please provide detailed explanation and required calculation.

Online Deals Inc. (ODI) is in the business of selling things online. The company is currently owned by two founding partners, Jay and Wen. Due to the rise in Internet commerce, Jay and Wen are thinking about taking the company public. Revenues have increased steadily over the past few years and demand for this type of service appears to be growing.

ODI sells airline tickets and hotel rooms. Sometimes it will buy a block of rooms or airline flights from a company and sell them online to interested individuals. Other times airline and hotel companies advise ODI when they have excess capacity and ODI passes this information on to its customers, hoping that they will buy. All transactions are booked as revenues when the customer pays for them. The amount of revenues is generally equal to the fair value of the flight or hotel room (which is equal to what the customer pays).

During the year, in response to increased competition from other online businesses, ODI has spent a significant amount of money on revamping its website. It unveiled the "new look" just before year end and customers appear to really like the new features built into the website. In this business, it is very important to have a fresh, current look to the website to keep customers coming back. ODI has a large team of dedicated information technology and service staff who deal with this. Like Jay and Wen, the senior management team do not yet draw salaries from the company but are paid with stock options. It is very difficult to determine the value of these options because the company is not yet public.

In the past year, the company's website and customer database were attacked by computer hackers. This was embarrassing for ODI and many customers were very angry. Jay and Wen made a public announcement that they would spend whatever it took to increase security so it would never happen again. Several customers are suing the company in a class-action lawsuit. The case goes to trial early next year. ODI's lawyers are a bit worried since similar lawsuits for other companies have ended up with the company paying out a fairly large settlement. Part of the problem, in this case, was that ODI relies on an outside company (Store All Inc., or SAI) that stores all of its data. The breach occurred at SAI although Jay and Wen also know that part of the problem was their own computer system, which they had spent a lot of money to develop. ODI has since terminated its dealings with SAI and is building a new company-owned technology facility that will be up and running by next year. The new facility is state of the art and very expensive. Jay and Wen have been heavily involved in the design of the new facility. They have been discussing with their lawyers their intention to sue SAI for the problems caused.

In order to finance the new facility, ODI issued financial instruments to a large institutional investor. The terms of the financial instruments are below:

• The face value is $100 million.
• They are repayable when revenues exceed two times the historic revenue levels.
• Each year, the financial instruments pay out a dividend of 3%.
• An annual audit must be performed.

Instructions

Audit & Assurance - Adopt the role of the auditors and discuss the financial reporting issues.