Question

JU U Tuled. NG "CIES Integrated Cases (Hint: If there are issues that are new, use the concep- tual framework to help support your analysis with solid reasoning.) IC6-1 Standford Pharmaceuticals Inc. (SP) researches, develops, and produces over-the-counter drugs. During the year, it acquired 100% of the net assets of Jenstar Drugs Limited (JDL) for $200 million. The fair value of the identifiable assets at the time of the purchase was $150 million (which included $120 million for patents). The plan is to sell the patents to a third party at the end of seven years, even though the remaining legal life of the patents at that time will be five years. SP already has a commitment from a specific third party that has agreed to pay $50 million for the patents (in seven years).

was having a hard time figuring out the financial reporting issues , user need and environment.

please guide me .

context in financial reporting issues identified.

i have only identified the lawsuit issue and amortization timeline of trademark.

Answer 1

IC6-1-Stanford Pharmaceuticals Inc (SP) -Case study

From an Auditor's point of view following financial reporting issues can be identified for discussion with SP's management and reporting to it's sharholders and regulators after finalisation of Audit excercise:

1.Reported fair value of JDL assets after acquisition during the year is $ 150 million against an acquisition price of $ 200 million will give rise to goodwill on acqusition for $ 50 million.

2.Above fair value needs to be tested by discounting future earnings from JDL business with a terminal value of $ 50 million at the end of 7 years.

3.Discounting factor used for fair value test sholud be based on WACC of SP. A third party valuer certificate can be relied by the Auditor . If fair value test gives a discounted present value of less than $ 150 million differential should be charged to current Income statement .

4.Goodwill of $ 50 million needs to be amortised over a period of 7 years.

5. Value of patent on JDL acquisition $ 120 million including trademark acquision cost on second acquisition needs to be ascertained and tested for it's fair value over remailning life of patent/trademark.

6.Financing of $ 30 million obtained from DDC on a consideration of 2% of SP's revenue from new drug needs to analysed and discussed with management.

7. Management compensation based on stock options needs to examined and fair reporting of stock options needs to be analysed.

8.Current and future liquidity situation of the company needs to be examined to the extent that may impact going concern status.

9.Impact of competitive pressure needs to be analysed for understanding current and future profitability of the company.

10. Contingent liability arising from class action suits needs to ascertained and examined specially with respect to current liquidity situation and chances of future bankruptcy needs to analysed and reported.

11. Finally Auditor should be able to ascertain if the company's going concern status can continued or they need to issue a qualified audit opinion on the financial statement of the company..

12.Regulatoty and other statutory compliances by the company needs to be examined and disclosures on non compliances needs to be made.

13. Compliance with all applicable accounting standards under US GAAP and listing agreement with exchanges needs to examined and disclosed.

14. Management discussion and analysis should be examined and. discussed..