Burlington Health and Racquet Club $($BHRC$)$ is a public company that operates eight

clubs in a Burlington and offers one$-$year memberships. The members may use any of the

eight facilities but must reserve racquetball court time and pay a separate fee before using

the court. As an incentive to new customers, BHRC 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 are given the option of financing the

membership fee over the membership period at a $15\%$ interest rate.

In the past, some customers had said they would like to take only the regularly scheduled

aerobic classes and not pay for a full membership. During the current fiscal year, BHRC

began selling coupon books for aerobic classes only 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coupons are no longer valid.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 $2019,$ BHRC expanded into the health equipment market by purchasing a local

company that manufactures rowing machines and cross$-$country ski machines. These

machines are used in BHRC$\text{'}$s facilities and are sold through the clubs and mail$-$order

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

two$-$year unconditional guarantee. Based on experience, BHRC expects the costs to

repair machines under guarantee to be $4\%$ of sales.

BHRC is in the process of preparing financial statements as at May $31,2019,$ the end of

its fiscal year. James Howell, corporate controller, expressed concern over the company's

performance for the year and decided to review the preliminary financial statements

prepared by Magda Bailey, BHRC$\text{'}$s assistant controller, for the company's bankers. After

reviewing the statements, Howell proposed that the following changes be reflected in the

May $31,2019$ published financial statements:

Membership revenue should be recognized when the membership fee is collected.

Revenue from the coupon books should be recognized when the books are sold.

Down payments on equipment purchases and expenses associated with the

guarantee on the rowing and cross$-$country machines should be recognized when

they are paid.

Bailey told Howell that the proposed changes are not in accordance with IFRS, but

Howell insisted that the changes be made. Bailey believes that Howell wants to

manipulate income to delay any potential financial problems and increase his year$-$end

bonus. At this point, Bailey is unsure what action to take.

Required

Discuss the financial reporting issues and how any ethical issues should be handled.