Question

Alpine Perceptions Ltd.

Alpine Perceptions Ltd. (APL) provides “technology solutions” to manufacturing companies. APL is a wholly owned subsidiary of Elevation Technologies Inc. (Elevation), a privately owned conglomerate. In 2016 APL was performing poorly and Elevation considered selling the company for the best offer. As a last resort Elevation hired turnaround specialist Kendal Wilson to more effectively manage and salvage APL. Ms. Wilson’s employment contract specifies that in addition to an annual salary she would receive a $1 million cash bonus after the end of the 2019 fiscal year if APL meets a number of performance goals over the 2017 to 2019 period. For 2017 and 2018 APL achieved the goals. To meet the performance goals for 2019 APL must report net income in excess of $20 million.

It’s now January 25, 2020. APL’s financial statements for the year ended December 31, 2019 have been received at Elevation’s corporate offices. APL’s net income for 2019 is $20,550,000. Elevation’s CFO has examined the financial statements and is satisfied with most aspects of them but is concerned with the reporting of some transactions and economic events. The issues of concern are described below:

1. On May 30, 2019 the company made a payment of $250,000 to a computer hacker who obtained access to the computer code to APL’s proprietary software that is used to produce some of APL’s products. The hacker had given the company ten days to pay or she would sell the information to a competitor. Management believed that if the information was obtained by a competitor it would have significant negative consequences for the company. APL has capitalized the amount of the payment and is amortizing it over the remaining life of the related assets, which is about four years.
2. APL has always shut down for one week in late December for routine maintenance of the company’s equipment. The annual maintenance is essential to ensure that the equipment can meet the precise specifications of customers. For the past three years, maintenance has been completed by the end of December. The annual maintenance originally scheduled for December 2019 was delayed until the first week of January 2020 because of scheduling problems with the company that does the maintenance and because APL had a number of contracts it wanted to complete by the end of December. The last maintenance was done in December 2018. APL paid $425,000 for the January 2020 maintenance work. The amount was paid in mid-January.
3. In October 2019 APL settled a lawsuit by an employee from an incident that occurred in 2015. APL agreed to pay the employee $350,000 and the payment was made on November 12, 2019. APL accounted for the settlement and payment by crediting cash and debiting retained earnings for $350,000. It was explained that since payment pertained to an incident in 2015, income in 2019 shouldn’t be affected.

The CFO has asked you, an accountant in the finance department, to prepare a report evaluating the issues. Ms. Wilson has already called the CFO to arrange a meeting to discuss the financial statements and the payment of the bonus. The CFO wants your report to explain the problem in each issue, identify reasonable alternatives, and provide full support for your recommendations.

Required:

Prepare the report requested by the CFO.

You should prepare a written report. Your report should consider responses to the following questions:

1. What is your role? Who are you reporting to and what are their objectives? (Think carefully about the objectives. Don’t necessarily rush to a conclusion.) How is that person’s objectives affected by accounting information?

2. Who prepared the financial statements? What are the objectives of the preparer? How do the financial statements affect the objectives of the preparer? How do you think the person preparing the financial statements will approach preparation of the statements (given the opportunity to make accounting choices, what kind of choices will he make)? What are the terms of the arrangement that make accounting information important in this situation? What conflicts, if any, are there between the parties? Explain the conflicts.

3. Are there any constraints you must adhere to? Explain why. (ASPE or IFRS)

Answer 1

Case Analysis

Alphine Preceptions Ltd ( APL) provides “ Technology Solution “ to manufacture companies

APL is wholly owned subsidiary company of Elevation Technology , a privately owned conglomerate

In year 2016, APL was started performing POOR and Elevation planning to sell this company . To do the same Elevation hired turnaround specialist Kendal with certain condition like she would receive $ 1 Mio cash bonus if APL meet 2019 fiscal year number.

2019 APL must report Net income in excess of $ 20 Mio . But in the month of Jan 2020 , While reviewing financial , CFO noticed that Net Income derived $ 20.55 Mio may not be correct and CFO asked “ You” as Accountant in the finance department to understand couple of transaction and do more depth analysis for the same .

On further analysis of Transactions :

On May 30 , 2019 the company made a payment $ 250 k to a computer hacker who have access to the computer code to APL proprietary software that is used to produce some APL products .

Now Hacker after completion of job ask for money to pay immediately otherwise she will sale the same to competitor . management paid this amount and amortized this cost over the period of 4 years . This accounting treatment is not correct . Management just try not to absorb her cost in one month ( to save good amount of cost ) amortized over 4 year period . As per Financial standard and prudent practice , this type of consultancy fees should be charged in same month , Company has to do correct cost booking process . In this case Company showed high Net profit by ( $ 187500)

Scenario 2 – Maintenance activity is almost regular job in every Year end . APL team used to shut down operation for one week and do maintenance . In this case , looks like Company not making enough provision of maintenance cost in particular year . Apparently company incurring $ 425k maintenance cost on Yearly basis but they are not following Accrual concept of accounting and not making any provision for the same . So again they mislead Net profit number and higher by $ 425k

Scenario 3- Oct 2019 APL settled lawsuit by an employee from an incident that occurred in 2015. Incidend happed in 2015 APL started performing low ( POOR 0 from 2016 and they have not make any provision in year 2016 in their books in this matter ( nor disclose the same as contingent liability) . Its looks like they not followed accrual base of accounting . In the year 2019 , They adjusted this amount against Retained Earnings because they can not disclose the same as Prior period item as per IFRS . This practice help them to established higher Net Profit by $ 350k

Due to follow of wrong accounting concept . APL overstated net Profit by $ 187.5k+$ 425k +$350k =$ 962k .. almost $1 Mio impact on Net profit .

It si quite apparent that Wilson Not able to do turnaround of company To get his turnaround bonus she just cooked and manipulated Fianncial number and not followed proper accounting process , stabdard diclosre , not followed accrual accounting no matching concept etc