MGAC01 – Case Assignment 2 2021 Fall Due Date : November 21, 2021 (Sunday) at 11:59 pm Page 1 Portland Recycling Inc. (PRI) is a large, diversified Canadian-controlled private company with several Canadian and US subsidiaries, operating mainly in the waste management and disposal industry. PRI was incorporated in 1950 and has grown to become one of the top four waste management firms in Canada. The business was started by the Portland family, but currently no family members are actively involved in the management of the company. The shares are owned by family members, family trusts, and a limited number of friends. In 2019, the Portland family decided to sell the company to a third party within the next two or three years to realize the value of their shareholdings. PRI has an August 31 year end. The company has elected to report using International Financial Reporting Standards (“IFRS”). It is now October 18, 2021. You, CPA, work for Hoa LLP. You are currently in charge of the audit of Portland. You had a meeting with PRI’s management and staff and have collected the following information. The partner on the engagement has asked you to identify any financial accounting issues and discuss them using IFRS and conclude on the appropriate treatment that you would expect PRI to follow in preparation of its financial statements. 1. A team of provincial sales tax auditors has been auditing PRI for nearly six months, but the audit is still not complete. The auditors are disputing certain expenses that PRI recognized for tax purposes which resulted in PRI paying substantial less tax in the past two years that the company would otherwise have to pay. 2. On June 23, 2021, PRI received a wire transfer of $10 million to its general Canadian dollar bank account, assuming that this amount was to settle an outstanding customer invoice. Days after, PRI realized that the amount was deposited in error. PRI has not informed the bank of the error and has taken $10 million into income as a ‘gain’. 3. During 2021, PRI lost a decision in the Federal Court of Appeal in a lawsuit brought by Waste Systems Integrated Limited for patent infringement. In an unusual award, the court ordered PRI to pay $18 million for 100% shares of Waste Systems Integrated Limited, a private company, which had been in some financial difficulty. PRI has decided not to appeal the decision to the Supreme Court, and the shares were purchased before year end. Since PRI now owns the patent, PRI is now considering how to best protect this technology going forward and the board is interested in understanding the accounting implication for this patent. 4. PRI purchased shares of a private company that is PRI’s equipment supplier. After the purchase, PRI owned 18% of the shares outstanding. PRI invested in the company due to a long-standing relationship with the company’s management, as well as the access to any new equipment technologies that can help to enhance the nature of PRI’s future business. PRI is able to appoint one out of five board members but PRI has not done so yet. 5. PRI bids on various municipal waste pick-up and disposal contracts. PRI buys waste-
disposal sites to dump the waste collected. PRI defers and amortizes the cost of the sites over the expected useful lives of the sites, stated in tonnes of capacity, years of remaining usage, or cubic metres of waste capacity. Amortization of the cost of these sites represents 41% of PRI’s operating expenses and therefore, have a significant impact on net income.
