To raise money for additional research, Dr. Hepburn approached the federal government and received a $2 million grant in early November. The condition of the grant was that it must be used "in the pursuit of leading edge medical product research". The agreement stipulated immediate repayment was required if the government determined that the money was used for any other purpose. To date, none of the cash has been used. SSL recorded the $2 million received as a liability.
In December, Dr. Hepburn decided it was time to "phase out" the pharmaceutical products division at SSL in light of weak demand for its products and declining profit margins. Although no formal plan is in place, Dr. Hepburn does not foresee any issues in selling the division and fully expects the division to cease operations within the next year. The operating loss of the pharmaceutical division is presented separately as a discontinued operation on the Statement of Earnings.
During the year, Mr. Hepburn travelled to China to investigate whether or not it would be beneficial to outsource some of the manufacturing functions. During his trip, he noted that a rival competitor was selling a special latex glove to overseas markets that appeared to be identical to a latex glove that developed by SSL. SSL had applied for, and received, a patent with respect to the latex glove five years ago. Mr. Hepburn informed legal counsel and the lawyers served the competitor with a lawsuit for patent infringement. The competitor claims that their latex glove is significantly different and, therefore, not protected by the patent. Legal counsel for SSL is now concerned about the merits of the lawsuit in light of a recent, similar case which was ruled in favour of the competitor. The costs associated with the registration of the patent are capitalized on the Balance Sheet. The court case is schedule for August 2016.
On December 31", SSL agreed to exchange a piece of equipment (i.e. a high powered microscope) that it used in the research lab for a similar piece of equipment held by a related corporation. The exchange resulted in a gain, which is included in the Statement of Earnings. The new piece of equipment has replaced the exchanged equipment and performs substantially the same functions. The fair market value and remaining useful life for both pieces of equipment are also similar.
At the conclusion of the meeting, you notice a memo on Mr. Hepburn's desk, dated December 21, 2015, which indicates that the engineer that was injured during the testing of the surgical saw has decided to sue SSL for the "pain and suffering" he has endured due to "unsafe working conditions". The memo indicates that SSL's lawyers feel reasonably confident, based on similar cases, that SSL will have to pay damages to the engineer. The
engineering is suing for $1 million, but the lawyers feel that the claim could be settled for $500,000. Mr. Hepbur did not advise his accounting staff of the lawsuit as he feels it will "go away" as the engineer continues to recove from his injuries and eventually returns to work.
REQUIRED: Assume the role of auditor, and discuss any financial accounting issues you identify in preparation for fiscal year ending December 31, 2015 (use the case analysis framework covered in the course). Assume that the KSG would like the financial statements presented using IFRS.