has been able to serve the youth market quite well despite offering no major "name brand" clothing. The primary emphasis is on clothing and fashion for young women, but about \(20 \%\) of sales are of young men's clothing such as trendy jeans and pullovers.

Historically, the company has been quite successful. This success is largely due to employing a small group of young adults whose job it is to detect fashion trends among young people well before the major fashion houses do-finding out what's "cool" among youth. The local manufacturing then makes it relatively easy for LCL to quickly design and manufacture new styles of clothing, and to deliver the merchandise to the stores.

No merchandise stays in the stores very long. The store managers are told that as soon as sales of a product begin to decline, the product should go on sale at increasing discounts until it is all sold:

The founder-owners of the company no longer take an active part in running the dayto-day business. Operational activity is the responsibility of the professional managers. Financing has come mainly from retained earnings, although the balance sheet does show a moderate amount of long-term debt. That debt is in the form of debentures held by a municipal employees' pension fund investment trust, secured by LCL's tangible capital assets. Short-term financing is provided by a bank line of credit. The line of credit is secured by a proportion of accounts receivable and inventory. However, the accounts receivable are minimal, since the company's sales are mainly by cash and general credit card (i.e., Visa, MasterCard, and American Express). Therefore, inventory is the primary security. The balance sheet also shows a small amount of capital lease liability.

Recently, LCL has begun to have difficulty in achieving the profit levels to which the owners have been accustomed, although the company certainly is not in any financial distress. It now is nearing the end of \(20 \mathrm{X} 9\) and LCL's financial group is prepared for the yearend closing. LCL managers have decided to look more closely at certain aspects of the way LCL does business, as well as how the company reports the results of operations.

1. In \(20 X 7\), LCL purchased \(100 \%\) of the shares of a small clothing manufacturer in Montreal, which then became a subsidiary of LCL. LCL was one of its customers, as were several other retailers. LCL paid \(\$ 5,000,000\) for that company, of which \(\$ 2,000,000\) was allocated to goodwill. Within a year of the purchase, many of the subsidiary's other customers left because they were concerned that LCL might steal their clothing designs. LCL managers had not expected those defections since LCL's designs were generally ahead of their competitors. As a result, the subsidiary has not been able to stay profitable. LCL has been in talks to possibly sell the subsidiary to a U.S.--based clothing chain. 2. LCL owns none of its stores because they are all located in shopping malls. LCL has preferred to use short-term leases (e.g., five years) in order to maintain flexibility. The company is now planning to renegotiate the leases for longer terms in order to spread the cost of store design (furniture and fixtures) over a longer time span.
3. The company has followed a practice of deferring and amortizing the start-up costs for new stores. However, a recent change in accounting standards has decreed that start-up costs cannot be deferred and amortized. LCL must present audited statements both to the provider of long-term debt and to many of the major shopping mall landlords. LCL reports on the basis of Canadian ASPE.
4. LCL has large electronic billboards mounted on the fronts and roofs of some buildings, space that is leased from the building owners. The lease contracts require LCL to restore the facades and roofs to the owner's satisfaction at expiry. The LCL financial manager has discovered that LCL completely overlooked one significant lease and has not accounted for that restoration cost. As well, due to a decline in interest rates in \(20 \mathrm{X9}\), the auditor recommends that LCL remeasure all of LCL's asset retirement obligations.
5. The company has been following income tax allocation procedures. LCL's financial manager is concerned that deferred income tax expense unrealistically depresses LCL's earnings. Therefore, he has proposed that the company change to the taxes payable method beginning in the current year. The auditor does not object to the change.
6. In 20X8, the company's designers had made a rare error in anticipating a fashion trend that failed to develop. As a result, the company ended the previous year with a severe overstock of that line of clothing. In retrospect, the company should have written down that portion of the inventory. Instead, the merchandise was sold for about \(20 \%\) of its manufacturing cost to a clearance house in San Francisco. The merchandise manager has recommended that the opening inventory for \(20 \mathrm{X} 9\) be restated to recognize the loss in value of those items.
Required:
Assume that you are Christopher Robins, an independent accounting consultant. The CFO of LCL has asked for a memo on the reporting implications for each of these issues. Write the memo.