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8 views3 pages

Group Research Activity 3 New

Uploaded by

p.a.bharuka952
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We take content rights seriously. If you suspect this is your content, claim it here.
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GROUP 1 RESEARCH ACTIVITY 3

CASE ANALYSIS- WPP SUGGESTED SOLUTION

1. Context & Financial Reporting Objective


Role: As a CPA and a senior at a National CPA Firm, my role is to ensure that WPP's financial
statements for the year ended December 31, 2024, are prepared in accordance with Accounting
Standards for Private Enterprises (ASPE). This involves identifying and addressing any financial
reporting issues to ensure that the financial statements are accurate, reliable, and compliant with
the relevant standards. Also showing good results for meeting the target and fulfilling the
requirements of Loan Requirements.

Constraints:

 WPP must include financial statements prepared in accordance with Accounting Standards for
Private Enterprises (ASPE) for the year ended December 31, 2024 with the loan application,
when applying for Loan from Bank.

Stakeholders and FRO (bias):

 The bank is considering a loan application with Financial Statements prepared as per ASPE and is
interested in the financial stability, profitability, and creditworthiness of WPP. They need
accurate and reliable financial statements to assess the risk of lending.
 As the owner-manager, Anna is interested in the profitability and long-term sustainability of
WPP. There could be a bias to inflate revenue or understate liabilities to present the business in
a more favorable light, which could help in meeting the loan requirements.
 Customers rely on WPP for high-quality wedding planning and related services.Ensuring
customer deposits are handled correctly and transparently can build trust and maintain WPP's
reputation.
 Compliance with accounting standards and regulatory requirements is critical to avoid legal
issues and penalties.
Summary (Overall FRO): The overall Financial Reporting Objectives for WPP ensure that the financial
statements are accurate, reliable, and compliant with ASPE, providing a transparent and realistic
view of the company’s financial position and performance.

Issue 1- Revenue Recognition for Deposits


Issue: According to ASPE 3400:-

 It is violation of Revenue recognition because the service has not been rendered yet and its
related revenue that is $58,000 should be recorded in 2025, instead of 2024.

Analysis:-

 Here, the risk of ownership is not transferred yet until 2025.

 The only risk is that it’s a fully refundable scheme if the customer demands a refund ,then the
company will have to refund the money.

 The involvement of WPP Ltd will remain active until the wedding is over.
 Revenue is not a reliable measure and it is just a ransom deposit and its an associated cost

Recommendation: Recognize revenue of $58,000 deposits in 2025 after service is rendered and
obligation is satisfied, instead of 2024.

Impact: In the year 2024,the revenue is overstated in the Income Statement of WPP ltd which
leads to high operating income or EBITDA and higher income or Net income and at the same time
company has to pay high taxes or current tax.

Balance sheet of company, Assets (Cash) or Account receivable has been increased by $58,000
and Current Liability has been generated in the same year with $58,000, in this way, we can trade
off Balance Sheet.

Issue 2- Revenue and Expense Recognition for Wine Tasting Events

.
Issue 3- Recording of the Lawsuit Settlement
Issue Identification:

WPP has paid the $100,000 without consulting it’s Lawyer in a lawsuit settlement but now she wants
to record this amount as receivable as there’s been a similar case settled through appeal where the
defendant was refunded with all the damages.

Analysis :

The above issue deals with the contingencies (ASPE Section-3290). Contingencies deal with the
recognition and measurement of contingencies, including liabilities and contingent assets.

A contingent asset depends on a future event that is out of a company’s control. Under ASPE, the
contingent asset is not recognized in the financial statements because recognizing it may inflate the
income. Instead, it is disclosed in the notes to the financial statements when the realization of cash
flow associated with it becomes virtually (roughly 90-95%) certain. In this case, the lawyer’s letter
dated December 15, 2024, indicates the positive outcome resulting from the past events but the
outcome and the amount are yet to be known, so receivable cannot be recorded until the appeal is
successful and the refund is virtually certain.

Recommendations:

WPP should record the payment of $100,000 made in the financial statement as an expense. It
should also be disclosed in the notes to the financial statement, the information regarding the
lawsuit, and the ongoing appeal along with the lawyer’s positive viewpoint on the outcome.

Impact:

In the year 2024, the expenses will increase by $100,000 but the Net Income will decrease by
$100,000, the reason behind this will be that it was not showed as an expense in the current year.

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