Vcl Inc. – Advertising and Revenue Recognition

VCL CASE

Group 2

To: Partner

From: CPA Firm

Re: VCL Inc. – Advertising and Revenue Recognition

Stuart is advising the bookkeeper, Glenda, to record revenue and set up a corresponding trade receivable from the advertiser. When an exchange advertising contract has been established for a product or service, Stuart is advising Glenda what amount to record based on the nature and location. Under IAS 18, revenue should be measured at the fair value of the goods or services received. This exchange of serviced that has not been recorded has created a barter transaction, in which a transaction involving advertising cannot be measured reliably at the fair value of the advertising service. 40% of the total advertising revenue are from exchanges, thus, 40% of revenues for advertising are not being recognized. Additionally in terms of loans and receivables set up in relation to the trade, under IAS 39.9, Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market other than those that are intended for immediate sale, those that the entity upon initial recognition designated as at fair value through profit and loss, and those for which the holder may not recover substantially all of its initial investment. Glenda does not record any amount for the products or services received in exchange for the advertising spots, and is thus doing poor accounting and meeting of reporting standards.

Franchise write-up – Glenda is increasing value of franchise solely based on Stuart’s feedback. Which is engaging in improper accounting policies.

It is recommended to use market value to put value on the franchise.

MC Advertising contract – Paying premium for advertising space (40K more than normal cost).

Renovation to stadium - Leasing stadium, costs are low, however, lease expires in 2 years. The facility needs $250,000 in renovation. Stuarts spends VCL’S money on the renovation.

Purchase Price of VCL

VCL must determine a purchase price after adjustments to the financial statements.

The company has settled on a purchase price of $1,009,704. The purchase price is based on an overstatement of Glenda’s earnings, which is a lowered to $50,000 per year. Also the Renovations to the stadium was capitalized when they should have been expensed resulting in a lower Net Income. The MC has overstated the advertising expense by $40,000 which will lower net income. Also, the Franchise fee of $50,000 has been overstated and not had an amortization so a decrease of $50,000 as well as a $10,000 for amortization. The promotional program has resulted a $270,000 overstatement in the earnings of $108,000 due to the 40% of the revenue occurring through exchanges. The 40% of revenues believe to be overstated because of the estimated through barter transactions. The net earnings after the calculations resulted in $288,487. The industry average earnings multiplier, 3.5, has resulted in a purchase of $1,009,704.

Conclusion: After the adjustments to the net earning, it is recommended that the VCL purchase price should be $1,009,704.

To: Mr. Elliot

From: CPA Firm

Re: VCL Inc. - Recommendation of Services

Subject- VLC’s financial statements have never been audited. A series of unconventional accounting policies have come to our attention:

-the recording of trade receivables when advertising clients had in fact exchanged goods and services for ball park advertising space

...