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Management (767)
MGT224H5 (1)
Lecture

Case MGT224

6 Pages
570 Views

Department
Management
Course Code
MGT224H5
Professor
Peter Thomas

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Description
OverviewXYZ is a private company which operates in 3 divisions Clothing and Other Apparel Flags and Ensignias and the Drapery division The company has been in operation for 10 years over which it has had varying levels of profitability The company is managed and partly owned by Justin Chang who owns 85 of the shares while Sam Oht owns 15 of the sharesUsers Justin Chang Want to gain 100 ownership by year end and so will want low to mediocre net income so that he can purchase back shares at lower priceSam Oht Wants clears and realistic statements so he can decide if he wants to further invest in the company and if he wants to buy 80 of shares in case Justin doesnt exercise his rightPotential buyer for Flag division Potential buyers will want realistic and accurate financial statements so that they can decide if they want to make the purchase or not of the flags divisionConstraint The constraint will be GAAP Part 2 as the company is a private company and Sam relies on audited financial statements and thus will want reporting to conform with GAAPRole The case will be analysed from the prospective of the Controller of XYZ taking a neutral standpoint throughout the analysisIssues and RecommendationsIssue 1a Disposal of the Flags DivisionThe Flags division recorded a loss in fiscal 2009 and 2010 and due to the market for flags basically dried up Justin the owner with 85 voting shares decided to sell the divisionOption 1 Is the division classified as discontinued operationsheld for saleThe Flags division is a component of XYZ Industries because it generates its own cash flows and has its own distinct set of operations Since it is authorized by management it meets the first criteria as held for sale However the division was marketed but a selling price was not assumed and hence this is the first violation of the criteria since the sale faces a measurement issue Justin estimated a buyer will be found by spring however this is just speculation and lacks complete certainty whether XYZ industries will find a buyer This is the second violation of the criteria for held for sale since Justin is not actively searching for a buyer Given the above criteria are not met the flags division cannot be considered a discontinued operations component to be held for saleOption 2 Treat the division as a continuing operationThe division could be left where it is on the financial statements with note disclosure explain the circumstances around it Since the drapery department has been seeing losses and the equipments usage has been decreased to the drapery its future economic benefit to the company has been reduced and impairment has occurred Impairment arises when the carrying amount of a long lived asset is greater than its future economic benefit to the
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