Goal Products Limited (GPL) is the official manufacturer and distributor of soccer balls for the North American League Soccer (NALS), a professional soccer association. GPL is a private company. It has always prepared its financial statements in accordance with ASPE. It is now October 20, Year 9. You, CPA, were recently hired as the manager of financial reporting for GPL. In your first week, you must review the first draft of the quarterly financial statements and provide comments to the financial reporting team on any issues you note. As you start your review you receive an email from the chief financial officer, Joey Bonaducci (Exhibit II). The quarterly financial statements, for the period ended September 30, Year 9, are still being finalized. So far you have received the balance sheet, statement of net income, and most of the planned note disclosures (Exhibit III) that will be provided to GPL's major lenders. You have received as well an internally prepared highlights summary (Exhibit IV) that will also be provided to GPL's major lenders. The statements of retained earnings and cash flows and the disclosures of changes in accounting policies are still being finalized. Required Prepare a report of your findings and recommendations on GPL's first quarter financial statements. In preparing your report, you need to address/incorporate the following requirements: 1. Assess the situation that is being presented in the case and provide a summary of this assessment as a case overview. Consider the following: a. Identify the role that has been assigned and the user(s) of the report. b. What are the major issues/problems? What do you need to analyze each issue/problem and what are the potential alternatives (if any)? Who are the decision-makers and what are their goals/objectives? d. Are there any other stakeholders? What are their concerns, needs, and preferences? e. What are the constraints that may affect the issues/problems the company is currently facing? f. Are there any other key situational factors such as economic circumstances, business opportunities, and risks that will need to be considered as part of the analysis of each issue/problem? 2. Provide a full discussion of the accounting policies used to finalize the financial statements. This should include providing a description of the issue (issue identification), an analysis of the issue or an analysis of the potential alternatives where relevant (issue analysis), and a thorough recommendation that describes the impact on the financial statements and links to the decision- makers goals/objectives, user needs and preferences, constraints, and/or other key situation factors, as applicable (issue recommendation). Bonus marks will be given if you quote specific handbook sections to support your analysis. Use the example in the case analysis workshop as guidance in how to integrate the CPA handbook with the situational analysis in requirement #1. If presenting numerical analysis, all figures should be properly labelled and any calculations must be clearly described. TAs are not required to review the formulas in Excel cells to determine how the figure was calculated. EXHIBIT II , EMAIL FROM JOEY BONADUCCI As you may know, we are planning to transition for ASPE to IFRS in the near future. I've just retumed from a conference on current issues facing private companies transitioning to IFRS. I don't think the transition will be difficult. The changes I've noted so far affect impairment of assets and extraordinary items. I'd like you to tell me how those IFRS would specifically apply to our most recent quarterly financial statements. You should also prepare a brief analysis that highlights any other major differences between ASPE policies and IFRS that are relevant for GPL. JB EXHIBIT III DRAFT INTERIM FINANCIAL STATEMENTS GOAL PRODUCTS LIMITED BALANCE SHEET (in thousands of Canadian dollars) (unaudited) As at: September 30, Year 9 June 30, Year 9 Assets Current assets: Cash and cash equivalents Accounts receivable Inventories (note 2) Prepaid expenses Capital assets Intangible assets Other assets (note 3) Current liabilities: Accounts payable and accrued liabilities Income tax payable Long-term debt (note 3) Future income tax liability Shareholders' equity: Share capital Retained earnings $ 3,068 1,985 1,690 548 7,291 3,648 680 65 $11,687 $2,578 256 2,834 1,000 $2,366 1,624 1,080 438 6,508 4,341 688 $10,537 $2,300 701 3,001 124 103 3,958 3,104 2,872 2,872 4,857 4,561 7,433 $10,537 7,729 $11,687 See accompanying notes to the consolidated financial statements. Revenue Cost of sales DRAFT INTERIM FINANCIAL STATEMENTS GOAL PRODUCTS LIMITED STATEMENT OF NET INCOME Three months ended September 30 (in thousands of Canadian dollars) Gross margin Operating expenses: Sales and marketing General and administrative Amortization of capital assets Amortization of other assets (note 3) Interest on long-term debt Other interest expense Income before income taxes and extraordinary item Income tax expense: Current Future Year 9 (unaudited) $16,000 Year 8 (unaudited) $15,180 8,349 6,831 2,511 8,957 7,043 2,744 3,087 2,865 167 133 2 13 4 1,036 329 21 350 1,319 430 23 453 866 Net Income before extraordinary item Extraordinary loss, net of tax of $219 (note 4) Net income for the period See accompanying notes to the consolidated financial statements. GOAL PRODUCTS LIMITED 686 (351) 335 NOTES TO DRAFT INTERIM FINANCIAL STATEMENTS For the period ended September 30, Year q 1. Basis of Presentation (unaudited) B66 These Interim financial statements were prepared using accounting policies and methods consistent with those used in the preparation of the Company's audited financial statements for the year ended June 30, Year 9. These interim financial statements conform in all respects to the requirements of Canadian gener ally accepted accounting principles for annual financial statements for private companies, with the excep tion of certain note disclosures, and should be read in conjunction with the Company's audited financial statements and notes for the year ended June 30, Year 9. 2. Inventories (in thousands) 3. Long-Term Debt Raw materials Finished goods September 30, Year 9 $ 146 1,544 $1,6940 June 30, Year 9 $ 124 956 $1,080 On July 1, Year, the Company entered into a $1 million, 10-year term loan bearing interest at 5%. Interest is payable quarterly. The principal of the debt can be converted, at the option of the lender, into 200,000 common shares of GPL at any time prior to maturity. The principal amount of the loan is due on July 1, 2019. Debt issue costs of $70,000 were incurred in relation to the loan agreement and have been cap- Italized to Other assets. The costs are being amortized over the term of the loan using the effective interest rate method. 4. Extraordinary Item During the three months ended September 30, Year 9, the Company experienced a loss of $570,000 before tax as a result of a fire that bumed a fleet of trucks containing several large shipments of soccer balls. EXHIBIT IV INTERNALLY PREPARED HIGHLIGHTS SUMMARY Revenue for Q1 (July to September Year 9) includes $900,000 booked for a special shipment of balls to the Pan-America Cup (PAC) at the end of the quarter. Title and risk of loss for the balls transferred once they were shipped, and we have invoiced the PAC committee for the full amount. The committee does not have to pay for the balls until they are sold at the PAC in November. They can retum any unsold balls, but we are confident they will sell out. General and administrative expenses increased because we hired three supervisors. We discussed the treatment of the fleet truck fire as an extraordinary item with the external audi tors, which they judged to be correct. In July, we were sued by one of our suppliers for non-payment for a shipment of leather. After using the leather in the production process, we realized it was below our quality standards. The supplier is claiming for damages as well as loss of revenue in the amount of approximately $800,000. Legal counsel thinks the chance we will lose is just over 75%. If we lose, counsel believes we will have to pay the full claim. We think the court proceedings will be resolved by the end of our fiscal year. We are accruing $150,000 (25% of our probability estimate) so we will have $600,000 accrued by year-end. The outlook for the rest of the year appears strong. We expect to operate the plant at capacity and pro- duce approximately 2 million soccer balls. Consistent with other years, we expect Q1 and Q2 to have signifi- cantly higher sales and profits since these are our peak sale times (NALS pre-season and regular season). During the year ended June 30, Year 9, we experienced a manufacturing equipment malfunc- tion. Management determined the value of the equipment had permanently declined, and booked an impairment loss of $160,000 in the year. Recently, we think we located the critical part needed to make the equipment serviceable again, and will receive the part next month.