Alliance Appliance Ltd. (AAL) is an assembler and distributor of household appliances: kitchen equipment, washing machines, and driers. AAL assembles the appliances from components received mainly from Germany and some also provided by Japanese parts manufacturers. AAL does not sell directly to end-users. The companys direct customers are retail appliance sales dealerships across Canada and, to a lesser extent, in the northern United States. Although the dealers sell primarily to homeowners, they also do contract work for institutional purchasers. Such institutional purchasers usually are real estate developers that are building new, or reequipping existing apartment and condominium buildings. AAL works closely with such developers to meet their needs at a reasonable cost. Alliance Appliance is based in Windsor, Ontario, where it operates its assembly plant and also has its principal warehousing facilities. The company has a second distribution centre in Vancouver for Western Canada. AAL also has a distribution centre near Detroit, Michigan, to serve its customer base in the northern United States. The Michigan distribution centre is deemed essential for quick delivery to customers in the United Statesrapid delivery is important, but shipments across the United StatesCanada border can be delayed by security and customs procedures, which leads to a backup of shipments waiting to cross the border. Each distribution centre stocks AALs most popular models. High-end models, all customized models, and all orders from institutional purchasers are assembled (and customized, if necessary) to order in the companys Windsor assembly plant. Each distribution centre also stocks spare parts that can be shipped to firms that are licensed to repair AAL appliances either under warranty or post-warranty.

All of AALs common shares are owned by the companys CEO, Douglas Beck, an engineer who migrated from Hungary to Canada 34 years ago and built up the business over three decades. Substantial external financing comes from two sources: As a Canadian private enterprise, AAL reports on the basis of ASPE. The companys annual financial statements are submitted to the AAL Board, to HSBI, and to Oxwell Inc. The Board and Oxwell also receive AALs unaudited quarterly statements. HSBI does not receive the quarterly statements, but the bank requires a monthly update on the balance of accounts receivable and inventories because the banks operating loans cannot exceed the sum of 75% of accounts receivable plus 50% of inventory.

It now is April 20X7. At some time over the next four or five years, Oxwell expects to convert its shares to common and then sell them to one or more investors. One potential option is that if the stock market is strong, Oxwell might choose to sell the shares through an initial public offering (IPO). If such an option were to be chosen, AAL would need to restate its accounts on the basis of IFRS. Even if other private investors acquire the Oxwell shares (i.e., instead of through an IPO), the potential pool of buyers would be increased if AAL used IFRS. Therefore, in early 20X7, the AAL Board commissioned a review of how a change to IFRS would impact AALs 20X6 financial reporting. AALs CFO contacted Henry & Higgins, the companys auditors, and asked them to provide a well-qualified person to assess the impact of any change. In response to the request, H&H assigned a senior staff auditor, Maxwell Davies, to prepare a report that provides the information requested by AAL. After extensive review of AALs accounting records, Maxwell has assembled the following information that may be relevant to the assignment: International banking company HSBI provides ongoing banking services via operating loans secured by AALs accounts receivable, inventory, and capital assets. HSBI also facilitates AALs international transactions with the United States, Germany, and Japan. Toronto-based private equity firm Oxwell Inc. holds convertible preferred shares in AAL, shares that had been issued to provide financing for a plant upgrade in 20X3 and the 20X5 investment in the Michigan warehousing facility. These are voting shares that Oxwell can convert into common shares at any time.

As a Canadian private enterprise, AAL reports on the basis of ASPE. The companys annual financial statements are submitted to the AAL Board, to HSBI, and to Oxwell Inc. The Board and Oxwell also receive AALs unaudited quarterly statements. HSBI does not receive the quarterly statements, but the bank requires a monthly update on the balance of accounts receivable and inventories because the banks operating loans cannot exceed the sum of 75% of accounts receivable plus 50% of inventory. It now is April 20X7. At some time over the next four or five years, Oxwell expects to convert its shares to common and then sell them to one or more investors. One potential option is that if the stock market is strong, Oxwell might choose to sell the shares through an initial public offering (IPO). If such an option were to be chosen, AAL would need to restate its accounts on the basis of IFRS. Even if other private investors acquire the Oxwell shares (i.e., instead of through an IPO), the potential pool of buyers would be increased if AAL used IFRS. Therefore, in early 20X7, the AAL Board commissioned a review of how a change to IFRS would impact AALs 20X6 financial reporting. AALs CFO contacted Henry & Higgins, the companys auditors, and asked them to provide a well-qualified person to assess the impact of any change. In response to the request, H&H assigned a senior staff auditor, Maxwell Davies, to prepare a report that provides the information requested by AAL. After extensive review of AALs accounting records, Maxwell has assembled the following information that may be relevant to the assignment:

a. AAL uses the titles Balance Sheet, Statement of Income, Statement of Cash Flows and Statement of Retained Earnings for its primary financial statements.

b. The companys income statement has no subclassifications of expense items; all expenses (including income tax expense) are listed in summary fashion with no subtotalsjust a final amount for net income. The company does not report earnings-per-share amounts.

c. Preferred dividends paid to Oxwell Inc. are reported only in the retained earnings statement.

d. AAL provides a one-year full guarantee on its products when sold to the final user. The company estimates the approximate future cost of making good on the guarantees, an estimate that is adjusted at every year-end. AAL also guarantees the bank loans of the Michigan facility.

Assume the role of Maxwell Davies, and prepare the report requested by AAL. Review case facts thoroughly and address all concerns.