a.

Liquidity Analysis WestJet Air Canada

2018 2017 2018 2017
Current Ratio 0.78 1.08 1.24 1.06
Quick Ratio
(Acid-Test Ratio) 0.63 0.90 1.08 0.91

Solvency Analysis
Long-term Debt-to-Equity
Ratio 1.94 1.89 2.50 2.71
Total Debt to Equity Ratio
2.92 2.63 3.76 4.20
Times Interest Earned
3.32 8.41 3.32 3.32

Profitability Analysis
Return on Sales 2% 6% 1% 12%
Return on Assets 1% 4% 1% 11%
Return on Equity 4% 12% 4% 59%
Gross Profit % 0% 0% 0% 0%

2018 2017 2018 2017

* in Thousands
Balance Sheet
Cash 1,279,577 1,373,166 4,707,000 3,804,000
Accounts receivables 145,544 152,492 796,000 814,000
Total current assets 1,770,720 1,817,079 6,301,000 5,397,000
Total long-term assets 4,987,335 4,705,605 12,896,000 12,385,000
Total current liabilities 2,275,207 1,686,302 5,099,000 5,101,000
Total long-term liabilities 4,455,488 4,263,829 10,065,000 9,259,000
Total shareholders' equity 2,302,567 2,258,855 4,033,000 3,422,000

Income Statement
Revenue 4,733,462 4,506,655 18,065,000 16,252,000
Gross profit*
Total operating expenses 4,578,235 4,073,890 16,891,000 14,881,000
Income (loss) before taxes 135,882 397,940 405,000 1,286,000
Net income (loss) 91,465 279,058 167,000 2,029,000

*Since the cost of goods sold/gross profit of both WestJet and Air Canada is not available, the gross profit % ratio cannot be c

b)
These two companies are comparable because the nature of the businesses is the same (airline operation and services) and th
However, there are also diffuculties in comparability. For example, they have different scopes. Air Canada is a true worldwide
the domestic market. The width of their revenue sources would be different.
c)
By comparing the value driver Return on Equity (ROE) and ROE changes across time, we will be able to explain which compan
Air Canada has a much higher ROE of 59% in 2017, compared to WestJet's ROE of 12%. In 2018, both companies have the sam
dropped significantly, overall, it still generates more value to shareholders.
ss profit % ratio cannot be calculated.

peration and services) and they are competitors in the same industry.
Canada is a true worldwide airline while WestJet focuses mainly
le to explain which company creates more value than another.
oth companies have the same ROE of 4%. Although Air Canada's ROE
Issue:
An entity subject to IFRS purchased new manufacturing equipment on March 1, 2017 and began depreciating using the straigh
The full $2 million retail price of the equipment without the 5% discount was included in the value of the asset. The cost of th
At the end of the year, it was estimated that the useful life of the equipment would be a lot shorter than originally estimated d

Standard:
1) IAS 16.55 states that depreciation begins when the asset is available for use. Because the cranes were available for
The equipment was not available for use until May 1, 2017 so the entity should have started to depreciate the equi

2) IAS 16-16 states that the cost of an item of property, plant and equipment comprises
a) its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and
The cost of the equipment should have been after the 5% trade discount was applied to the full $2 million.
b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of op
IAS 16-17 provides examples of directly attributable costs, including initial delivery and handling costs, installation a
The cost of the delivery, installation and testing should have been capitalized instead of expensed.

3)
IAS 16.60 states that the depreciation method used shall reflect the pattern in which the asset’s future economic be
IAS 16-61 states that the depreciation method applied to an asset shall be reviewed at least at each financial year-e
of consumption of the future economic benefits embodied in the asset, the method shall be changed to reflect the
accounting estimate in accordance with IAS 8.
The straight-line basis results in a constant charge over the useful life of the asset but it is no longer suitable due to

Recommendation:
1) Cost of equipment on book:
Adjusted cost: $2,000,000 x 95% + 25,000 =
Reduction in cost:

Depreciation taken: 2,000,000/5 x 10/12=

Depreciation on units of production basis 1,925,000/50,000,000x16,000,000=
Increase in Depreciation Expense

Adjusting Entries to be made for 20X7:

Accounts Receivable/Cash 100,000

Equipment 75,000
Expense 25,000

Depreciation expense 282,667

Accumulated depreciation 282,667
 depreciating using the straight-line method at the time.
ue of the asset. The cost of the delivery, installation and testing was fully expensed.
ter than originally estimated due to the significant increase of production level from Year 1 to Year 2.

the cranes were available for use at the beginning of year, a full year of depreciation should have been taken.
tarted to depreciate the equipment on May 1 instead of March 1.

educting trade discounts and rebates.

to the full $2 million.
ssary for it to be capable of operating in the manner intended by management.
d handling costs, installation and assembly costs and costs of testing.
of expensed.

he asset’s future economic benefits are expected to be consumed by the entity.

least at each financial year-end and, if there has been a significant change in the expected pattern
hall be changed to reflect the changed pattern. Such a change shall be accounted for as a change in an

it is no longer suitable due to the expected new pattern (increase of production level). The entity should change the depreciation method

2,000,000
1,925,000 Adjusting entries
75,000 Remove discount received
Add shipping and installation
333,333 New depreciation
616,000
282,667
the depreciation method to units of production which is based on the expected use or output.
Issue: An entity is being sued for $4,000,000. It was found liable and expected to pay. The company's lawyers provided an
and the company's liability insurance will cover the exact amount. CFO thinks there is no need to report a provision

Standard:
1) IAS 37-14: 14 A provision shall be recognised when:
(a) an entity has a present obligation (legal or constructive) as a result of a past event;
The company was found liable due to a past event in a court of law on March 1, 2018 so the company will have to p
qualify as a legal obligation and they are awaiting the judge's ruling on the amount they will have to pay.

(b) it is probable that an outflow of resources embodying economic benefits will

be required to settle the obligation;
They were found liable the court and are waiting for the judge's ruling on the amount that they will have to pay. La
and a 10% chance they will pay $5 million.

(c) a reliable estimate can be made of the amount of the obligation.

A reliable estimate can be made by using the mostly likely outcome (90%) of $4 million as the estimated amount.

2) IAS 37-40: Where a single obligation is being measured, the individual most likely outcome
may be the best estimate of the liability.
This is a single outcome event, so $4 million (most likely outcome) will be the best estimate of the liability.

3) IAS 37-53: Where some or all of the expenditure required to settle a provision is expected to be reimbursed by ano
when, it is virtually certain that reimbursement will be received if the entity settles the obligation. The reimbursem
for the reimbursement shall not exceed the amount of the provision.
Since the insurance broker has provided in writing assurance that they will write a cheque to the company for the s
The insurance reimbursement for the company's liability should be treated as a separate asset and both the provisi
The reimbursement amount should be $4 million that the company is expected to pay.

4) IAS 37-54 In the statement of comprehensive income, the expense relating to a provision
may be presented net of the amount recognized for a reimbursement.
Because of the insurance coverage of $4 million, the legal expense and reimbursement amount will net out.

Recommendation:
Both the provision and the reimmbursement should be recorded and following is the adjusting entries:

Legal Expense 4,000,000

Provision for lawsuit 4,000,000

Reimbursement Receivable 4,000,000

Legal Expense 4,000,000
CR Gain on insurance proceeds
ny's lawyers provided an estimate of the amount the entity will pay
ed to report a provision on the financial statements since the two net out.

e company will have to pay. This would

have to pay.

hey will have to pay. Lawyers also provided estimates that a 90% of chance they will pay $4 million

he estimated amount.

of the liability.

o be reimbursed by another party, the reimbursement shall be recognized when, and only
gation. The reimbursement shall be treated as a separate asset. The amount recognized

o the company for the same amount, the reimbursement can be recognized.
set and both the provision and the reimursement net out and they should be recorded.

ount will net out.

ting entries: Adjusting entries

Add the provision
Add the reimbursement
Issue: Nature's Scent uses the full costs of direct materials, direct labour, overhead and selling to account for their invento
Cost of goods sold and the ending inventory need to be determined.

Standard:
Since Section 3031 for ASPE is fully converged with IAS 2, IAS 2 standards are quoted below:

1) IAS 2-10: The cost of inventories shall comprise all costs of purchase, costs of conversion
and other costs incurred in bringing the inventories to their present location and
condition.
Direct materials and direct labour costs should be included in the cost of perfume.

2) IAS 2-12: Costs of conversion include: all direct costs including direct labour + systematic
allocation of variable and fixed overhead.
Again, direct labour cost should be added to the cost of perfume.

3) IAS 2-16 provides examples of costs excluded from the cost of inventories:
• abnormal spoilage,
• storage costs (unless they are a necessary part of the production process),
• administrative overheads, and
• selling costs.
Since the administrative overheads and selling costs are excluded from the cost of inventories, the 30% of administ
, the $1,000 sales commisions and the $4,000 shipping costs should be deducted. Moreover, as the $3,000 storage
it should be excluded as well.

4) IAS 2-13 states that unallocated overheads are recognized as an expense in the period in which they are incurred.
The 30% unallocated overhead related to administrative costs will need to be expensed in the most recent fiscal ye

5) IAS 2-9: Inventories shall be measured at the lower of cost and net realisable value.
The company follows ASPE. It's not active in the market so it would be difficult to estimate the net realisable value

Recommendation:
Per Batch
Full Cost 25,750
Adjusted Cost 15,800
(7,000+4,250+6,500*0.7) 9,950
The cost of inventories per bottle should be reduced by $9.95.

Following is the adjusting entry:

Administrative expense ($6.50x0.3x144,000) 280,800

Selling expense ($8.00x144,000) 1,152,000
Cost of Goods Sold （$9.95x120,000)
Inventory

Conclusion: cost of goods sold should be reduced by $1,194,000 and ending inventory should be reduced by 238,80
d and selling to account for their inventory.

re quoted below: ASPE 3013.13

ASPE 3013.17
of conversion

r + systematic

cost of inventories, the 30% of administrative overhead costs

ucted. Moreover, as the $3,000 storage cost is for storage of finished products,

the period in which they are incurred.

be expensed in the most recent fiscal year.

cult to estimate the net realisable value of the inventories.

Per Bottle Adjusting entries

25.75 Remove Expense from Inventory
15.80 Remove Expense from COGS
9.95

Adjusting entries:
DR Selling and Admin. Expense 238,800
1,194,000 CR Inventory 238,800
238,800 ($9.95/bottle x 24,000 bottles)
DR Selling and Admin. Expense 1,194,000
g inventory should be reduced by 238,800. CR COGS 1,194,000
($9.95/bottle x 120,000 bottles)
m Inventory

ory 238,800
Issue: The initial cost of $1,200,000 was recorded for the value of the "Tree Farm". The land price is included in the cost o

Standard:
1) IAS 41-10: An entity shall recognise a biological asset or agricultural produce when, and only
when:
(a) the entity controls the asset as a result of past events;
Festive Trees Farm owns the Christmas tree farm and the Christmas trees are biological assets.
(b) it is probable that future economic benefits associated with the asset will flow
to the entity;
Christmas trees can be sold for cash flows and to make a profit.
and(c) the fair value or cost of the asset can be measured reliably.
The market prices of the Christmas trees are available.

2) IAS 41-12: A biological asset shall be measured on initial recognition and at the end of each
reporting period at its fair value less costs to sell, except for the case described in
paragraph 30 where the fair value cannot be measured reliably.
Since the fair value of the trees can be measured reliably, the trees should be measured at the fair value less costs t
Also, the land price should not have been included in the cost because the land is not a biological asset.

3) IAS 41-15 The fair value measurement of a biological asset or agricultural produce may be facilitated by
grouping biological assets or agricultural produce according to significant attributes; for example, by
age or quality. An entity selects the attributes corresponding to the attributes used in the market as a
basis for pricing.
The Christmas Trees are grouped by 5 ages to keep a steady flow of mature trees that are ready to be sold.
The market prices of the trees should be considered.

4) IAS 41-26 A gain or loss arising on initial recognition of a biological asset at fair value less costs
to sell and from a change in fair value less costs to sell of a biological asset shall be
included in profit or loss for the period in which it arises.
After the measurement of the value of the trees, any gain or loss will be included in profit and loss.

Recommendation:

75 acres/5 = 15 acres/per age of trees

Cost on book
Deduct Land value
Deduct Total FV of trees of all types = FV - selling costs = ($30+35+45+45+50)x400x15 - 5x400x75 =
Impairment Loss

Adjusting Entries:
Land 75,000
Impairment Loss - biological asset 45,000
Biological Assets 120,000

Conclusion: the entity needs to increase the land value by $75,000 and decrease the biological assets value by $120,000.
price is included in the cost of the 75 acres planted with trees.

IAS 41.12 “ A biological asset shall be measured on initial recognition and at the end of each reporti

ed at the fair value less costs to sell. The $1,200,000 initial cost on the balance sheet will need to be adjusted.
a biological asset.

y be facilitated by
r example, by
the market as a

are ready to be sold.

ofit and loss.

Adjusting entries
Remove land
1,200,000 Write down asset
(75,000)
(1,080,000)
45,000

Adjusting Entry:
DR Christmas Tress (Biological Asset) 1,080,000
DR Land (Tree Farm) 75,000
DR Loss on write-down of asset 45,000
CR Tree Farm 1,200,000
sets value by $120,000.
at the end of each reporting period at its fair value less costs to sell, …”