Intermediate financial accounting1

Higgins Dairy Limited

Higgins Dairy Limited (Higgins) is a dairy company operating in South Western Ontario. The companys founder, Karen Binev, owns 70 percent of the shares. Three other private individuals, who have very little involvement in operating decisions, each own 10 percent. Higgins produces milk, yogurt, ice cream, etc. that it sells through grocery stores and chains throughout Ontario.

Over the years, labour and management have had a taxing relationship. Over the past ten years, the union representing Higginss employees have made significant wage concessions to avoid job losses. In the last contract negotiations, Higgins and the union agreed that the union would have access to the companys financial statements. The upcoming negotiation will be the first time the union will receive the financial statements.

You have been hired by the union representing Higginss employees to prepare a report on how to account for a number of controversial issues that arose on the unions review of Higginss December 31, 2018 financial statements and its preliminary discussions with Higginss management. The union will use your report in its assessment of Higginss financial position and performance, and its ability to pay higher wages and benefits to employees.

Up until now, the company has followed ASPE, however, the union leader has asked whether IFRS would be more beneficial for the employees.

The union leader has asked for your report to fully explain your recommendations, discuss arguments that Higginss management might use to counter your recommendations, and identify and discuss alternative treatments that Higgins might present for the outstanding issues:

1. In September 2018, Higgins signed an agreement with a health organization that provided its seal of approval on certain products. The seal of approval provides assurance to consumers that the products meet the health standards of the organization and allows Higgins to use the health organizations logo on the products. As part of the agreement, Higgins donated $520,000 to the health organization. The amount was paid in October 2018. Higgins is allowed to use the seal of approval for four years. Higgins expensed the amount when it paid the health organization.

2. In November 2017, the company signed an agreement a well-known professional athlete to endorse the Higgins product line. In September 2018, the athlete was found to be a user of performance-enhancing drugs and has been suspended from his sport for at least two years. Higgins has decided not to use the athletes endorsement anymore, although the companys lawyer advises that the contract doesnt provide any way to avoid paying the agreed $12,000 per month until December 31, 2020. Higgins expensed the full amount of the contract owing, $288,000, in 2018.

3. On December 31, 2018, Higgins shipped a large order to a customer. Normally, Higgins recognizes revenue on delivery to the customer. The goods shipped werent included in the year-end inventory count. Higgins uses a periodic inventory control system. The goods were delivered on January 2, 2019.

4. Early in 2018, Karen loaned Higgins $150,000 to provide the cash to repair some of their processing equipment. As a result of the changes, the equipment is now likely going to be able to produce double the amount of ice cream and other products. The loan is to be paid back in 2022. Higgins expensed both the $150,000 in repairs and the $20,000 in interest on the loan in 2018.

5. In January 2019, a large customer suffered a catastrophic fire that may put the customer out of business. Higgins doesnt expect to collect any of the $55,000 its owed by the customer and accrued an additional expense for the amount in 2018.

Required:

Provide the report to the head of the union.