Rouge Valley Golf and Health Club (RVGH) is a public company that operates eight clubs in a large city and offers one-year memberships. Membership gives members access to golf and the fitness centre including fitness classes. The members may use any of the eight facilities but must reserve golf time and pay a separate fee before using one of the golf courses. As an incentive, RVGH 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 have the option of financing the membership fee over the membership period at an interest rate of 8%.
In the past, some customers have said they would like to take only the regularly scheduled aerobic classes and not pay for the full membership. During the current fiscal year, RVGH began selling coupon books for only aerobic classes to accommodate these customers. Each book is dated and contains 50 coupons that may be redeemed for any regularly scheduled aerobics class over a one-year period. After the one-year period, unused coupons are no longer valid.

During 2020, RVGH expanded into the health equipment market by purchasing a local company that manufactures elliptical machines. These machines are used in RVGH’s facilities and are sold through the clubs and 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 one-year unconditional guarantee against defaults. Based on experience, RVGH expects the costs of repairing machines under guarantee to be 4% of sales.

RVGH is preparing financial statements as at May 1, 2020, the end of its fiscal year. Jaymie Hogan, corporate controller, expressed concern over the company’s performance for the year and decided to review the preliminary financial statements prepared by Zahra Browning, RVGH’s assistant controller, for the company’s bankers. After reviewing the statements, Hogan proposed that the following changes be reflected in the May 31, 2020 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 elliptical machines should be recognized when they are paid.

Browning told Hogan that the proposed changes are not in accordance with IFRS, but Hogan insisted that the changes be made. Browning believes Hogan wants to manipulate income to delay any potential financial problems and increase her year-end bonus. At this point, Browning is unsure what action to take.

Instructions

Ethics Discuss the financial reporting issues and how any ethical issues should be handled. If RVGH decided that it wanted to become a private company, describe how the financial reporting issues should be handled.