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Taffy Corporation (Tafty) was incorporated in 2011 when Mark Smith, Alice Chu and Sam MacDonald united their three existing companies in a business combination Tally is named after Smity's cut with the cat's picture used as the company logo Tafty is involved in online gaming. There are many marginal and small games to be found on-line, and many short-lived games. However, a big winfranchine game can generate a billion dollars in lifetime gross bookings. Taffy and many others hope to develop a game of this magnitude. The goal is to produce an engaging multi-platform game that produces bold features to motivate players to play longer and, in turn, generate increased revenues for the developer. Tatly's games operate on-line and allow players to play for free. Players can purchase "virtual currency' to enhance their game in some fashion, and these in-app purchases are the source of Tally's revenue. Credit cards, Paypal, and iTunes have been used to collect money for this virtual currency It is now early October 2020, and Tafty is preparing its annual August 31 financial statements, which will again be audited. Selected financial information is included in Exhibit 1. A major issue in 2020 was that revenue failed to meet expectations in the latter part of the year. The company failed to retain players in three of its major games, and two new games failed to take off. Continued operating losses resulted Management has embarked in cost-cutting, closing the two new games that did not meet expectations, and sacrificing plans for development of several future games, while preserving plans to develop two others, of particular interest is a math game to be made available free through schools, with a subscription-based advanced game marketed to parents for their children to continue to use at home. This will be the first subscription-based game for Taffy. All of the deferred development costs at August 31, 2020 relate to the math game that will be heavily marketed in the upcoming weeks. Given the speed of change in the gaming industry, revenue-based cash-flow projections are only meaningful for a four-year period. Projections are presented in Exhibit il and are presumed to occur evenly throughout the year The bulk of Taffy's existing revenue is from the sale of virtual goods to players in games that Tafty hosts on its servers. These virtual goods are categorized as two types: consumable and durable. Consumable goods like energy or life, are consumed by the player during the game. These goods last only a short period of time, often must be used immediately, and have no value to the player after being consumed Durable goods, on the other hand, are accessible to a player over an extended period of time. Prior to 2020, Taffy felt that data did not exist to accurately differentiate revenue from consumable goods versus durable goods. It did, however, defer a nominal amount of revenue associated with the sale of virtual goods in one of its newer games. This revenue was allocated based on the estimated life of one of the games, as Taffy did not have the data to allocate the revenue based on how long the virtual goods would be used within the game. However in 2020, data was compiled on the average playing period of paying players in Tatty's games. The two revenue streams were separated, with consumables revenue recognized immediately Consistent with the policy of others in the industry, Taffy's revenue from durables is recognized over the Taffy Corporation 2 average life of a player. This average is based on statistical data thered on month These statistics track the churn rate of players the time between the meant to a player falls inactive Players typically become inactives a relatively enters statistics are used from other recently launched games with the In 2021. Taffy will migrate into an agreement with Facebook, where the sig inom Facebook Credits will be the primary game method under the terms of the the price players pay for Facebook Credits and collects cath Senty is remoto Facebook retains the remaining thirty percent. There is debate within Tally as to whether 2011 revenue should be recorded at its gross amount of not that is a player purchases $100 Credits. Should Tally record 570 worth of net revenue, or $100 ot grows revenut with a 50 trang expense recorded? Transactions through credit cards, Paypal and lunes have been recorded although financing expense averaged only about 35% of gross fees Taffy has obtained financing from venture capitalists whose financing rate excellent pays its commercial banker. The venture Capitalists also have an equity stake in the company with poor operating results in 2020, Tatly's shareholders and venture capitalists all have an analons eye on the financial statements. The company follows. ASPE, but is considering adopting US Deventure capitalists have always viewed a public offering as an extrategy that willow them to profit on the Investment. In particular, revenue trends are critical, both in 2020 and going forward in order town + an IPO You, Hannah Singh, are a recently qualified professional accountant who has been hired as Talstis full-time controller. You and the company's shareholders recently met with lys external auditors who explained that they will be relying primarily on substantive audit procedures for the 2020 at the company's president, Mark Smith, has asked you to detail how each of the financial reporting we Identified above would be treated under both ASPE and IFRS He would also like you to provide comments with regards to the possible IPO. Required: Prepare the information requested by Mark. Substantive audit procedures are direct tests of a financial statement balance designed to detect material misstatements at the assertion level Substantive procedures como se tests of details cases of transactions account balances, and disclosures), and substantive analytical procedures (http://www.als-cpa com/giosa html) Tafty Corporation Exhibiti Tally Corporation Selected financial information in thousands of dollars) For the years ended August 31 2012 (audited) Revenue consumables Revenue durables Revenue - Total 2020 (draft) $525 440 $965 51.365 Net Loss $404 $209 5400 Current assets Office and computer equipment Deferred development costs Goodwill 5450 246 1,200 164 825 164 Unearned/deferred revenue Other liabilities Shareholders' equity $120 369 1,346 520 250 1,750 Exhibiti Taffy Corporation Projections (in thousands of dollars) For the years ended August 31 2022 2021 $400 325 150 $875 Net cash flows - consumables Net cash flows-durables Net cash flows - game subscriptions Net cash flow - total $450 375 250 $1,075 2016 $480 400 250 $1.130 2024 S.BD 350 200 $1,030 Taffy Corporation 4 Taffy Corporation (Tafty) was incorporated in 2011 when Mark Smith, Alice Chu and Sam MacDonald united their three existing companies in a business combination Tally is named after Smity's cut with the cat's picture used as the company logo Tafty is involved in online gaming. There are many marginal and small games to be found on-line, and many short-lived games. However, a big winfranchine game can generate a billion dollars in lifetime gross bookings. Taffy and many others hope to develop a game of this magnitude. The goal is to produce an engaging multi-platform game that produces bold features to motivate players to play longer and, in turn, generate increased revenues for the developer. Tatly's games operate on-line and allow players to play for free. Players can purchase "virtual currency' to enhance their game in some fashion, and these in-app purchases are the source of Tally's revenue. Credit cards, Paypal, and iTunes have been used to collect money for this virtual currency It is now early October 2020, and Tafty is preparing its annual August 31 financial statements, which will again be audited. Selected financial information is included in Exhibit 1. A major issue in 2020 was that revenue failed to meet expectations in the latter part of the year. The company failed to retain players in three of its major games, and two new games failed to take off. Continued operating losses resulted Management has embarked in cost-cutting, closing the two new games that did not meet expectations, and sacrificing plans for development of several future games, while preserving plans to develop two others, of particular interest is a math game to be made available free through schools, with a subscription-based advanced game marketed to parents for their children to continue to use at home. This will be the first subscription-based game for Taffy. All of the deferred development costs at August 31, 2020 relate to the math game that will be heavily marketed in the upcoming weeks. Given the speed of change in the gaming industry, revenue-based cash-flow projections are only meaningful for a four-year period. Projections are presented in Exhibit il and are presumed to occur evenly throughout the year The bulk of Taffy's existing revenue is from the sale of virtual goods to players in games that Tafty hosts on its servers. These virtual goods are categorized as two types: consumable and durable. Consumable goods like energy or life, are consumed by the player during the game. These goods last only a short period of time, often must be used immediately, and have no value to the player after being consumed Durable goods, on the other hand, are accessible to a player over an extended period of time. Prior to 2020, Taffy felt that data did not exist to accurately differentiate revenue from consumable goods versus durable goods. It did, however, defer a nominal amount of revenue associated with the sale of virtual goods in one of its newer games. This revenue was allocated based on the estimated life of one of the games, as Taffy did not have the data to allocate the revenue based on how long the virtual goods would be used within the game. However in 2020, data was compiled on the average playing period of paying players in Tatty's games. The two revenue streams were separated, with consumables revenue recognized immediately Consistent with the policy of others in the industry, Taffy's revenue from durables is recognized over the Taffy Corporation 2 average life of a player. This average is based on statistical data thered on month These statistics track the churn rate of players the time between the meant to a player falls inactive Players typically become inactives a relatively enters statistics are used from other recently launched games with the In 2021. Taffy will migrate into an agreement with Facebook, where the sig inom Facebook Credits will be the primary game method under the terms of the the price players pay for Facebook Credits and collects cath Senty is remoto Facebook retains the remaining thirty percent. There is debate within Tally as to whether 2011 revenue should be recorded at its gross amount of not that is a player purchases $100 Credits. Should Tally record 570 worth of net revenue, or $100 ot grows revenut with a 50 trang expense recorded? Transactions through credit cards, Paypal and lunes have been recorded although financing expense averaged only about 35% of gross fees Taffy has obtained financing from venture capitalists whose financing rate excellent pays its commercial banker. The venture Capitalists also have an equity stake in the company with poor operating results in 2020, Tatly's shareholders and venture capitalists all have an analons eye on the financial statements. The company follows. ASPE, but is considering adopting US Deventure capitalists have always viewed a public offering as an extrategy that willow them to profit on the Investment. In particular, revenue trends are critical, both in 2020 and going forward in order town + an IPO You, Hannah Singh, are a recently qualified professional accountant who has been hired as Talstis full-time controller. You and the company's shareholders recently met with lys external auditors who explained that they will be relying primarily on substantive audit procedures for the 2020 at the company's president, Mark Smith, has asked you to detail how each of the financial reporting we Identified above would be treated under both ASPE and IFRS He would also like you to provide comments with regards to the possible IPO. Required: Prepare the information requested by Mark. Substantive audit procedures are direct tests of a financial statement balance designed to detect material misstatements at the assertion level Substantive procedures como se tests of details cases of transactions account balances, and disclosures), and substantive analytical procedures (http://www.als-cpa com/giosa html) Tafty Corporation Exhibiti Tally Corporation Selected financial information in thousands of dollars) For the years ended August 31 2012 (audited) Revenue consumables Revenue durables Revenue - Total 2020 (draft) $525 440 $965 51.365 Net Loss $404 $209 5400 Current assets Office and computer equipment Deferred development costs Goodwill 5450 246 1,200 164 825 164 Unearned/deferred revenue Other liabilities Shareholders' equity $120 369 1,346 520 250 1,750 Exhibiti Taffy Corporation Projections (in thousands of dollars) For the years ended August 31 2022 2021 $400 325 150 $875 Net cash flows - consumables Net cash flows-durables Net cash flows - game subscriptions Net cash flow - total $450 375 250 $1,075 2016 $480 400 250 $1.130 2024 S.BD 350 200 $1,030 Taffy Corporation 4
