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Comprehensive Independent Assignment PART 1: PROPERTY, PLANT & EQUIPMENT WestJet Airlines Ltd. is one of Canada's leading airlines, offering service to destinations in Canada, the United States, Mexico, and the Caribbean. The following is a partial extract from its December 31, 2014, notes to the financial statements: Note. 1 (j) Statement of Significant Accounting PoliciesProperty and Equipment Property and equipment is stated at cost and depreciated to its estimated residual value. Expected useful lives and depreciation methods are reviewed annually. Asset class Aircraft, net of estimated residual value Engine, airframe and landing gear overhaul Ground property and equipment Spare engines and rotables, net of estimated residual value Buildings Leasehold improvements Basis Rate Straight-line 15-20 years Straight-line 5-15 years Straight-line 3-25 years Straight-line 15-20 years Straight-line 40 years Straight-line 5 years/Term of lease Estimated residual values of the Corporation's aircraft range between $2,500 and $6,000 (in thousands of dollars) per aircraft. Spare engines have an estimated residual value equal to 10% of the original purchase price. Residual values, where applicable, are reviewed annually against prevailing market rates at the consolidated statement of financial position date. Major overhaul expenditures are capitalized and depreciated over the expected life between overhauls. All other costs relating to the maintenance of fleet assets are charged to the consolidated statement of earnings on consumption or as incurred. Requirement 1 (6 marks): WestJet uses straight-line depreciation for all of its depreciable property and equipment. For which of the assets shown above might WestJet consider using units-ofproduction instead of straight-line depreciation? Should WestJet use units-of-production for those assets? . Requirement 2 (5 marks): According to this note, major overhaul expenditures are treated differently than other fleet maintenance costs. Explain how WestJet records these items. Is this appropriate? Why or why not? Requirement 3 (8 marks): a. WestJet depreciates the cost of leasehold improvements over the terms of the leases. Is this appropriate? Are these terms the same as the physical lives of these assets? (3 marks) b. Does WestJet use component depreciation for any of its property and equipment assets? Explain. (5 marks) PART 2: CURRENT LIABILITIES 1 Loblaw Companies Limited (which owns Shoppers Drug Mart) reported the following information about contingencies in the notes to its December 31, 2014, financial statements: LOBLAW COMPANIES LIMITED Notes to the Consolidated Financial Statements December 31, 2014 32. Contingent Liabilities (excerpt) Legal Proceedings The Company is the subject of various legal proceedings and claims that arise in the ordinary course of business. The outcome of all of these proceedings and claims is uncertain. However, based on information currently available, these proceedings and claims, individually and in the aggregate, are not expected to have a material impact on the Company. Shoppers Drug Mart has been served with an Amended Statement of Claim in a proposed class action proceeding that has been filed under the Ontario Superior Court of Justice by two licensed Associates, claiming various declarations and damages resulting from Shoppers Drug Mart's alleged breaches of the Associate Agreement, in the amount of $500 million. The proposed class action comprises all of Shoppers Drug Mart's current and former licensed Associates residing in Canada, other than in Qubec, who are parties to Shoppers Drug Mart's 2002 and 2010 forms of the Associate Agreement. On July 9, 2013, the Ontario Superior Court of Justice certified as a class proceeding portions of the action. While Shoppers Drug Mart continues to believe that the claim is without merit and will vigorously defend the claim, the outcome of this matter cannot be predicted with certainty. Requirement 4 (4 marks): Why would Loblaw disclose information about these legal disputes, including the amount of the potential loss, in the notes to the financial statements instead of accruing an amount for these as liabilities in its accounting records? PART 3: FINANCIAL REPORTING CONCEPTS McCain Foods Limited is a large multinational private company with $7 billion in sales. It produces both frozen and non-frozen food products and makes one third of the frozen French fries produced worldwide. It has manufacturing operations in 18 countries, sales operations in over 160 countries, and employs more than 17,000 people. Most private companies in Canada have chosen to follow ASPE; however, some private companies like McCain have chosen to follow IFRS. \"We believe that we are exactly the type of company for whom IFRS was developed,\" McCain told the IASB in a letter of comment responding to the IASB's preliminary views on financial statement presentation. Requirement 5 (7 marks): Answer the following questions: (a) Other than the owners of McCain, who might be the users of McCain's financial statements? (2 marks) (b) McCain has numerous subsidiaries located throughout the globe. How would this type of multinational structure motivate McCain to follow IFRS? (2 mark): (c) What are the benefits to the users of its financial statements of McCain reporting under IFRS? (3 marks) 2 PART 4: CORPORATIONS - SECTION A Loblaw Companies Limited, headquartered in Brampton, Ontario, is a large food and pharmacy retailer. Loblaw's authorized share capital includes an unlimited number of common shares, 1 million first preferred shares, and 12 million second preferred shares, series A. As at December 31, 2014, no first preferred shares had ever been issued. The following information is also available for the years ended December 31, 2014 and 2013: 2014 Gross profit margin 24.8% Return on assets 0.19% Return on equity 0.54% Market price per common share $62.17 Market price per second preferred share, series A $25.85 2013 23.7% 3.25% 9.38% $42.38 $26.25 Requirement 6 (7 marks): Discuss the change in Loblaw's profitability from 2013 to 2014. Is your assessment consistent with the change in market price per share? Explain. Requirement 7 (2 marks): Loblaw issued 133.5 million common shares during 2014 and received proceeds of $6.8 million, but no additional preferred shares were issued during 2014. Was it more advantageous to issue the common shares instead of preferred shares? Explain. Requirement 8 (3 marks): Loblaw has a stock option plan for its employees and directors. What advantages are there to the employees when they receive a portion of their annual compensation in shares? What are the advantages to the corporation? Requirement 9 (6 marks): The preferred shareholders receive a dividend of 5.95% on the face value of the preferred shares. The company has issued a total of 9 million second preferred shares, series A, with total face value of $225 million. What is the dollar amount of the dividend per share? Why is this rate higher than the interest rate on savings accounts paid by banks? Requirement 10 (4 marks): The preferred shares are redeemable for $25 per share (plus unpaid dividends) on or after July 31, 2015. Why might Loblaw choose to redeem the shares? PART 4: CORPORATIONS - SECTION B Potash Corporation of Saskatchewan Inc., known as PotashCorp, is the world's largest fertilizer enterprise by capacity and a leading supplier to three distinct market categories: agriculture, animal nutrition, and industrial chemicals. PotashCorp completed a share repurchase plan in 2014. Financial information for PotashCorp for the years ended December 31, 2014 and 2013, follows (in millions of U.S. dollars, except per share data): 2014 2013 Profit for the year $1,536 $1,785 Shareholders' equity at December 31 $8,792 $9,628 Cash dividends declared during the year $1,164 $1,146 Number of shares outstanding (at year end) 830.2 856.1 Weighted average number of shares outstanding 838.1 864.6 3 Requirement 11 (6 marks): Explain the different effects that a cash dividend, stock dividend, and stock split would have on PotashCorp's assets, liabilities, shareholders' equity, and the number of shares outstanding. Requirement 12 (2 marks): What is the likely reason that PotashCorp has repurchased shares over the past two fiscal years? Requirement 13 (2 marks): Based on the following excerpt from the PotashCorp notes to the financial statements for 2014 on the share reacquisition, did the company pay more than the average per share amount or less than the average per share amount? Explain. 2014 2013 Common shares repurchased for cancellation 29,200,892 14,145,100 Average price per share $35.31 $31.46 Repurchase resulted in a reduction of: Share capital $53 $25 a Contributed surplus 2 82 Retained earningsa 976 338 Total cost $1,031 $445 PART 5: NON-CURRENT LIABILITIES Gap Inc. and lululemon athletica inc. are specialty clothing merchandisers. Here are recent financial data for the companies: Balance sheet data Total assets Total liabilities Income statement data Interest expense Income tax expense Profit Gap Inc. (in millions of U.S. dollars) January 31, 2015 $7,690 2,473 lululemon athletica (in millions of U.S. dollars) February 1, 2015 $1,296 207 Year ended January 31, 2015 Year ended February 1, 2015 $75 751 1,262 $14 114 239 Requirement 14 (8 marks): Calculate the debt to total assets and interest coverage ratios for Gap and lululemon. Requirement 15 (3 marks): Discuss the solvency of each company compared with the other. Requirement 16 (2 marks): The notes to the financial statements for Gap and lululemon indicate that the companies have significant operating lease commitments. Discuss the implications of these operating leases for each company's solvency. 4