Sigma Auto Parts Ltd. is an Ontario-based manufacturer of automobile parts. The Canadian operations supply automotive components and parts to three U.S. states and two Japanese auto manufacturers. Approximately \(30 \%\) of Sigma's worldwide sales is generated by its Canadian operations.

The company has large operating subsidiaries in the United States, Mexico, Germany, and the Czech Republic. Sigma has recently established an operating subsidiary in the People's Republic of China to supply both international and domestic manufacturers in that country.

Sigma is a Canadian private company. However, the German subsidiary does have an outstanding public issue of non-voting common shares that are traded on the Frankfurt exchange. Generally, financing is obtained through a combination of retained earnings, debt, and private equity placements in each subsidiary's home country, with the exception of China (as explained below). The company reports using international accounting standards, using U.S. dollars as the reporting currency.

Angelo Zhang has recently been promoted to the position of chief accountant at the Sigma head office in Windsor, Ontario. The newly appointed chief financial officer, Jean Adams, has asked Mr. Zhang to review several reporting issues and advise her on appropriate treatments. The specific issues are as follows:

1. Earlier in the year, a Canadian supplier claimed the right to terminate its obligations to supply Sigma with certain stainless steel products at the prices stated in two standing supply contracts with Sigma. The supplier has continued to supply the products, but invoiced Sigma at market prices rather than at the contracted prices. Sigma has continued to pay the supplier, but only at the contract prices. The accumulated differential between the invoiced market prices and the contract prices has been accumulating for several months and now amounts to about \(\$ 30\) million. Sigma and the supplier have agreed to submit their disagreement to binding arbitration. The arbitration hearing is expected to be held late in the following fiscal year.

2. Sigma is building new manufacturing facilities in the Czech Republic to replace some older facilities that have become obsolete. The new facilities should be ready within two years, whereupon operations will be transferred to the new facilities and the old site will be abandoned. Recent legislation in the Czech Republic makes Sigma responsible for demolition and site restoration costs in the event that the old facilities cannot be sold to a buyer that is willing to bear the costs of demolition or rebuilding. The currently estimated costs are \(\$ 25\) million for demolition and \(\$ 10\) million for site restoration (at the current exchange rate).

3. The U.S. operations have experienced profitability problems over the past several years. The decline of some of the U.S. auto manufacturers has taken its toll on the auto parts industry. The auto companies have been forcing suppliers' prices down, a situation that has led to the bankruptcy of one major U.S.-based auto parts manufacturer. For a while, Sigma U.S. was just about breaking even on an accounting basis, but was in an operating loss position for tax purposes. However, for each of the most recent two years, Sigma's U.S. subsidiary has reported a significant loss for both accounting and tax purposes. In view of the basic strength of Sigma's cutting-edge operations and the strength of its worldwide operations, Jean Adams's predecessor felt confident in fully recognizing the income tax benefits that will be derived from any tax loss carryforwards. Now, however, the situation is not so clear-cut. It may be quite a while before the industry settles and Sigma is able to return the U.S. operations to profitability.

4. Generally speaking, the subsidiaries in each country are financed locally rather than through significant direct investment from Canada. An exception is the new subsidiary in China; substantial direct foreign investment was necessary in order to quickly establish the company and also to obtain certain government approvals and tax benefits.

Total direct investment in China currently is \(\$ 103\) million and is likely to increase over the next couple of years. The Chinese new yuan is tied to a basket of foreign currencies, of which the U.S. dollar represents the largest proportion. Due to the weakening of the U.S. dollar, the yuan has been gradually increasing in value.
5. During the current year, Sigma's German division issued \(€ 150\) million of \(7 \%\) unsecured subordinated debentures on a private placement basis. The debentures mature in five years and are not redeemable prior to maturity. Upon maturity, Sigma has the option of issuing non-voting common shares, the number of shares dependent on their market value at the time.

Required:
Assume that you are Angelo Zhang. Prepare the report to Ms Adams.