Required: Prepare a memo to the Audit Partner of your firm stating the significant accounting issues for BLC relating to each of the aforesaid events. Support your views by making refrence to the conceptual framework and state your conclusions at the end of the memo
Better Land Company Limited (BLC) is a Hong Kong company with several subsidiaries operating mainly in the waste management and disposal industry. BLC was incorporated in 1981 and has grown to become one of the top four waste management companies in Hong Kong. The business was started by the Wong’s family, but currently no family members are actively involved in the management of the company despite their ownership of BLC’s ordinary shares. In 2018, the Wong family decided that they would begin the process of selling the company over the next two or three years. In preparation for the sale, the company has engaged your firm, Lo and Partners, to audit the company’s financial statements. BLC has an August 31 year-end.
It is now September 18, 2020, and your firm is conducting the audit of BLC for the year ended August 31, 2020. You are reviewing the files of BLC and you noted the following events:
On June 23, 2020, BLC received a wire transfer of 2.5 million Guinean francs (GNF) to its general Hong Kong dollar bank account in payment of an outstanding customer invoice. BLC’s bank had incorrectly assumed that the transfer was in the currency of Papua New Guinea, the kina (PGK), and converted the funds to 8 million Hong Kong dollars. On that day, 1,000 Guinean francs bought 1.12 Hong Kong dollar. BLC has not informed the bank of the error and has taken the difference into income.In early 2020, BLC lost a decision in a lawsuit brought by Recycle Systems Integrated Limited (RSI) for patent infringement. In an unusual award, the court ordered BLC to pay $18 million for buying shares of RSI, a private company, which had been in some financial difficulty. BLC has decided not to appeal the decision to the Supreme Court, and the company bought the shares in RSI before year-end.BLC bids on various government waste pickup and disposal contracts. BLC buys waste disposal sites to dump the waste collected. BLC defers and amortises the cost of the sites over the expected useful lives of the sites, using different amortisation bases including tonnes of capacity, years of remaining usage, or cubic metres of waste capacity. Amortisation of the cost of these sites represents 41% of BLC’s operating expenses. Of BLC’s assets, 64% are waste disposal sites.BLC defers and amortises over five years the costs of locating new waste disposal sites and negotiating agreements with the government.Every year BLC updates the estimates of the remaining useful lives of waste disposal sites using the services of a consulting engineering firm. In the past, BLC used Fok & Co., Environmental Engineers, for these reviews. Fok & Co. did no other work for BLC. Starting in 2020, BLC used Delta Consulting Engineers for the reviews. Based on the new consultants’ report, the useful lives of all waste disposal sites have been increased between 4% and 26%.
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Required:
Prepare a memo to the Audit Partner of your firm stating the significant accounting issues for BLC relating to each of the aforesaid events. Support your views by making refrence to the conceptual framework and state your conclusions at the end of the memo
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