From: Ben, Ther and Donthat, Chartered Accountant
Date: September 15, 2005
Subject: JerRae Engineering Inc.
After reviewing JEI's issues related to financial statement information, the memo will be divided into four accounting areas:
In the financial accounting area the memo will analysis the net profits of two contracts, coffee purchases issue, cigarettes on payroll, and contingency issues.
In the audit area, memo will do the risk analysis, Materiality, bank account, and cigarettes on payroll.
In the taxation area the memo will calculate the taxable income of the Bonito Dam project.
The memo will also discuss some ethics issues related to the project.
Financial Accounting Issue
JEI could earn CAN$46.82 million (see appendix 1). World Bank charges JEI a CAN$4.2 million financing fee. This fee is not included in the budget of design contract. If the financing fee is paid right after JEI gets the design contract, it should be directly recognized to expense.
On other hand, if the financing fee is amortized based on the life of the design contract, it is reasonable to be expensed separately over the life of the contract.
Estado Norte will pay the final payment in five years after completion of the project. The total owned amount is CAD$274.5 million (CAD$915 million x 30%). JEI estimates that the contract's net earning is CAD$93.282 million (see appendix 2). However, additional costs are not included such as losses on the coffee contract and tax estimated. The new cash flow will be much lower than what JEI has estimated.
At the time the contract was signed, there is a loss of CAD$50 million (see appendix 3) should be recognized right away. Because the coffee purchase contract has no link to the design and construction contract, it can not be...