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ACC 703 (10)

Week 11 PCA.docx

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Ryerson University
ACC 703
Deidre Taylor

Wednesday November 14, 2012 Chapter 10, Case 3 Accounting Implications of CCI’s Investment in RUSSIA  IFRS constraint as CCI is a public company  CCI want to provide useful information to existing and potential investors and creditors in order to support decision making in providing resources to CCI  Auditors want to ensure recognition, measurement and disclosure issues related to Russian Venture sufficient to enable shareholder and creditors to fully understand transactions  Assume transaction is material to financial statements of CCI o Joint operation set up so one venture has control over assets of the other o Asset from conceptual framework: acquired through transactions and should generate future economic benefit for company Your Role is:  Determine investment in Russian Division of CCI reported in Consolidated FS of CCI o Installed machinery at cost of $5 million o Provided initial working capital o Provided management team in Russia o Exports Cola Syrup at COST  Determine if agreement is for specific number of years  Appears no shares were issued Investment in Russia  Use conceptual framework to help determine how to report transaction  Asset: o Resource controlled by CCI o As a result of past transaction o Expected inflow of economic benefits  Recognized if item meets definition and o Probable that benefit will flow to CCI o Cost or value can be measured reliably o Could report as an asset but need to check for impairment, revenues are not guarantee  Joint operation or joint venture? o Assess rights and obligations of each party  Investment in an associate?  Investment in machinery and equip and working capital?  Investment in intangible asset that needs to be tested for impairment? o Finite or infinite life  Should we expense as equivalent to research?  Determine appropriate accounting for Russian Division to measure profit  How should land and building donated by Russian gov’t be reported in divisions’ FS  Bottling machinery?  Transfer of Cdn management team, remuneration?  Management fee for daily operations of plant? Machinery: CCI’s Books  Does not qualify as equip of CCI as CCI does not control use of this equipment, CCI management only have access to machinery to produce cola in Russia  Cannot How to assess value of Russian investment  Need to look at assumptions used by mgmt prior to signing agreement  Review estimates of expected cash flows from sale of vodka in Canada  Assumptions reasonable?  Other outflows expected to sell vodka in Canada?  Expected sales of Canada Cola in Russia  Expected profits in Russia Use PV techniques to estimate value in use  Series of FV cash flows from expected vodka sales  Expectation in variations in amount and timing of CF  Appropriate discount rate based on risk  Investment in Russia needs to be tested for impairment CCI’s Russian division  Other expenses on CCI’s book related to Russian division  Continuous transfer of Cola syrup  Should we track and independently report all expenses accumulated since inception of Russian division o Amounts material?  Allocation of head office costs for mgmt time, travel to Russia, cost of transferring Cdn mgmt to Russia Revenue recognition  Record all revenues and expenses at the time profit is determined in rubles at equivalent value in vodka as determined by main export market price in Russia and Canada o Still, risk exists that price of vodka in rubles may change  Or could record revenues and expenses when vodka is sold to Cdn market and exact dollar profit is reliably measured o Most conservative approach, gains recognized only when realized Segmented reporting  Amount of investment in Russia accounted for as investment in joint venture o If investment is regularly reviewed by chief operating decision maker  IFRS has fairly weak requirement for Geographic information o Revenues from foreign countries in total and revenue in a single country if it is material o Noncurrent asset in a foreign countries in total and NC assets in a single country if material GROSS METHOD USED as in text (a) Dec 31, Yr 3 Inventory 444,600 A/P (DM) 444,600 (DM600,000 * 0.741) Dec 3, Yr 3 Due from bank (DM) 488,600 Payable to bank
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