MPAC 833 – Case Pair Assignment – Sunset Mountain Apartments Inc

Role: Controller of Sunset Mountain Apartments Inc.

To: Toby and Darryl
GAAP: ASPE
Users: Toby and Darryl
Date: Sep 3, 2010
 
AO1: Appropriate Accounting Policies for Private enterprise as per ASPE:
 
As the controller of Sunset Mountain Apartments these are the following issues and appropriate
policies suited to tackle the new business accounting issues:
 
Membership plans – revenue recognition:
 
Issue:
 
There are two sets of plans in the new business model when charging clients for the car-sharing
services. The monthly billed membership plans or the per-km driven based, which is 0.50/km.
The concern is that if the customers who is in the membership plans exceeds their monthly
allotted limit, they can upgrade to an new monthly plan or pay for the excess km driven. The
issue is customers pay upfront before using their km’s, so is the revenue recognize as soon as
they pay their registration or monthly fees or when the kms are driven by the customers. There is
a need to record the revenue based on completed contract method or percentage of completion
method. The customers can use different kinds of plans when choosing the car-sharing services –
individual kms, limited kms monthly plans, and unlimited kms plan. The problem is how the
business should recognize the revenue for each of the revenue stream plans?
 
Analysis:
 
As per ASPE 3400, for service rendered as a car-sharing company, the revenue is recognized for
a service based on using either two methods:
 
In the case of rendering of services and long-term contracts, performance shall be determined
using either the percentage of completion method or the completed contract method, whichever
relates the revenue to the work accomplished. Such performance shall be regarded as having
been achieved when reasonable assurance exists regarding the measurement of the
consideration that will be derived from rendering the service or performing the long-term
contract.
 
It feels right for the business to use “completed contract method” to ascertain where the
performance obligation is satisfied/completed before recognizing it for revenue. So, as per ASPE
3400 (.18) - The completed contract method would only be appropriate when performance
consists of the execution of a single act or when the enterprise cannot reasonably estimate the
extent of progress toward completion.
 
The performance is set to be achieved when they have met ALL three criteria for the business to
record its revenue for the services provided through their customers: ASPE 3400 (.07)
 MPAC 833 – Case Pair Assignment – Sunset Mountain Apartments Inc

 
(a)    persuasive evidence of an arrangement exists;
a. yes, when the customer registers to become a customer, there is a written
legal agreement, through the membership plans or individual billed.
(b)    delivery has occurred or services have been rendered; and
a. no, the customer pays upfront during their registration and monthly payment
so the payments should not be recognize as revenue until the customer drives
the allotted kms for the month or the month is completed. It is like a
subscription service.
(c)    the sellers' price to the buyer is fixed or determinable.
a. Yes, the membership lists out the costs of the monthly prices for the car-
sharing services as well as the individual km costs.
 
Record only the individual kilometer as revenue recognized and the registration and membership
fees as revenue after each month. When it comes to the unlimited kms plan, the customer is not
billed by the kms driven, so as the plan is valid for one year (12 months), the revenue is
recognized after each month i.e 8000/12 = $666.66/month. For the limited kms monthly plan, the
business should recognize the revenue for kms driven at the particular month and at the end of
the year, they should recognize the unearned revenue (which should be recorded as liability until
the end of the year) as revenue earned; if the customer uses all the allotted kms for a particular
month – they can use individual kms or choose another monthly plan, so use apt recognition
accordingly.
 
Bias:
 
There is a natural tendency for the owners (Toby and Darryl) to record the registration fees and
monthly fees as revenue, which overstates the revenue and increases risk of material
misstatements.
 
Recommendation:
 
As per ASPE 3400 and mentioned standards discussed above, they should not record their
revenues except for the “by individual kilometer” as revenues. In the “by individual kilometer”,
the customer has satisfied the performance obligation so the revenue can be recorded – matching
principle (recognize revenue as the expense for that activity is incurred). For the limited kms
monthly plan – recognize revenue for the kms driven at the particular month if within the
allocated kms such as in plan A – customer drives 5000 kms, so then recognize only $2000 that
month and defer the unearned revenue as liability until year end and then recognize them as
revenue. For unlimited kms, spread the total amount ($8000) into 12 months, recognize revenue
at $666.66 after each month.
 

Cars recorded as inventory and disposed as Cost of Sales at end of 3rd year:
 
 MPAC 833 – Case Pair Assignment – Sunset Mountain Apartments Inc

Toby and Darryl thinks of recording the cars to be used for the car-sharing business as inventory.
The cars is being used for more than 1 year (3 years to be exact) to create cash flow for the
business so it is a non-current asset which is to be recognised as inventory and the owners thinks
to dispose it as Cost of Goods Sold. Should the car-sharing business classify the cars as
inventory or PPE?
 
Analysis:
 
By definition, as per ASPE 3031 (.07), inventories are assets that are:
 
(i) (i) held for sale in the ordinary course of business;
a. Not met, they are used as business asset for revenue generation for 3 years; not for
sale
(ii) (ii)    in the process of production for such sale; or
a. Not met, they are used in car-sharing business as rentals
(iii) (iii)   in the form of materials or supplies to be consumed in the production
process or in the rendering of services.
a. Not met, not consumed – they are finshed product.
 
Although the cars used in the business is not held for sale in ordinary course of business or in the
process of production; they do not meet (iii) as they are used in rendering services(a), (b), and (c)
– not consumed in the process. They are used in business for cash flow generation and disposed
at the end of 3 year useful life, so they are considered as PPE (plant, property, equipment). Let’s
see if they meet the ASPE 3061(.03) – to satisfy the accounting standards to meet the definition
of PPE:So, the issue is how to record the cars when they are sold to the dealers as they are seen
as “long-lived assets”. Refer the definition below for clarity: ASPE 3475 - Disposal of long-lived
assets and discontinued operations

(1) are held for use in the production or supply of goods and services, for rental to others,
for administrative purposes or for the development, construction, maintenance or repair
of other property, plant and equipment;
a. yes, meet as they are used as rentals
(2) have been acquired, constructed or developed with the intention of being used on a
continuing basis; and
a. yes, for the three years they are used continuously for business purposes
(3) are not intended for sale in the ordinary course of business.
a. yes, they are sold after the useful life of 3 years to the dealership

As per the ASPE 3061 (.03), the cars are classified as PPE; they are recognize at cost of
acquisition in the books and when they are disposed we need to remonve the carrying amount
from the statement of financial statements – gains/loss are reflected in Profit/Loss A/C. 

Another issue is to determine the amortization policy (straight-line – 3 years, declining balance
method, or units of kms method – 120,000). In this case, we can use straignline method or units
 MPAC 833 – Case Pair Assignment – Sunset Mountain Apartments Inc

of kms. I think as the business is s car-rentals company, it would be appropriate to use units of
kms as it affects the life/quality of the car – more kms driven, more value depreciating and vice
versa.
.03 © A long-lived asset is an asset that does not meet the definition of a current asset (see
CURRENT ASSETS AND CURRENT LIABILITIES, Section 1510). For purposes of this
Section, the term "long-lived asset" includes a disposal group. 
 
Therefore, assets held for sale such as the cars (with life span of 3 years under the company)
refers to all recognised non-current assets including cash generating units called disposal groups
if there carrying value will be recovered through sale transactions rather than continuing use. The
dealer who is known to the owners are said to provide them with top dollar for their used cars a
they have good relationship - there is certainty that the dealer will pay the fair price for the
inventory (in this case, the cars).
 
The cars will be recognised as long-lived assets at the end of 3 years as it meets all of the
following criteria as per ASPE 3475 (.08) - recognition:
 
A long-lived asset to be sold shall be classified as held for sale in the period in which all of the
following criteria are met:
(a)     management, having the authority to approve the action, commits to a plan to sell;
Yes, they have the authority as owners of the cars
(b)     it is available for immediate sale in its present condition subject only to terms that are
usual and customary for sales of such assets;
Yes, at the end of 3 years for each cars from their date of purchase
(c)     an active program to locate a buyer and other actions required to complete the sale plan
have been initiated;
Yes, good relationship with the dealer and the dealer know that they will be getting cars from the
company at the end of their useful life at the car-sharing company
(d)     the sale is probable, and is expected to qualify for recognition as a completed sale within
one year, except as permitted by paragraph 3475.09;
Yes, sale to be completed from the end of the 3rd year - good relationship dealer
(e)     it is being actively marketed for sale at a price that is reasonable in relation to its current
fair value; and
Yes, the dealer said he/she will pay top dollar for the used cars which means at fair value market
price
(f)     actions required to complete the plan indicate that it is unlikely that significant changes to
the plan will be made or that the plan will be withdrawn.
Yes, the plan is simple and straightforward, no issues.
 
When it comes to cost of goods sold value at the end of 3 years, refer to IFRS 3031 (.10):
 Inventories shall be measured at the lower of cost and net realizable value.
 
In this case, the cost value is tend to be higher than the net relizable value. 
 
 MPAC 833 – Case Pair Assignment – Sunset Mountain Apartments Inc

Recommendation:
 
For used cars, the net realizable value is less due to depreciation, so logically and as per ASPE
3031, we record the inventory as COGS during its sale at the net reliazable value (deducting the
selling costs). So, the cars will be recognised as long-lived assets held for sale after 3rd year. We
classify the cars as PPE as it meets the ASPE 3061 standards and it is used for business purpose.
For the depreciation policy, we use units of kms driven method as reflects the car health
correctly.
 
Website costs – multiple stages in production – R&D:
 
Issue: whether the 10,000 dollars used in the previous website building capitalized or
notexpensed? The problem arised when we take a look at the multiple stages involving the
website development process and the question to be asked is what stage production costs should
be capitalized and expensed. The intangible asset generated when we set up the website for
business purposes is a major factor to be discussed.
 
Analysis:
 
As per ASPE 3064, the three critical attributes of an intangible asset are:
 Identifiabily 
 Control 
 Future economic benefits
The website developed is used for business purposes only and it meet all three criteria as it is
identifiable, has control as it helps customers to know about the car-sharing business as well as
bring it cash flow through attracting clients and therefore, brings in revenue. 
 
It also meets the recognition criteria as per:
 
a. The probability that the future economic benefits will flow through the company through
the asset - discussed above
b. Costs of asset can be measured reliability as it has development stages and it cost.
 
To be recongnised as a development costs, the intangible assets (in this case, the website costs)
needs to meet all the following criterias: as per ASPE 3064 (.41) - GOODWILL AND
INTANGIBLE ASSETS
 
An intangible asset arising from development (or from the development phase of an internal
project) is recognized if, and only if, an entity can demonstrate all of the following:
(a)     the technical feasibility of completing the intangible asset so that it will be available
for use or sale;
 Yes
(b)     its intention to complete the intangible asset and use or sell it;
 MPAC 833 – Case Pair Assignment – Sunset Mountain Apartments Inc

 Yes, 
(c)     its ability to use or sell the intangible asset;
 yes
(d)     the availability of adequate technical, financial and other resources to complete the
development and to use or sell the intangible asset;
 yes,
(e)     its ability to measure reliably the expenditure attributable to the intangible asset
during its development; and
-yes, 
(f)     how the intangible asset will generate probable future economic benefits. Among
other things, the entity can demonstrate the existence of a market for the output of
the intangible asset or the intangible asset itself or, if it is to be used internally, the
usefulness of the intangible asset.
 Yes, 
 
It meets all the criteria, so the website costs to be as development costs – only the costs used is
directly attributable to website product costs. There is a need to satisfy SIC-32 as it involves the
the following stages. :
 

The first website costs ($10,000) should be expensed as it is not used for business purposed and
does not generate any future economic benefits. Lets take a closer look at the new website costs:

Software purchase and customization – 30,000 (capitalize)

Graphic design – 15,500 (capitalize)
Develop content and populate database – 11,500 (capitalize)
Register or Internet domanin name – 1,000 (capitalize)
Register with search engines – 2,000 (capitalize)
Traning – 20,000 (expense)

Total capitalized amount is $60,000.

Planning
 Application and infrastructure development
 Graphical design development
 Content development
 Operating
 
Recommnedation:
 
Therefore, the 10,000 is to be expensed as it is not used for business purposes anymore(old
website) and the new website costs $90,00060000 is to be capitalized. The training costs is not
attributable to the direct production of the website so it is expensed – ASPE 3064 53(B).
 
 
 MPAC 833 – Case Pair Assignment – Sunset Mountain Apartments Inc

 
Other issues:
 
 The admin expenses can be expenses as it is a period costs ($500).
 When it comes to the $20 monthly costs to be used as a provision for insurance purposes
can be recorded as provision expense and recorded as an provision for insurance
account. 
 The use of logbook is very dangerous as it can be stolen and misplaced - it is poor
internal control and it is safe to use an computer system or app for the customers to log
their ending and beginning kms - using a logbook leads to poor tracking issues when
found in a situation.
 Besides the owners should used the odometer to enter the kilometers driven by the
customers and not tell them to enter themselves - high risk of fraud and mistatting the
kilometers driven. When the customers are entering the kilometers, it need to be verified
by a employee of the company. 
The bookkeper should not manually alter the kilometers driven written in the logbook each
month so it can lead to fraud and mistataements. 
A02: Control Issues:

Logbook:
 Weakness: the lack of monitoring and regulation – can lead to fraud or misleading kms
recorded by the customers, they can enter less kms to pay less for the rentals
 Impact: When the customers are not supervised when entering their kms driven, they are
wrongly enter less kms to pay less for their trip. This is poor internal controls and can
accumulate losses for the business.
 Recommendation: Each customer should have someone from the company to supervise
them to double check the kms in the logbook and the recording should be done by the
employee not the customer. It is a manual process, but they can record the kms using the
odometer as well as track the beginning and ending kms after each trip to make sure the
odomterer records correct kms and customer do not tamper with it.

Punch-Code:
 Weakness: No updating the punch code system can compromise who access the vehicle
and does not assure the customers that their cars are safety as they can think somebody
could have accessed the vehicle and tampered with it.
 Impact: A previous customer can access the vehicle without paying any money or steal
the vehicle. This is not assuring for people who are renting the vehicle. It will not inspire
confidence that their cars are safe to travel in.
 Recommendation: The car-sharing business would use automation tools to change the
punch-code as the company wishes through the system, there are tools which can change
the punch-code remotely so before renting a car to a customer, the employee can change
the punch code through their computer system.

Booking Sheet:
 MPAC 833 – Case Pair Assignment – Sunset Mountain Apartments Inc

 Weakness: The booking sheet can be tampered with as it is in the lobby (access to
anyone), no regulation and control who access the booking sheet and it can be stolen.
 Impact: As there is no control on who uses the booking sheet, we cannot monitor if the
information written is accurate, can be used for by frauds – cannot restrict who can book
and cannot. Sometimes, bad people can use the booking sheet to access the vehicle –
which cannot be stopped.
 Recommendation: Use a computer system and each and every customer has to consult
with a company employee to book a car – this involes employee checks the background
info of the clients and using a computer system – they can track in real time who has the
car and not miss the booking sheet or let anyone access it without any supervision. More
secure and strengthens internal control system.

Non-resident access:
 Weakness: No control on who enters the apartment building, bad for apartment tenants
who may feel insecure. Lack of control who gets access to the building as car-sharing
customers can be non-resident of the building.
 Impact: When anyone with the car-sharing business membership can access the
apartment building, they can get into the apartments – can lead to theft, violent acts and
increase insecurity for the tenants. In the current business of apartment rentals, they may
loss future apartment rentals.
 Recommendation: Provide car-rental to apartment tenants only or try to expand their
business by having a car-parking outside the apartment so it does not obstruct the safety
of the apartment tenants.

 
 A03: Guidance or Analysis of the car-sharing business for the owners:

The new business idea of car-sharing is interesting but there are factors to consider whether the
car-sharing business is a good idea or not for Toby and Darryl - risk factors listed below.

1. Market Scope – big city vs small city:

The size of the market is a big factor when deciding if the car-sharing business is a good idea in
small urban sprawl like Saskatoon. The previous success cities project where in large densly
populated cities like Toronto and Vancouver, where owing a car can be expensive not as much as
Sask. Besides, there is not much demand for this service as population numbers are low
compared to these big cities.
2. Expertise in the car-sharing business:

For Toby and Darryl, they do not have expertise as they are real estate people and got introduced
to the car-sharing through trends/market news – not an expert and have to do more market
research and get guidance from people who are in the business to understand and tackle business
issues that they may not be familiar in this car-sharing business.
 MPAC 833 – Case Pair Assignment – Sunset Mountain Apartments Inc

3. Security concerns for the apartment tenants:

They may loose their current apartment tenants when they bring in non-residents to their
buildings. They should only reserve their apartment tenants to use the car-sharing business which
can be restrict customers for the car-sharing company, thus reducing revenue clients. For
instance, if they do not bring in non-residents it may impact margins for the car-sharing business
but improve tenant-owner relationship in the building – but not good for the car-sharing
business. It is a double edge sword – they have to look at the pros/cons of owing the business –
they need to give up margin in their apartment or car-sharing business.

Therefore, to conclude, I think that the are expert in the real estate industry so should reserve
themselves to that and not insert or invest in the car-sharing business which may risk the overall
business margin.