ADMS 3585 Accounting Statement Analysis

Part A: Case Analysis: 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. ADMS 3585 Accounting Statement Analysis.

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.

1. A team of provincial sales tax auditors has been auditing PWF for nearly six months, but the audit is still not complete. The auditors are disputing certain expenses that PWF recognized for tax purposes which resulted in PWF paying substantial less tax in the past two years that the company would otherwise have to pay.

2. On June 23, 2019, PWF received a wire transfer of $10 million to its general Canadian dollar bank account, assuming that this amount was to settle an outstanding customer invoice. Days after, PWF realized that the amount was deposited in error. PWF has not informed the bank of the error and has taken $10 million into income as a ‘gain’.

 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.