Case #1 We Love Waste Inc.

We Love Waste Inc. (WLW) is a large, diversified Canadian company with several subsidiaries operating mainly in the waste management and disposal industry. WLW was incorporated in 1980 and has grown to become one of the top four waste management firms in Canada. The business was started by the Love family, but currently no family members are actively involved in the management of the company. Family members, family trusts, and a limited number of friends own the common shares. In 2019, the Love family decided that they would begin the process of selling the company over the next two or three years. In preparation for the sale, the company has engaged your firm, Passey and Partners, to audit the companys financial statements. WLW has an August 31 year-end. It is now September 22, 2021, and your firm is partway through the audit of WLW for the year-ended August 31, 2021. The materiality for the engagement has been set at $6.5 million. You are reviewing the files that your junior auditors have prepared, and you note the following events:

1. On June 23, 2021, WLW received a wire transfer of 20 million Guinean francs (GNF) to its general Canadian dollar bank account in payment of an outstanding customer invoice. WLWs bank converted the funds to $10 million Canadian, incorrectly assuming that the transfer was in the currency of Papua New Guinea, the kina (PGK). On that day, 8,000 Guinean francs bought one Canadian dollar. WLW has not in-formed the bank of the error and has taken the difference into income.

2. During 2021, WLW lost a decision in the Federal Court of Appeal in a lawsuit brought by Garbage Globe Ltd. for patent infringement. In an unusual award, the court ordered WLW to pay $18 million for shares of Garbage Globe Ltd., a private company, which had been in some financial difficulty. WLW has decided not to appeal the decision to the Supreme Court, and the company bought the shares in Garbage Globe Ltd. before year-end.

3. WLW issues debt for long-term financing purposes through three major investment dealers. In July 2021, Moonys, the credit-rating agency, put WLWs credit rating on alert for downgrade due to the potential negative effects of progressive toughening of environmental legislation applying to waste disposal sites.

4. WLW bids on various municipal waste pickup and disposal contracts. WLW buys waste disposal sites to dump the waste collected. WLW defers and amortizes the cost of the sites over the expected useful lives of the sites, stated in tonnes of capacity, years of remaining usage, or cubic metres of waste capacity. Amortization of the cost of these sites represents 41% of WLWs operating expenses. Of WLWs assets, 64% are waste disposal sites. Provisions for cleanup and site sealing costs are accrued on the same basis as the amortization of the sites.

5. WLW defers and amortizes over five years the costs of locating new waste disposal sites and negotiating agreements with municipalities.

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6. Every year WLW updates the estimates of the remaining useful lives of waste disposal sites using the services of a consulting engineering firm. In the past, WLW used Folk & Fest., Environmental Engineers, for these reviews. Folk & Fest did no other work for WLW. Starting in 2021, WLW used Jazz Consulting Engineers for the reviews. Based on the new consultants report, the useful lives of all waste disposal sites have been increased between 4 and 26% and the sealing/cleanup provision reduced by $13.6 million.

7. On September 5, 2021, WLW had a large flood in one of their facilities, destroying $30,000 of inventory and creating $7,000,000 of damage to the facility, which was not insured. Management feels these amounts should be expensed in the 2022 fiscal year statements, as they represent something that happened after year end rather than something that happened in 2021. Therefore, these items have not been included in the August 31, 2021 trial balance.

8. WLWs management is aware that to comply with the audit, the companys financial statements need to be prepared in accordance with GAAP. However, management is unclear which set of standards within GAAP the company should follow.

Required: The partner has requested a memo that deals with the significant accounting issues for WLW.