Billy's Research Questions

BILLY’S BEATS INC.

NOTE 1 - THE COMPANY

Billy’s Beats Inc. and its wholly owned subsidiaries (collectively, the “Company,” and its) design, manufacture and market branded musical instruments under the Billy’s, Little Drummer and RockOut.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATON

The audited consolidated financial statements include the accounts of Carter’s Inc. and its wholly owned subsidiaries. Thus, all intercompany transactions and balances have cancelled out each other in consolidation.

FISCAL YEAR

The Company’s fiscal year ends on the 31st of December. Fiscal 201X, which ended on December 31, 201X, contained 52/53 weeks.

USE OF ESTIMATES IN THE PREPARATION OF THE CONSOLIDATED FINANCIAL STATEMENTS

The preparation of these consolidated financial statements in conformity with the Generally Accepted Accounting Principles (GAAP) requires management to make estimates that affect the reported amounts of assets and liabilities with appropriate disclosures at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. However, actual results could differ from those estimates.

FAIR VALUE MEASUREMENTS

The IFRS 13 Fair Value Measurement requires the Company to categorize certain assets and liabilities into three levels, based upon the assumptions used to price those assets or liabilities. The following shows the definitions of the three levels:

If they do not follow all of the standards that are set by FASB, there is no promise that the audit team will give them an unqualified opinion. For example, if they don’t follow the FASB standards for listing fair value or determining useful economic life, they will have to fix the issues that they have caused or get an adverse opinion from the auditors.

PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment are reported at cost, less accumulated depreciation and amortization. When the company sells or disposes of fixed assets, the accounts are relieved of the original cost of the assets and the related accumulated depreciation or amortization and any resulting profit or loss is credited or charged to income. For financial reporting purposes, the calculation of depreciation and amortization uses the straight-line method over the estimated useful lives of the assets as follows:

• Plant – 30 years
• Equipment – 15 years
• Acquired customer lists (in other assets) – 15 years (changed from 25 years)

GOODWILL AND OTHER INTANGIBLE ASSETS 

The Company's goodwill balance is comprised of amounts related to the acquisition of Billy’s Beats Inc. by a predecessor company and the acquisition of Little Drummer boy Inc. The goodwill balances have indefinite useful lives and are not deductible for income tax purposes. The Company's other intangible assets are comprised of tradenames, customer lists and non-compete agreements. The tradenames include Billy's, Little Drummer and RockOut in the United of States. In addition, RockOut Inc. acquired five, eight, and four guitar companies in 201X, 201Y, and 201Z, respectively. In 201X, management changed the estimate of newly acquired customer lists’ amortization life to be 15 year.

IMPAIRMENT OF OTHER LONG-LIVED ASSETS

The Company reviews other long-lived assets, including property, plant, and equipment and intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of such an asset may not be recoverable. Management will determine whether there has been a permanent impairment on such assets held for use in the business by comparing anticipated undiscounted future cash flows from the use and eventual disposition of the asset or asset group to the carrying value of the asset. The amount of any resulting impairment will be determined by comparing the carrying value to fair value, which can be estimated using the present value of the same cash flows. Long-lived assets that meet the definition of held for sale will be valued at the lower of carrying amount or fair value, less costs to sell. For different classes of intangible assets, accounting standards require different asset impairment tests (FASB ASC Topic 350). Thus asset impairment tests and deciding the amount of impairment loss are complex procedures, involving judgment and estimation.

NOTE 3– ACQUISITION OF LITTLE DRUMMER’S PROPERTY, PLANT AND EQUIPMENT

• Due to the complex accounting issues and difficult-to-audit transactions, there were potential high inherent risks such as improper useful life for estimates of useful lives on the newly acquired capital assets or improper capitalization of operating expenses as property, plant and equipment to overstate income.
• Because of the large capital asset transaction, control risk was high and the control activities for the occurrence and authorization were both part of the purchasing process and outside it. For the occurrence and authorization assertions, the audit procedures should not only include confirm that the authorization to purchase capital assets is consistent with the authorization table, but also review capital-budgeting documents like predefined internal rate-of-return criteria. For ensuring completeness assertion, the auditor can check the periodic reconciliation of the property, plant and equipment subsidiary ledger to the general ledger control accounts and compare the detailed records in the subsidiary ledger with the existing capital assets periodically through physical examination.

1. Estimates of Useful Lives

The Company acquired Little Drummer Boy Inc. for $575 million paid in cash in 201X. There was discrepancy between the useful lives of the old plant and equipment and the new plant and equipment. Billy’s useful lives for the plant and equipment that Billy’s already owned were 20 years and 10 years, respectively. However, Little Drummer’s useful lives were 30 years for the plant and 15 years for the equipment.

• Both Right & Obligation and Valuation & Allocation were the key management assertions of the detection risk. Management from Billy’s and Little Drummer asserted that plant and equipment were existed before acquired by Billy’s and that they were valued as promised, before the acquisition (when it comes to useful life).
• Audit team asks Billy’s management what the reason is for the difference in useful life between the new plant and equipment that they acquired and the old plant and equipment that they already had.

• Reason: Billy’s continued to use the same number of years as Little Drummer Boy Inc. used for useful life of the assets after the acquisition.

• Documented in working papers.

• Audit team speaks with the Property plant and equipment manager at Little Drummer Boy about the useful lives.

• The manager confirms that they were using 30 years for plant and 15 years for equipment after the acquisition.

• Documented in working papers.

1.  Fair Value Measurements

Billy’s acquired Little Drummer Boy Inc. for $575 million paid in cash in 201X. The Specialist for plant valuation settled on a combined fair value of $865 million for the total Property, Plant and Equipment based on an appraisal of the market prices of similar assets. The fair value of Property Plant and Equipment was $865 million and the one of Other Assets was $145 million.