Gourmet Products Inc Case Study

This report addresses issues surrounding the preparation of the consolidated tenements for Gourmet Products Inc. (GPO) and Brazil Oils Inc. , and provides suggested adjustments as well as recommendations on other Issues. Since GPO Is a publicly traded company, FIRS provisions for reporting and presentations of financial statements must be adhered. Valuation of goodwill The current valuation of goodwill from the bottling machine Is Inappropriately reported.

Under FIRS 3, all Identifiable assets and liabilities are to be recognized at fair value.

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By not recognizing at fair value, the machine will be understated, goodwill ill be overstated, and income will be overstated due to lower depreciation on the machine. Adjustment required: the machine should be reported at fair value and goodwill should be calculated by subtracting the fair value from the acquisition cost and be depreciated over the useful life of the machine. Employees re-located to Italy Some employees were temporarily relocated to Italy in order to maintain the operations there. However, these employees are being treated as consultants rather than Spic’s employees and as such GPO is no longer taking source deductions.

The employee / contractor status must be determined, as certain requirements must be met. The inappropriate classification of these employees means the company is neglecting on payroll deductions. Adjustments required: record payroll liabilities and payroll taxes payable to avoid errors in financial reporting. Also, there is a possibility of fines being imposed by CRA due to not remitting payroll deductions correctly. Also, the amounts GPO paid to facilitate the employee’s Job-related move are deductible as ordinary and necessary business expenses.

These deductions will reduce taxable Income AT Financing for labeling machine GPO has purchased a labeling machine by borrowing EURO funds from Banc Camera in Italy.

The machine is then transferred to Brazil for a note similar to the borrowing terms with the bank. GPO is opting not to charge Brazil interest and states this method reduces foreign currency risks. However, GPO is still obligated to pay the bank the 7% interest rate to the bank. In this situation the loan principle is appropriately hedged from foreign exchange risk exposure.

However, the monthly interest payments are exposed to foreign exchange risk, as GPO has to pay interest in Euros to the Italian bank.

Recommendation: to reduce this risk, GPO should arrange a currency swap with Brazil or use another hedging instrument to eliminate or reduce the currency risk on interest payments. To an acceptable level. Another issue with the loan is potential tax avoidance by GPO, due to not charging interest on the loan. Interest income is fully taxable at corporate rate in Canada. This issue can be resolved by using the currency swap with Brazil for the amount of the interest.

Classification of Brazil

According to AS 21 , Brazil should be classified as a self-sustained subsidiary, and will use local currency (Euro) as functional currency in its operations. Recommendations: for consolidation purposes, the Current rate method should be used. Under this method, any exchange gains or losses are deferred and included in OIC. Also, appropriate disclosure in financial statements should be included regarding presentation currency and functional currency used, as well as any exchange gains or losses recorded in OIC. Revaluation of land and building The revaluation of the land and building is inaccurately reported.

Revalued amount should not increase the land and building accounts directly as these amounts are not realized.

Adjustment: the increase in value should be credited to other comprehensive income less the loss that was recognized in the prior year. EURO K should be recorded as a gain on the income statement because it reverses the previously recognized loss. The remaining EURO ASK snouts owe recorder In OIC Ana accumulate revaluation surplus. 150% markup of Brazil goods EAI In equity unaware The transfer pricing of Brazil goods sold to GPO raises concerns.

The markup of 50% seems unusually high with no explanation to support this decision. Due to the high markup cost, GPO would report a very low profit margin on the sales of these goods.

Improper transfer pricing could provide an opportunity for GPO to income manipulation and income tax implications. The corporate tax rate in Italy is much lower than the tax rate in Canada so this may suggest potential tax avoidance by GPO. This issue has tax implications due to higher COOS recorded in Canadian operations, thus decreasing the taxable income.

Recommendation: review the transfer pricing policy by both SCOFF and CEO. Generally, transfer pricing is set close to the fair value market.

To defer from this, there should be support to back-up this decision. There is a potential penalty from CRA due to inappropriate transfer pricing in a non-arm length transactions. Implementation of new payroll system The concern on the approach to implementing a new payroll system was mentioned by you at our meeting. Although the direct cutover conversion is faster to implement and costs less, the risk factor that come with this makes this approach less favorable.

Because the transition will be dealing with sensitive employee information, the many should be due diligent in handling this information.

As well, any errors on payroll will likely to frustrate and anger employees even more so than the delays. Recommendation: It will be more favorable to choose a less risky parallel conversion. Parallel approach would provide a reliable transfer into new system, but it will be more costly due to more resources required for conversion. Users of the consolidated financial statements In addition to preparing consolidated financial statements, there is an option to prepare FSP for each separate entity.

However it’ll be more costly to provide another set of financial statements to shareholders. The cost of preparing additional set of statements need to be considered.

According to FIRS 3 and 12, disclosures regarding business combination and Interest in other entities is required. These are the issues I have come across as I was preparing for the consolidation of the financial statements. It is important that you review these issues and consider the adjustments I have suggested. While some of the items will not impact the consolidated financial statements, they will have some implications during an