05/03/2014
ABI
The Context
ABI is a Canadian public company that manufactures consumer
electronics. ABI is preparing its financial statements for the year
of 2011.
Constraints
IFRS: Canadian public company
Anything else? – Key numbers such as debt covenants?
– EPS grow by 30%?
ABI
Overall Financial Reporting Objectives
your role
Auditor
Conservative, Fair, or Aggressive? Why?
Other stakeholders
Management
Conservative, Fair, or Aggressive? Why?
Investors
Conservative, Fair, or Aggressive? Why?
Customers? Banks?
Your overall FRO?
ABI
ISSUE Identification
• #1: AppleBerry Gold revenue recognition
– Shall ABI recognize revenue?
– If so, what is the amount?
– How to present and disclose the information related to this issue?
• #2: AppleBerry Lightning revenue recognition
– Shall ABI recognize revenue?
– If so, what is the amount?
– How to present and disclose the information related to this issue?
ABI: Issue analysis
ISSUE #1: AppleBerry Gold revenue recognition
• Relevant GAAP:
– IFRS provides ALTERNATIVES: recognize full revenue $700 right away vs.
defer over contract life
– Recognize if: R&R transfer, no continuing involvement; measurable,
collectible
– Defer: continuing software costs (part that still must perform over
service contract, and measurability issue)
per share=NI-…/…
• IMPLICATIONS of each alternative: earningsnet income increase,so EPS will
because
– Recognize: higher NI and EPS also increase.
– Defer: lower NI and EPS, but defer to future periods (still recognize
some)
• With reference to case facts
– RWI paid already
– returns/warranties immaterial
– Customers cannot return due to software problems
• Your recommendation: recognize
ABI: Issue analysis
ABI: Conclusion
ISSUE #2: AppleBerry Lightning revenue recognition
• Relevant GAAP:
– ALTERNATIVES: recognize vs. not recognize
– Recognize if: R&R transfer, no continuing involvement, measurable, collectible
–...