Financial Reporting I Project

Financial Reporting I Project


Job Description

Dear Contractors,

Please read the attached word document. All the information is there. And here are the requirements:


Assume that you are an audit senior of the external audit firm engaged by MVS. To help in the forthcoming presentation for the Board of Directors of the Company, the audit partner has asked you to provide an analysis of the Company's existing accounting policies pertaining to the gift card transactions and an evaluation of the management's proposals to recognize estimated gift card breakage and estimated non-redemption of the restricted gift cards issued during the special promotion. Your answers should provide a description of the accounting policies, an assessment of whether they comply with IFRS, and your recommendation for a preferred approach in instances where alternative approaches are permissible under IFRS. Explain your rationale and support your position with citations from the applicable authoritative pronouncements using the CICA Handbook, or other relevant resources, if an authoritative pronouncement is unavailable. The audit partner would like you to consider the plausible motivations for management's choice of existing accounting policies and proposals it has made during the year-end audit.
Not knowing exactly how to go about executing the above assignment, you consulted with the audit manager of your firm on the MVS assignment. Together, you have determined that the task involves addressing the following specific issues.
1. Analysis of the Existing Accounting Policies for the Gift Card Transactions
a. Gift Cards of Other Retailers
(i) Is it appropriate for MVS to record $50 million as sales and $42.5 million as cost of goods sold for the gift cards of other retailers that it sold during fiscal 2008? Why?
[Insert response here]
(ii) What is a plausible motivation for the management of the Company to report sales and cost of goods sold separately, rather than report the net effect ($7.5 million) of the two as other income?
[Insert response here]
b. Gift Cards Issued during the Special Thanksgiving Promotion
Does the Company's financial reporting of restricted gift cards issued during the special Thanksgiving promotion comply with IFRS? Explain why or why not.
[Insert response here]
c. Gift Cards of Max-Value Stores
Assuming that MVS cannot estimate the gift card breakage (i.e., amount of likely non-redemption), is the existing accounting policy of the Company for gift cards compliant with IFRS? If yes, explain why. If not, explain why not.
[Insert response here]
2. Evaluation of Management Proposals
a. IFRS Compliance
Discuss whether management's proposals to recognize (i) the estimated non-redemption of the restricted gift cards issued during the special Thanksgiving promotion and (ii) the estimated gift card breakage would comply with IFRS. Assume that MVS is in compliance with all laws.
[Insert response here]
b. Alternative Accounting Approaches for Gift Card Breakage
For the recognition of gift card breakage, discuss the alternative accounting approaches that would comply with IFRS. Discuss where in the Income Statement the gift card breakage should be presented.
[Insert response here]
c. Plausible Motivations for Management Proposals
What are plausible motivations for the proposals by the Company's management to recognize estimated gift card breakage and estimated non-redemption of the restricted gift cards issued during the special Thanksgiving promotion? Be specific.
[Insert response here]
3. Other Accounting Issues for Gift Card Breakage
a. Change in Accounting Estimate versus Change in Accounting Principle
Assume that MVS starts to recognize the gift card breakage from fiscal year 2008. It will now recognize breakage when the prospects of redemption become remote (i.e., the third year after the year in which the gift cards are sold). In the year of change (i.e., fiscal 2008), MVS wishes to recognize the breakage for prior years as well. Discuss whether starting to recognize gift card breakage in fiscal 2008 will constitute a change in the accounting principle, a change in the accounting estimate, or correction of an error. Explain your rationale and cite applicable authoritative pronouncements.
[Insert response here]
b. Role of Judgment in Accounting Policy Choices
Assume that the financial controller of MVS concludes that recording gift cards breakage is permissible under IFRS and would like to make the change in financial reporting from fiscal 2008. The financial controller can (i) report the 2008 income effect in sales or in other income, (ii) record the change as a change in accounting estimate or a change in accounting principle, and (iii) choose the approach of recognizing breakage. What choices would the financial controller likely make, and what are the implications for the financial analysts of the choices made by the financial controller?
[Insert response here]

Skills: analysis, management

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