The United Football League (UFL), a North American professional football league, has been in work stoppage since July 1, 2013, immediately after the six-week training camp ended. Faced with stalled negotiations, the players' union representing the league's 28 teams, the UFL Players' Association (UFLPA), called a general strike. It led to the cancellation of games scheduled for the beginning of the regular season, which was to start on July 5 and end with play offs in mid-December.

The main disputed issue is player compensation. According to the team owners, the current compensation system has created an excessive increase in players' salaries (more than 300% in 10 years), which has most teams incurring net losses and several facing extinction. Currently, players are contracted by the teams for fixed periods. Owners are free to negotiate personalized compensation terms with each player. The UFLPA likes the current system and wants it maintained for the duration of the next collective bargaining agreement.

The team owners are proposing a new compensation system. Under this new system, owners and players would still be free to negotiate, but the annual amount each team could spend on payroll could not be outside a predetermined range. The lower limit of this range would be based on a percentage of the annual "gross football revenues" generated by the team. The owners' last proposal suggested this percentage should be 55%. The upper limit of this range, also known as the salary cap, was proposed at U.S. $30 million. Therefore, the annual amount each team could spend on payroll would be no less than 55% of the team's gross football revenues, but no more than U.S. $30 million.

The UFLPA objects to this system for two reasons. First, the players are against the salary cap because they see it as a way for owners to pay players less than market value. They contend that owners wouldn't enter into these contracts if they didn't receive sufficient value for the high salaries they pay. Second, since the players' compensation would be based on the teams' gross revenues, the players are not convinced that the owners will properly account for revenues.

The dispute is dragging on: more than half of the current season games have already been cancelled, and some players and owners are growing impatient with the slow progress at the negotiating table. Faced with these pressures, the UFLPA's executive committee has decided to take a closer look at the owners' proposal, but wants to consult with public accountants to get a clearer picture. The team owners have, for the first time, agreed to show the UFLPA their financial statements. The Calgary Cowboys, one of the teams that has incurred major losses in the last few seasons and claims that it is going under, has already handed over its unaudited GAAP financial statements to the UFLPA.

You, CA, are employed by McMaster & Caisse, Chartered Accountants (M&C). Your boss, Marie Caisse, calls you into a meeting with Billy Baker, star quarterback for the Regina Rebels and chair of the UFLPA executive committee.

Billy is asking M&C to analyze the financial statements submitted by the Cowboys so that he can formulate sound arguments to bring to the negotiating table. Given the financial statements provided were unaudited, Billy wants M&C to evaluate the financial viability of the team and determine whether the Cowboys have a net loss in accordance with IFRS. Marie asks you to draft a report that will address Billy's requests.

Following the meeting, you receive the unaudited financial statements of the Cowboys for the year ended December 31, 2012 (Exhibit C7-5[a]), and meet with the team's financial controller to obtain additional information (Exhibit C7-5[b]).

Required

Draft the memo requested by Marie Caisse.

CALGARY COWBOYS LIMITED
Balance Sheet
As at December 31
(in thousands of Canadian dollars)

EXHIBIT C7-5(b)
NOTES FROM DISCUSSION WITH THE FINANCIAL
CONTROLLER OF CALGARY COWBOYS LIMITED
1. Calgary Cowboys Limited (CCL) was created in 1988 by Crystal Roberts, a wealthy businesswoman from Calgary, when the company acquired the UFL franchise. On January 1, 2011, Crystal sold all her shares in CCL to Crystal Roberts Management Inc. (CRM). She is the sole shareholder of CRM. Following the sale, a comprehensive fair value revaluation of CCL's assets and liabilities was undertaken. On January 1, 2011, the fair values of CCL's assets and liabilities approximated their book value, except for the non-competition clause, which had a fair value of $100 million and a book value of $3 million. This clause, included in the Cowboys' contract, states that no other UFL team can be established within a 200-kilometre radius of the Cowboys stadium until 2027. As a result of the revaluation, the intangible asset related to the non-compete clause was increased by $97 million, with a corresponding amount disclosed as a separate equity item. The balance of retained earnings was reduced to zero and a corresponding amount was transferred to share capital. Before the revaluation, the non-compete clause was being amortized at a rate of $150,000 a year.
2. CRM is a financial holding company that owns several other subsidiaries, including the Calgary Sports Channel, which broad casts all of the Cowboys games in the Calgary area. The amount billed by CCL was recorded under "Local TV broadcast rights" in the statement of income. Calgary Sports Channel's main competitor made an offer of $8 million per year to broadcast Cowboys games locally, but Crystal felt it would be more profitable to have the Calgary Sports Channel benefit from the team's popularity.
3. CRM leases the huge parking lot adjacent to the stadium from the city for $1 per year and charges $10 per car. The parking lot can hold over 15,000 cars and is always full for Cowboys games. CRM owns the company that operates all the food concessions in the stadium where the Cowboys play.
4. Players who sign long-term contracts often ask for a signing bonus in addition to their annual salary. A typical contract is for two to four years with an additional one-year renewal option. When a player signs a contract, CCL expenses the bonus. Bonuses are disclosed separately in the statement of income to facilitate financial analysis. These bonuses are refundable if the player leaves within the first year of the contract.
5. UFL players are all paid in U.S. dollars, since most of the teams are American. The spectacular volatility of the Canadian dollar against the U.S. dollar in 2012 triggered a number of exchange gains and losses in the salaries payable. The net gains were shown separately as deferred exchange gains on the balance sheet.
6. Travel expenses include all costs related to the private jet owned by Crystal, which she graciously allows CCL to use during the football season. The team uses it for all out-of-province trips. The plane's operating costs are approximately $2 million per year.
Without the plane, players would fly business class at an average return fare of $2,000 per trip.
7. The advance from the parent company bears interest at the annual rate of 20% due to the significant risk of operating a football team.
8. Accrued liabilities include C$3 million in salary for defensive tackle Jimmy Swagger for the 2013 and 2014 seasons ($1.5 million per season). Swagger, one of the best tackles in the UFL, was paid a signing bonus of $1 million at the start of the 2012 season. However, he has formally asked to be traded to another team because of a run-in with the Cowboys' head coach during the last game of 2012. The UFL has declared a trade moratorium until the strike is settled. Since Swagger will probably not provide any future benefit to the Cowboys, CCL has expensed the salary remaining in his contract. Once Swagger is traded to another team, CCL will no longer have an obligation to him.
9. The Cowboys' stadium seats 40,000 spectators and is almost always full. The team plays 10 home games per season and as many on the road. Spectators pay approximately $53 per ticket and around $25 for food and beverages per game. The team has 40 players, as well as 10 coaches and trainers who travel with the team.

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EXHIBIT C7-5(a) CALGARY COWBOYS LIMITED STATEMENT OF LOSS AND DEFICIT For the year ended December 31 (in thousands of Canadian dollars) 2012 2011 (unaudited) (unaudited) Revenue National TV broadcast rights Local TV broadcast rights Ticket sales Corporate boxes Advertising revenue $19,500 1,500 21,154 3,546 2,100 $47,800 $19,500 1,250 18,653 2,436 1,876 $43,715 penses Signing bonuses Salaries and benefits (players) Other salaries and benefits Stadium rental Business taxes Miscellaneous supplies Administration Interest on advance from parent company Travel Amortization-capital assets Amortization-non-competition clause 5,000 38,540 661 375 90 91 1,099 344 2,610 15 5,000 53,825 (6,025) 4,000 34,767 547 375 89 76 1548 551 3,267 5,000 50,239 (6,524) Loss before income taxes Income taxes Net loss Deficit, beginning of year Deficit, end of year (6,025) (6,524) $(12,549) (6,524) $ (6,524) 2012 2013 (unaudited) (unaudited) Assets Current assets as Accounts receivable Prepaid expenses $55 320 170 545 380 557 96 90,000 Capital assets Furniture and equipment (net) 91 Other asset 95,000 $95,636 Non-competition clause (net) $90,653 Liabilities Current liabilities Bank overdraft Accounts payable GST and withholding taxes payable Accrued liabilities $110 36 13 3,343 3,502 1,567 566 28 12 657 697 3,772 124 Advance from parent company Deferred exchange gains Shareholder's equity Share capital Deficit Revaluation adjustment 567 (12,549) 97,000 85,018 $90,653 567 (6,524) 97,000 91,043 $95,636