FROM: Company Controller (LSL)
DATE: December 10, 2010
SUBJECT: LumberSell Limited—Financial Reporting Issues (Fiscal Year 2010)
This memo will analyze significant financial reporting issues relating to LSL’s financial statement for 2010.
LUMBERSELL LIMITED (LSL)
LSL is a public company in lumber business and has decided to report financial issues under IFRS for the year of 2010. Based on the expectation that the company will only have a break even this year, we are seeking to increase the company’s line of credit, which depends on the company’s net income and liquidity ratios for 2010. The financial statement users and their objectives, including the following: •As the CFO of the company, you want to demonstrate good debt paying ability in order to get the increased line of debt and therefore have the incentive to maximize net income and liquidity. •The bank, as a potential debtor, holds a conservative attitude and wants to see the true picture about the company’s financial situation to ensure LSL can repay its debts. •The auditors verify the reliability of our financial statements as neutral parties with fair reporting objective, and will audit fairly and truthfully. As a company controller, my job is to help the CFO with preparing standard financial statements that will hopefully let the company get an increased line of credit from the bank. With an aggressive financial reporting objective, I am responsible for reporting the financial statements with a view to the best interests of our company within IFRS.
ISSUE #1: ACCOUNTING FOR ROYALTIES PAYMANTS
During the year of 2010, LSL has signed a licensing agreement with Bowman Inc. (BI) and promises to pay BI royalties each year. Alternative #1: record royalties of $1,750,000 for five years as expenses. According to the licensing agreement, LSL has to pay BI loyalties each year with a minimum payment of $350,000 for at least five years. Because the payment of...