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.

1. For each transaction:
   1. Identify and explain the issue;
   2. Explain the impact of the method the preparer used to account for the transaction or economic event (how does the accounting for each issue affect the parties involved).
   3. Evaluate the accounting used for each issue. Do you think it’s appropriate (explain why or why not)? (To do this you need to apply your knowledge— definitions of elements, etc.).
   4. Is there a better (more appropriate, different) treatment that could be used for the transaction? If there is a better alternative, provide support. Support means referring to appropriate criteria, definitions, standards, etc. as well as to the facts defining the transaction/economic event. If the treatment currently used is appropriate, explain why. When thinking about the existing and alternative accounting treatments, be sure to keep in mind the interests of your client.
   5. Calculate/ (State) the impact of any changes you propose.
   6. Make a recommendation.

Answer 1

Alpine Perceptions Ltd.

Alpine Perceptions Ltd. (APL) provides “technology solutions” to manufacturing companies.