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Gourmet Products Inc. Essay Gourmet Products Inc. (GPI) is a Canadian publicly traded retailer of aged balsamic vinegars, culinary sauces, spices, herbs, and seasonings. Products are sold globally through several Internet sites created and operated by GPI. On August 15, 20X0, GPI completed the acquisition of all the common shares of Abruzzi Oils Inc. (Abruzzi), an Italian producer and retailer of specialty olive oils, for cash consideration of C$6,000,000. The acquisition cost was allocated to the fair value of the identifiable assets and liabilities. The acquisition cost included a bottling machine with a book value of $400,000 and a fair market value of 0,000. However, to avoid any unnecessary reporting complications, the entire purchase discrepancy related to this machine was allocated to goodwill. GPI intends to keep the Abruzzi name and brand intact. Operations in Italy will be maintained, but GPI will import some of the olive oil production to Canada. The Abruzzi line of speciality olive oils will be featured on all of GPI’s Web sites. In preparation for ongoing operations, GPI has temporarily transferred two managers and five employees to Italy to work at the Abruzzi home office for a period of two years to ensure the transition runs smoothly and that the scale of operations can be increased to meet the forecasted sales growth. GPI is recording wages paid as consulting fees and is no longer taking source deductions. One manager has recognized that the move would cause undue stress on his family if they remained in Canada so he has decided to take his wife and children with him for the two-year period. GPI has just negotiated the purchase of a labelling machine in Italy for EUR 200,000. The equipment is expected to be useful for a period of 12 years. GPI has borrowed EUR 200,000 from the Banca Cammerata in Italy to finance the equipment purchase. The loan, dated July 1, 20X0, is at 7% and is repayable in euros in 15 equal annual instalments, commencing August 1, 20X0. The interest is payable monthly in euros by GPI. The ownership of the labelling machine was transferred to Abruzzi on September 1, 20X0, in exchange for a EUR 200,000 note. The terms of the note are similar to the terms GPI negotiated with the Banca Cammerata, except that GPI is not charging Abruzzi any interest. The CFO of GPI stated this type of structure would minimize the foreign currency risk that GPI is exposed to. On the basis of an extensive review of the relationship between GPI and Abruzzi, Abruzzi has been classified as a foreign operation in accordance with IAS 21. In accordance with IFRS, Abruzzi revalued its land and building asset grouping to fair market value, resulting in an increase to the land and building account of EUR 20,000. Abruzzi’s accountant recorded the offsetting credit as a gain in profit and loss. A revaluation loss of EUR 5,000 had been recognized for land and buildings in the previous year. The corporate tax rate in Italy is considerably less than Canada’s combined provincial and federal rates. Both GPI and Abruzzi have a September 30 fiscal year end. GPI’s usual wholesale markup on its product imported is 60%; however, GPI has been acquiring goods from Abruzzi at 150% above Abruzzi’s cost. The decision to use 150% above Abruzzi’s cost was made by the CFO. As a result, GPI has had a very low profit margin on its retail sales of Abruzzi olive oils. You are Asif Majarani, a senior audit manager working in the assurance department of Majarani Associates, CGAs, a CGA firm in Winnipeg. Majarani Associates has three other specialized departments — advisory, taxation, and transaction services — with three other partners, one managing each department. Your firm has been engaged to prepare the consolidated financial statements for the fiscal year ending September 30, 20X0, for GPI. This is the third year the firm has been engaged by GPI. You recently met with Ed Moore, CEO of GPI, on October 15 to obtain additional information. Moore mentioned that he had some concerns about the upcoming project of converting the existing payroll system to a new technology platform. A new payroll software system has been purchased since the payroll system currently in use is designed for a small company. GPI’s growth has strained the payroll system’s ability to provide timely payroll processing. Delays in payment of payroll have caused frustration for employees, although this does occur on an infrequent basis. The IT director is strongly suggesting that a direct cutover conversion approach be taken so that the new system can be used as soon as possible to realize the benefits. It is also the least expensive approach. Moore is concerned that this is a risky approach and he believes that a parallel conversion would be a better option. He is particularly concerned since he has heard that other companies have found errors during the implementation of this specific software system, although these errors are easily resolved once identified. Furthermore, since this is the first time GPI has been required to prepare consolidated financial statements for its shareholders, Moore is concerned about how the users will be able to differentiate between the financial positions and results of operations for the two separate entities. Required a) In your discussion group, analyze the case as a whole and identify all the issues to be included in the report to the CEO. Note: Candidates must participate in the online discussion. Failure to post in the online discussion and respond to the posts of others will result in failing the discussion-based communication competencies. b) Prepare a report to the CEO (900 to 1,100 words), listing the adjustments that should be considered in preparing the consolidated statements. You should also address any other issues raised in the case. Complete this report independently of your group and submit it as a hand-in assignment.
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