Porto Waste Facilities Inc. (PWF) is a large, diversified Canadian-controlled private company
with several Canadian and US subsidiaries, operating mainly in the waste management and
disposal industry. PWF was incorporated in 1955 and has grown to become one of the top four
waste management firms in Canada. The business was started by the Porto 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 2017, the Porto
family decided to sell the company to a third party within the next two or three years to realize
the value of their shareholdings. PWF has an August 31 year end. The company has elected to
report using International Financial Reporting Standards (“IFRS”).
It is now October 18, 2019.
You, CPA, work for Hoa LLP. You are currently in charge of the audit of Porto. You had a
meeting with PWF’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 PWF to follow
in preparation of its financial statements.
3. During 2019, PWF 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 PWF to pay $18 million for 100% shares of Waste Systems Integrated Limited, a
private company, which had been in some financial difficulty. PWF has decided not to
appeal the decision to the Supreme Court, and the shares were purchased before year end.
Since PWF now owns the patent, PWF 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. PWF purchased shares of a private company that is PWF’s equipment supplier. After the
purchase, PWF owned 18% of the shares outstanding. PWF 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 PWF’s future business. PWF
is able to appoint one out of five board members but PWF has not done so yet.
Required:
Prepare the report as required by your Partner. In discussing key financial issues, please make
sure to quote the proper section from the CPA handbook that is relevant to your discussion,
As the Porto family plans to sell the business in the future, you are also asked to assess and
address any issues regarding the integrity of their financial reporting. Any obvious management
biases in their financial reporting should be reviewed in your report.
The case had 9 parts but I am not able to find much on these two points. Could anyone help?
Based on the information provided, let's address the two points you have mentioned:
3. The lawsuit and acquisition of Waste Systems Integrated Limited:
The financial accounting issue here relates to the accounting treatment of the acquisition of Waste Systems Integrated Limited as a result of losing a patent infringement lawsuit. According to the information, the Federal Court of Appeal ordered PWF to pay $18 million for 100% shares of Waste Systems Integrated Limited. Since PWF now owns the patent, the board is interested in understanding the accounting implications for this patent.
Under IFRS, the acquisition of a subsidiary is accounted for using the business combination accounting principles. The relevant guidance can be found in the CPA Handbook in Section 1582 - Business Combinations. According to this section, when a business combination occurs, the acquiring entity needs to recognize and measure the identifiable assets acquired, liabilities assumed, and any non-controlling interest at fair value as of the acquisition date.
In this case, since PWF has acquired 100% shares of Waste Systems Integrated Limited, they need to recognize and measure the assets and liabilities of Waste Systems Integrated Limited at fair value as of the acquisition date. The patent acquired by PWF should also be recognized and measured at fair value. Any excess of the consideration paid over the fair value of the identifiable net assets acquired is recognized as goodwill.
4. PWF's investment in the equipment supplier:
The financial accounting issue here relates to PWF's investment in a private company that is their equipment supplier. PWF purchased shares of this company and currently owns 18% of the outstanding shares. The company has a long-standing relationship with the equipment supplier's management and expects to benefit from any new equipment technologies that can enhance their future business.
Under IFRS, investments in equity instruments are accounted for using the equity method unless PWF has significant influence over the investee. The relevant guidance can be found in the CPA Handbook in Section 3051 - Investments.
According to the equity method, PWF will initially record the investment at cost but subsequently adjust it for their share of the investee's profits or losses and dividends received. In this case, since PWF owns 18% of the shares and can appoint one out of five board members, it is likely that they have significant influence over the investee. Therefore, PWF should use the equity method to account for its investment in the equipment supplier.
In your report, you should discuss these financial accounting issues in detail, referencing the relevant sections from the CPA handbook (Section 1582 for the acquisition of Waste Systems Integrated Limited, and Section 3051 for the investment in the equipment supplier). Additionally, as part of your assessment of the integrity of the financial reporting, you should review any potential management biases that may exist in the financial statements and address them accordingly in your report.