1. Introduction: Establish the landscape of the case.
Who are the main users of the case? Consider any key internal and external users
of the financial information.
What are the user objectives? What do the users really care about? For example
a bank is a typical user and they care most about receiving the scheduled interest
payments.
What is your role in the case? This should be reasonably clear in the case but may
be overlooked if not.
What GAAP is appropriate in the case? Determine whether ASPE or IFRS is used
or perhaps both need to be applied to the case.
Is there a Big Picture item in the case? For example there may be a debt covenant
imposed by the bank for financing. This covenant will likely be based on
maintaining a certain financial ratio, such as current ratio or debt–to–equity ratio.
As you identify issues in the case and recommend adjustments, this ratio will also
require adjustment that could either better or worsen the ratio. Other common
big picture items could be fraud, business acquisition/valuation, bonus payments,
etc.
2. Analysis: Accounting Issues
Identify EACH accounting issue in the case using the following format:
ISSUE #1 – …..
State the accounting issue and how it is currently being accounted for.
Identify any possible alternative ways to account for the issue such as to capital or
expense.
Discuss the appropriate GAAP criteria that should be applied such as the definition
of a capital asset. Try to provide a balanced analysis if alternatives do exist. For
example, do not only provide facts to support capitalization, try to also discuss
points that support the expensing option.
Apply case facts to the noted GAAP criteria. This will support the criteria and
ultimately provide the support needed for a recommendation.
Recommend how the issue should be accounted for.
Quantify the financial statement impact of each adjustment to correct or account
for the issue. If numbers are not provided simply discuss the general financial
statement impact.
3. Conclusions and Big Picture Issue
Based on the big picture issue noted in Step 1, discuss and quantify the overall
impact (if possible) of the adjustments required from the accounting issues.
What does this mean for the company? For example, if there is a restrictive
covenant and after the suggested adjustments it appears to be in breach, then the
underlying bank debt would be repayable immediately!
