Background of Madeline's Pharm

Madeline's Pharm Berhad (Madeline's Pharm) is a public listed company that has been operating

for the past 15 years, specializing in the manufacturing of high-quality pharmaceutical products

and solutions for various disease and conditions, including the following:

Cardiovascular diseases and conditions

Cancer

Diabetes and metabolic disorders

Fulminant viral hepatitis

Immune system diseases and conditions

Neurological diseases and conditions

Menopause

Vaccine-related conditions

Skin diseases and conditions

Systemic sclerosis

Bechet's disease

Pemphigus vulgaris

Neuromyelitis optica and neuromyelitis optica spectrum disorder

Hypoparathyroidism

Eighty-five per cent of the pharmaceutical products and solutions are exported to other countries

such as Japan, Korea, China, India and Australasia, with North America (comprising the US and

Canada) as the main market, while the remaining 15% are sold to major hospitals, clinics and

chain stores in the local market. Despite the stable economic condition in North America,

Madeline's Pharm's revenue has been gradually decreasing for the past six years and the trend

continues to show a declining pattern. Mr Pierre, the director of Madeline's Pharm, is very worried

about the dropping trend in its revenue. He was a former pharmacist who had been in the

business for over 35 years and the founder of Madeline's Pharm, which was named after his late

wife. During the last annual general meeting of Madeline's Pharm, some of the investors had

already told Mr Pierre that they would pull themselves out of the company if there was still no

improvement in the figures. Mr Pierre had then guaranteed that he would ensure that the

investors would not incur losses and the revenue will rise again.

Increasing competition and rising debt ratio

OnlyUTrading Ltd (OnlyUTrading), a company established in Sinagapore just five years ago, is

the main competitor of Madeline's Pharm and is slowly taking over Madeline's Pharm's major

clients with its aggressive marketing. Although the company is new, it is extremely driven to

become one of the largest and most successful pharmaceutical manufacturers in the world. It is

supported by a strong company that provides it with quality or rare pharmaceutical products and

solutions and it uses the online platform to sell its products and solutions with worldwide delivery.

Besides, it has a strong team of scientists, some of which were actually ex-employees of

Madeline's Pharm that OnlyUTrading had attracted with higher salaries and better benefits. This

team of scientists also introduced advanced pharmaceutical products and solutions that combine

the traditional recipes with modern formulas. This new range of solutions have been well received

by renowned medical practitioners in North America and this business development has quite

badly affected the business of Madeline's Pharm.

Not only is the revenue of Madeline's Pharm is gradually declining, the debt ratio is apparently

also rising, from 45% in 2016, to 49% in 2017 and 57% in 2018. Although the figures have not

breached the debt covenant with the creditors, the increase in debt ratio is worrisome to Mr

Pierre. Some creditors knew of the issues being faced by Madeline's Pharm and they already

stopped renewing their contracts. Mr Pierre had tried to gain back the creditors' trust, but his

efforts were to no avail. One of his employees suggested to Mr Pierre to ge the government's

support to ensure that the company does not go bankrupt. Mr Pierre then remembered his

childhood friend, Mr Kamarul, who is now a politician. Thus, he had generously provided political

donations under the name of his company to Mr Kamarul's party in the recent general election

and the party had easily won the election.

Recording a gifted artwork

Mr Kamarul wanted to express his gratitude to Madeline's Pharm and Mr Pierre so he bought an

artwork and gave it to Madeline's Pharm as a donation. Mr Pierre happily received the gift and

displayed it in his office. He then asked a professional valuer to evaluate the market price of the

artwork known as 'Sera Moana', which depicts a replica of the great ship Titanic agains the

backdrop of old Southampton, featuring the classic port during the early twentieth century, which

was handcrafted by Sir Andrew Charles, a famous artist back then. After the artist died, his works

became very famous because of their association with 'high quality' and 'fine art'. The professional

valuer estimated that the current price of the artwork to be RM6 million. As the artwork is an

antique piece sought after by mana antique fans worldwide, the value of the artwork is expected

to rise at least three times its current value in the nest two or three years.

So far, the accounting department of Madeline's Pharm has not made any records regarding

the artwork in the books. At first, Mr Pierre wanted to regard the artwork his own asset but since

the donations to Mr Kamarul was made under Madeline's Pharm's name, he felt that it would be

appropriate to record the artwork as an asset of the company. With the increased amount of

assets, it would also lower the company's debt ratio and the creditors would regain their

confidence in Madeline's Pharm. Hence, he had a meeting with Mr Chin, the finance controller,

regarding the artwork. Mr Chin suggested to record the artwork as an investment as the value

would drastically in the future but Mr Pierre insisted to include the artwork as an asset in the

books as the artwork would 'improve the financial outlook of the company'. Mr Pierre also asked

Mr Chin to confirm whether there will be any tax implications for the gift received. What should

Mr Chin do?

1) Review and analyse the case above.

2)What area of knowledge helped you in your analysis and answering the remaining requirements?