Consolidated Statement of Comprehensive Income Years Ended 31 December 20X13 20X12 Forecasted Actual (in millions of Canadian dollars) Revenue $ 1,127.6 $ 1,116.7 718.0 690.7 Cost of sales 190.9 194.8 Other operating expenses 908.9 885.5 207.8 2421 Earnings before interest and taxes Interest income 11.0 13.0 (41.4) (35.7) Interest on long-term debt Earnings before taxes 177.4 219.4 Income tax at 30% 53.2 65.8 Net earnings and comprehensive income $ 124.2 $ 153.6 Total liabilities (all liabilities excluding deferred taxes) to equity to be a maximum of 1.0. Times interest-earned to be a minimum of 5.0 times. Current ratio to be a minimum of 1.0. The company also has stock options outstanding that can be exercised only once profitability ratios meet certain targets. For the executive management team, these targets are as follows: Return-on assets-to be greater than 6%. Net income as a percentage of revenue to be no less than 10%. It is now carly December 20X13, and the accounting department has just completed its expected results for 20X13. PMC recently hired a new financial analyst, Eric Forman, who has been examining the company's accounting policies. Eric would like to make some changes in some of these policies, as he believes that the changes will provide more relevant information to PMC's users. You are the CFO and Eric has come to you with some of his ideas. For you to be able to make this decision, you have asked Eric to explain the changes for 20X13 and what they would have been in 20X 12 reports, if these new accounting policies were adopted. Below is the summary of Eric's memo: 1. PMC should adopt the revaluation model for its land. The land was purchased about 30 years ago and has a cost of $50 million for 20X13 and 20X12. Eric has been able to determine that the fair value of the land at the end of 20X13, 20X12, and 20X 11 to be $450 million, $400 million, and $425 million, respectively. 2. PMC currently uses the cost model for its investment properties. Eric suggests that the company adopt the fair-value model for investment properties. During 20X13 and 20X12, the company recognized depreciation of $24.9 million and $32 million, respectively included in Other operating expenses). The fair value of all of the investment properties is estimated to be $850 million, $880 million, and S790 million for 20X13, 20X12, and 20X11, respectively, 3. The bonds receivable are currently recognized at amortized cost. Eric would like to classify these at FVTPL as the selling price has been increasing on these bonds, and it has been mentioned that PMC might sell once the price reaches a certain level. The bonds' fair market value was $195.2 million for 20X11; was $205.2 million in 20X12; and is estimated to be $210.2 million in 20X13. As CFO, you have decided that the financial statements for 20X12 and forecasted 20X13 should be recast showing the impact of adopting the three proposed accounting policy changes. The memo to the board will have to include these restatements and a summary of the impact on the loan covenants and the share option targets. The memo should also discuss any possible volatility that these accounting policies may introduce on PMC's financial statements and ratios. A final recommendation will be required as to whether or not the company should adopt any of these changes. (The impact on deferred taxes is to be included using a rate of 30%.) Required: Prepare the memo for the board. Below are the current financial statements of PMC. Additional information: Total assets for 20X11 were $2,904.6 million. Of this amount, the land was $50 million, investment property was $630 million, and the bonds receivable were S163 million. PLASTICS MOULDING CO. Plastics Moulding Co. (PMC) is a plastics company that operates in Canada. PMC manufactures plastic bottles for customers in North America. The company is publicly traded and follows IFRS. PMC has recently renewed its bank loan and the bank requested stricter covenants due to a reduction in lower forecasted revenues and earnings. The new covenants for 20X13 are as follows: Consolidated Statement of Comprehensive Income Years Ended 31 December 20X13 20X12 Forecasted Actual (in millions of Canadian dollars) Revenue $ 1,127.6 $ 1,116.7 718.0 690.7 Cost of sales 190.9 194.8 Other operating expenses 908.9 885.5 207.8 2421 Earnings before interest and taxes Interest income 11.0 13.0 (41.4) (35.7) Interest on long-term debt Earnings before taxes 177.4 219.4 Income tax at 30% 53.2 65.8 Net earnings and comprehensive income $ 124.2 $ 153.6 Total liabilities (all liabilities excluding deferred taxes) to equity to be a maximum of 1.0. Times interest-earned to be a minimum of 5.0 times. Current ratio to be a minimum of 1.0. The company also has stock options outstanding that can be exercised only once profitability ratios meet certain targets. For the executive management team, these targets are as follows: Return-on assets-to be greater than 6%. Net income as a percentage of revenue to be no less than 10%. It is now carly December 20X13, and the accounting department has just completed its expected results for 20X13. PMC recently hired a new financial analyst, Eric Forman, who has been examining the company's accounting policies. Eric would like to make some changes in some of these policies, as he believes that the changes will provide more relevant information to PMC's users. You are the CFO and Eric has come to you with some of his ideas. For you to be able to make this decision, you have asked Eric to explain the changes for 20X13 and what they would have been in 20X 12 reports, if these new accounting policies were adopted. Below is the summary of Eric's memo: 1. PMC should adopt the revaluation model for its land. The land was purchased about 30 years ago and has a cost of $50 million for 20X13 and 20X12. Eric has been able to determine that the fair value of the land at the end of 20X13, 20X12, and 20X 11 to be $450 million, $400 million, and $425 million, respectively. 2. PMC currently uses the cost model for its investment properties. Eric suggests that the company adopt the fair-value model for investment properties. During 20X13 and 20X12, the company recognized depreciation of $24.9 million and $32 million, respectively included in Other operating expenses). The fair value of all of the investment properties is estimated to be $850 million, $880 million, and S790 million for 20X13, 20X12, and 20X11, respectively, 3. The bonds receivable are currently recognized at amortized cost. Eric would like to classify these at FVTPL as the selling price has been increasing on these bonds, and it has been mentioned that PMC might sell once the price reaches a certain level. The bonds' fair market value was $195.2 million for 20X11; was $205.2 million in 20X12; and is estimated to be $210.2 million in 20X13. As CFO, you have decided that the financial statements for 20X12 and forecasted 20X13 should be recast showing the impact of adopting the three proposed accounting policy changes. The memo to the board will have to include these restatements and a summary of the impact on the loan covenants and the share option targets. The memo should also discuss any possible volatility that these accounting policies may introduce on PMC's financial statements and ratios. A final recommendation will be required as to whether or not the company should adopt any of these changes. (The impact on deferred taxes is to be included using a rate of 30%.) Required: Prepare the memo for the board. Below are the current financial statements of PMC. Additional information: Total assets for 20X11 were $2,904.6 million. Of this amount, the land was $50 million, investment property was $630 million, and the bonds receivable were S163 million. PLASTICS MOULDING CO. Plastics Moulding Co. (PMC) is a plastics company that operates in Canada. PMC manufactures plastic bottles for customers in North America. The company is publicly traded and follows IFRS. PMC has recently renewed its bank loan and the bank requested stricter covenants due to a reduction in lower forecasted revenues and earnings. The new covenants for 20X13 are as follows