Issues referred to you by the CFO of Raven Ltd (Raven) Currently, Raven is working on a new product that it thinks will revolutionize a segment of the skin care market and generate huge revenues Before 2021 Raven expensed all research and development costs Up until the end of 2020 Raven spent $5,850,000 on this product In 2021 an additional $11 million has been spent until September 30 Expenditures by quarter plus estimated spending for the fourth quarter are Period Amount Spent January March 2021 $2 75 million April June 2021 $3 20 million July September 2021 $5 15 million October December 2021 (estimate) $2 50 million Management thinks this new product will be ready to go to market in 2023 The product has been undergoing consumer testing and the response has been very positive Some users have experienced rashes and the development team is working on resolving the problem and believes a solution will be found soon If the rash problem isnt resolved introduction of the product may have to be delayed Developing the product cost significantly more than expected and until late June it was unclear there would be financial resources to complete the project In late June an agreement was signed with an investor group to provide the money needed The product meets all government regulations regarding cosmetics in Canada and the US Required documentation was filed with government agencies on August 25, 2021 The production process itself is quite simple and Raven will be able to use existing equipment to produce the product One of the biggest challenges will be getting the new product into stores The Raven sales team has already been working with retailers to familiarize them with the product and interest appears significant The company has already spent $1 million promoting the new product Required This company has adopted IFRS and is being audited this year for the first time How to account for these issues as well as your thoughts on what, if anything should be done by the end of the year for there to be a desirable accounting outcome regarding them The CFO said that it was very important for Raven to show immediate improvement in performance in terms of net income and the debt to equity ratio

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Posted on Apr 14, 2022

Issues referred to you by the CFO of Raven Ltd (Raven): Currently, Raven is working on a new product that it thinks will revolutionize a

Issues referred to you by the CFO of Raven Ltd (Raven):

Currently, Raven is working on a new product that it thinks will revolutionize a segment of the skin care market and generate huge revenues. Before 2021 Raven expensed all research and development costs.
- Up until the end of 2020 Raven spent $5,850,000 on this product.
- In 2021 an additional $11 million has been spent until September 30. Expenditures by quarter plus estimated spending for the fourth quarter are:

Period Amount Spent

January - March 2021 $2.75 million

April - June 2021 $3.20 million

July - September 2021 $5.15 million

October - December 2021 (estimate) $2.50 million

Management thinks this new product will be ready to go to market in 2023.
The product has been undergoing consumer testing and the response has been very positive. Some users have experienced rashes and the development team is working on resolving the problem and believes a solution will be found soon. If the rash problem isn’t resolved introduction of the product may have to be delayed.
Developing the product cost significantly more than expected and until late June it was unclear there would be financial resources to complete the project. In late June an agreement was signed with an investor group to provide the money needed.
The product meets all government regulations regarding cosmetics in Canada and the US. Required documentation was filed with government agencies on August 25, 2021.
The production process itself is quite simple and Raven will be able to use existing equipment to produce the product.
One of the biggest challenges will be getting the new product into stores. The Raven sales team has already been working with retailers to familiarize them with the product and interest appears significant. The company has already spent $1 million promoting the new product.

Required: This company has adopted IFRS and is being audited this year for the first time. How to account for these issues as well as your thoughts on what, if anything should be done by the end of the year for there to be a desirable accounting outcome regarding them. The CFO said that it was very important for Raven to show immediate improvement in performance in terms of net income and the debt-to-equity ratio.