Hunkydory Health Products Inc. (HHP) is a private company incorporated 5 years ago dedicated to the production and distribution of health products for the burgeoning health and well-being sector. Their two production lines - health foods and cosmetics - have both done extremely well, riding on the wave of interest in well being and health consciousness that has caught on with young, and not-so-young professionals. Their spectacular growth has led to increased financing needs, and they are considering going public in the near future. They have been generating modest profits in the last three years, and estimate a profit after taxes of $762,000 - an impressive return on sales of 15% - in 2013, based on a preliminary draft of their financial statements prepared by the administrative staff. The firm has not paid dividends in the past, preferring to finance their growth with internally generated funds as much as possible. Management receives part of their compensation in the form of stock options.

In the past the firm has followed ASPE using the taxes payable method. However as soon as they go public they know that they have to adopt IFRS rules.

It is January 2014. HHF's fiscal year-end is December 31, 2013. The President of HHF Chuck Hunkydory, an old school friend and the company's founder, has provided you (CGA) with the following accounting issues facing the company for 2013. "Hey, as you know, I am just a guy who loves the gym, fresh air and a healthy wholesome lifestyle", he said, shaking you warmly by the hand, "but I am completely lost in the new global business environment with all these new fangled rules that they keep throwing at us. Tony, my head clerk, is very hard-working and intelligent, but he just cannot keep up with all the changes that have taken place in the past few years. Aunt Bertha helps as much as she can. In fact she has given me an interest free loan of $400,000 to help us along. I would have to pay the banks at least 5%. But she is facing a tightening of her financial position, and I will have to return her money in a year or two. "  He would like you to prepare a report outlining alternative accounting policies and your recommendations.

The following information has been collected by you:

1. HHP does not accrue warranty expenses for their products, expensing the amounts that are paid out to service the warranties. Based on the one-year warranty given by the company on the sale of their cosmetics products you estimate that the company will have to pay $40,000 in warranties over the next year.
2. HHP issued $200,000 in $5 preferred shares on January 1, 2013. The 2,000 preferred shares must be redeemed, or bought back, at their $100 stated value per share, in 2014. The dividends are cumulative. If there are any dividends in arrears they must be paid before the redemption date. No dividends have been declared in 2013. The preferred shares are classified under shareholders' equity.
3. To conserve cash, an arrangement was made at the end of 2013 to exchange 4,000 common shares in HHP for equipment from their supplier. The book value of the equipment was $250,000 and the listed selling price was $350,000. Similar equipment is sold for $300,000 if cash is paid. Common shares were last issued at $100 per share. HHP recorded this share issue at $400,000, using the $100 price of the last issue.
4. Again, to conserve cash, HHP has reduced salaries to top management staff and issued stock options as compensation in 2013. TI provides only note disclosure of the stock options, which have been valued by options pricing models at $200,000, and vest at the end of 2013. The options may be exercised during 2014-2015.
5. At the end of 2013 HHP bought back some of their own shares with a capital loss of $30,000. These shares are expected to be reissued when employee stock option plans are exercised. The loss from the repurchase has been included in other income.
6. In 2013 HHP issued $200,000 in bonds with detachable warrants to make them more marketable. Every $1,000 bond has 4 warrants, each of which can be used to purchase one common share at a strike price of $90 per share during the exercise period 2014. Without the warrants the bonds would be issued at 96. The entire proceeds of the bond sale have been booked as a liability.
7. The pension is underfunded, although it does meet the provincial legislation for pension funding. The company books the annual fund contribution as pension expense. Actuarial data indicates that the Accrued Benefit Obligation at the beginning and end of 2013 were $700,000 and $750,000 respectively, whereas the value of the Plan Assets were $600,000 and $790,000 respectively.
8. On January 1, 2013 HHP purchased a 3 year insurance policy for $60,000 on its offices and equipment, and expensed the entire amount in that year.
9. HHP has been following the tax rules (CCA) for calculating depreciation expense, but would like to change to the straight line method because it better matches the pattern of benefits obtained from their long-lived assets. UCC for the Property Plant and Equipment of the company at the beginning of 2013 was $500,000 and the book value would have been $550,000 if straight line depreciation had been used. In 2013 the depreciation expense and CCA were $60,000 and $50,000 respectively. No purchases of Property Plant and Equipment were made during 2013.
10. HHP has had no collection problems from its clients, and feels that the current 2% of net sales applied to calculate bad debt expense is excessive, thinking that 1% would be more appropriate.
11. Summarized statement of financial position for 2013 - the company had total assets of $4,500,000 and liabilities of $3,000,000.
12. The income tax rate is 30%.
13. The firm has covenants with their creditors to maintain their debt-equity ratio at or below 2:1.

Required: Prepare the requested report, adjusting the income statement and the summarized statement of financial position for 2013 using IFRS rules.

Comment on the firm's performance, and its compliance with its covenants.

Your discussion should identify recognition, measurement and disclosure issues, citing from the official IFRS rules to justify your recommendations.

Chuck is an old school friend, but this is a professional report.