Financial Reporting and Strategy for White Pine Homes

School: University of Ottawa - Course: ADM 4340 - Subject: Accounting

WHITE PINE HOMES ASPE Issues Strategy and governance - Audit and Assurance Tax Financial reporting FINANCIAL REPORTING -indicators: client worried about an impact on their f/s ISSUE #1 - Guarantees on the home (impact on revenue recognition) Sale of a house: revenue recognition @ the time of sale -When ownership is transferred: on the closing date of the sale; the date you take possession; the date you get the keys Case facts that changes the revenue recognition: -Terminate condition: the house might not get done by the closing date, this causes issues (not being able to transfer ownership) -$200,000 per day penalty: contingent liability? -Option to sell their home back to WPH at the original purchase price: have we really transferred the risk/rewards of ownership if this is a condition? have we really met the transfer conditions for revenue recognition? oRecommendation: Would need to record sale as unearned revenue (i.e. no rev) until the whole community has been finished building If we build the green spaces first, we already met the condition, so no un- guarantee of revenue; revenue can be recognized immediately how would you audit this: (audit procedures: existence - document required: plan for the community as a whole (calculate the area occupied by green space vs area occupied by the homes/rest) -Same idea for condition 5 - have we met the conditions for transfer of risk/rewards and revenue recognition? ono way to predict the market SO, recommendation: differ recording revenue for at least 2 years until the period expires -Warrantee costs: would you consider the warrantee being a performance obligation from selling home; oYES: warrantee has value - allocate transaction price to each performance obligation (sale of the home obligation and warrantee obligation) oWhat do you think will happen when you change the warrantee obligation from 1 year to 2 years: significant amount of deficiencies found in year 2 (increase costs) ohow would you audit this account (warrantee liability): completeness, accuracy: working papers for the estimates (internal work); previous years warrantee claims

-Penalties: contingent liabilities? no penalties to be accrued, so just expense -Commission accrual: change in commission structure significantly reduced the commission expense earlier in the year and increases it later in the year oless of a consistent average seen before the change othis inconsistent expense is not going to look good to the bank (not a reg fiscal year - financial reporting multiple times in calendar year) Recommendation: forecast for a sales person to average out their commissions on a monthly basis (accrual) - clearer picture on financial position and bank will be more happy Risks that could have been involved with their plan: -Environmental risks (construction can be stopped for weeks): implication may need to pay some penalties oRecommendation: clauses stating the uncontrollable delays -Funding risks to finish homes (banks, ...): implication: can't close on time oRecommendation: loan agreement prior to signing purchase offer with customer -Dependent on contractors: implication: unavailable, short-notice, ... oRecommendation: pre-set requirements, long-term agreement, multiple suppliers, vertical integration, poach them from competitors, train them, ... -Building permits: implication: holt developments oRecommendation: permit process before