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With permission of the CICA, a consortium made up of members from each of the four provincial CA professional programs updated

the following simulation and evaluation guide to reflect the CICA Handbook standards, the Tax laws and the UFE Candidates Competency Map in effect as of March 31, 2011. Any changes to the original material are the sole responsibility of the consortium and have not been reviewed or endorsed by the CICA. The assumption was made that private companies will apply Accounting Standards for Private Enterprises (ASPE) and public companies International Financial Reporting Standards (IFRS)*. The assumption was also made that the accounting framework had been in place for several years. Dates in the simulation have not been changed. * Note: For the 2011 UFE, a candidate might be required to determine whether ASPE or IFRS is appropriate under the circumstances.

2011 Institute of Chartered Accountants of Ontario

Paper III - SIMULATION 3 (90 minutes) The United Football League (UFL), a North American professional football league, has been in work stoppage since July 1, 2009, immediately after the six-week training camp ended. Faced with stalled negotiations, the players union representing the leagues 28 teams, the UFL Players Association (UFLPA), called a general strike. It led to the cancellation of games scheduled for the beginning of the regular season, which was to start on July 5 and end with playoffs in mid-December. The main disputed issue is player compensation. According to the team owners, the current compensation system has created an excessive increase in players salaries (more than 300% in 10 years), which has most teams incurring net losses and several facing extinction. Currently, players are contracted by the teams for fixed periods. Owners are free to negotiate personalized compensation terms with each player. The UFLPA likes the current system and wants it maintained for the duration of the next collective bargaining agreement. The team owners are proposing a new compensation system. Under this new system, owners and players would still be free to negotiate, but the annual amount each team could spend on payroll could not be outside a predetermined range. The lower limit of this range would be based on a percentage of the annual gross football revenues generated by the team. The owners last proposal suggested this percentage should be 55%. The upper limit of this range, also known as the salary cap, was proposed at US$30 million. Therefore, the annual amount each team could spend on payroll would be no less than 55% of the teams gross football revenues, but no more than US$30 million. The UFLPA objects to this system for two reasons. First, the players are against the salary cap because they see it as a way for owners to pay players less than market value. They contend that owners wouldnt enter into these contracts if they didnt receive sufficient value for the high salaries they pay. Second, since the players compensation would be based on the teams gross revenues, the players are not convinced that the owners will properly account for revenues.

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Paper III - SIMULATION 3 (continued) The dispute is dragging on: more than half of the current season games have already been cancelled, and some players and owners are growing impatient with the slow progress at the negotiating table. Faced with these pressures, the UFLPAs executive committee has decided to take a closer look at the owners' proposal, but wants to consult with public accountants to get a clearer picture. The team owners have, for the first time, agreed to show the UFLPA their financial statements. The Calgary Cowboys (the Cowboys), one of the teams that has incurred major losses in the last few seasons and claims that it is going under, has already handed over its unaudited GAAP financial statements to the UFLPA. You, CA, are employed by McMaster & Caisse, Chartered Accountants (M&C). Your boss, Marie Caisse, calls you into a meeting with Billy Baker, star quarterback for the Regina Rebels and chair of the UFLPA executive committee. Billy is asking M&C to analyze the financial statements submitted by the Cowboys so that he can formulate sound arguments to bring to the negotiating table. Given the financial statements provided were unaudited, Billy wants M&C to evaluate the financial viability of the team and determine whether the Cowboys have a net loss in accordance with GAAP. Marie asks you to draft a report that will address Billys requests. Billy goes on to explain that the UFLPA would also like to entrust M&C with an annual special engagement. According to Billy, the players will soon accept the owners offer, and when that happens, M&C would be responsible for auditing the gross football revenues of each of the 28 league teams to ensure the owners are disclosing their actual revenues for the purpose of calculating the 55% limit. Marie asks you to draft a memo to her attention which scopes out the special engagement and addresses any significant engagement planning considerations you identify for M&C. As the meeting is ending, Billy receives an email that seems to trouble him. The email comes from a former teammate of his, Frank, who is now playing for an American franchise. Frank is bragging about how he now pays less tax despite having the same salary. Billy questions the high personal tax paid by Canadian players compared to their American counterparts. He wonders what he would have to do to avoid being taxed as a Canadian resident. Following the meeting, you receive the unaudited financial statements of the Cowboys for the year ended December 31, 2008 (Exhibit I), and meet with the teams financial controller to obtain additional information (Exhibit II).

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Paper III - SIMULATION 3 (continued) EXHIBIT I CALGARY COWBOYS LIMITED STATEMENT OF LOSS AND DEFICIT For the year ended December 31 (in thousands of Canadian dollars) 2008 (unaudited) Revenue National TV broadcast rights Local TV broadcast rights Ticket sales Corporate boxes Advertising revenue $ 19,500 1,500 21,154 3,546 2,100 47,800 $ 2007 (unaudited) 19,500 1,250 18,653 2,436 1,876 43,715

Expenses Signing bonuses Salaries and benefits (players) Other salaries and benefits Stadium rental Business taxes Miscellaneous supplies Administration Interest on advance from parent company Travel Amortization capital assets Amortization non-competition clause

5,000 38,540 661 375 90 91 1,099 344 2,610 15 5,000 53,825 (6,025) (6,025) (6,524) $ (12,549) $

4,000 34,767 547 375 89 76 1,548 551 3,267 19 5,000 50,239 (6,524) (6,524) (6,524)

Loss before income taxes Income taxes Net loss Deficit, beginning of year Deficit, end of year

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Paper III - SIMULATION 3 (continued) EXHIBIT I (continued) CALGARY COWBOYS LIMITED BALANCE SHEET As at December 31 (in thousands of Canadian dollars) 2008 (unaudited) Assets Current assets Cash Accounts receivable Prepaid expenses $ 380 177 557 $ 55 320 170 545 2007 (unaudited)

Capital assets Furniture and equipment (net) Other asset Non-competition clause (net) $ Liabilities Current liabilities Bank overdraft Accounts payable GST and withholding taxes payable Accrued liabilities

96

91

90,000 90,653 $

95,000 95,636

110 36 13 3,343 3,502 1,567 566

28 12 657 697 3,772 124

Advance from parent company Deferred exchange gains Shareholders equity Share capital Deficit Revaluation adjustment

567 (12,549) 97,000 85,018 $ 90,653 $

567 (6,524) 97,000 91,043 95,636

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Paper III - SIMULATION 3 (continued) EXHIBIT II NOTES FROM DISCUSSION WITH THE FINANCIAL CONTROLLER OF CALGARY COWBOYS LIMITED 1. Calgary Cowboys Limited (CCL) was created in 1988 by Crystal Roberts, a wealthy businesswoman from Calgary, when the company acquired the UFL franchise. On January 1, 2007, Crystal sold all her shares in CCL to Crystal Roberts Management Inc. (CRM). She is the sole shareholder of CRM. Following the sale, a comprehensive fair value revaluation of CCLs assets and liabilities was undertaken. On January 1, 2007, the fair values of CCLs assets and liabilities approximated their book value, except for the non-competition clause, which had a fair value of $100 million and a book value of $3 million. This clause, included in the Cowboys contract, states that no other UFL team can be established within a 200 kilometre radius of the Cowboys stadium until 2027. As a result of the revaluation, the intangible asset related to the non-compete clause was increased by $97 million, with a corresponding amount disclosed as a separate equity item. The balance of retained earnings was reduced to zero and a corresponding amount was transferred to share capital. Before the revaluation, the non-compete clause was being amortized at a rate of $150,000 a year. 2. CRM is a financial holding company that owns several other subsidiaries, including the Calgary Sports Channel, which broadcasts all of the Cowboys games in the Calgary area. The amount billed by CCL was recorded under Local TV broadcast rights in the statement of income. Calgary Sports Channels main competitor made an offer of $8 million per year to broadcast Cowboys games locally, but Crystal felt it would be more profitable to have the Calgary Sports Channel benefit from the teams popularity. 3. CRM leases the huge parking lot adjacent to the stadium from the city for one dollar per year and charges $10 per car. The parking lot can hold over 15,000 cars and is always full for Cowboys games. CRM owns the company that operates all the food concessions in the stadium where the Cowboys play. 4. Players who sign long-term contracts often ask for a signing bonus in addition to their annual salary. A typical contract is for two to four years with an additional one-year renewal option. When a player signs a contract, CCL expenses the bonus. Bonuses are disclosed separately in the statement of income to facilitate financial analysis. These bonuses are refundable if the player leaves within the first year of the contract. 5. UFL players are all paid in US dollars, since most of the teams are American. The spectacular volatility of the Canadian dollar against the US dollar in 2008 triggered a number of exchange gains and losses in the salaries payable. The net gains were shown separately as deferred exchange gains on the balance sheet.

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Paper III - SIMULATION 3 (continued) EXHIBIT II (continued) NOTES FROM DISCUSSION WITH THE FINANCIAL CONTROLLER OF CALGARY COWBOYS LIMITED 6. Travel expenses include all costs related to the private jet owned by Crystal, which she graciously allows CCL to use during the football season. The team uses it for all out-of-province trips. The planes operating costs are approximately $2 million per year. Without the plane, players would fly business class at an average return fare of $2,000 per trip. 7. The advance from the parent company bears interest at the annual rate of 20% due to the significant risk of operating a football team. 8. Accrued liabilities include C$3 million in salary for defensive tackle Jimmy Swagger for the 2009 and 2010 seasons ($1.5 million per season). Swagger, one of the best tackles in the UFL, was paid a signing bonus of $1 million at the start of the 2008 season. However, he has formally asked to be traded to another team because of a run-in with the Cowboys head coach during the last game of 2008. The UFL has declared a trade moratorium until the strike is settled. Since Swagger will probably not provide any future benefit to the Cowboys, CCL has expensed the salary remaining in his contract. Once Swagger is traded to another team, CCL will no longer have an obligation to him. 9. The Cowboys stadium seats 40,000 spectators and is almost always full. The team plays 10 home games per season and as many on the road. Spectators pay approximately $53 per ticket and around $25 for food and beverages per game. The team has 40 players, as well as 10 coaches and trainers who travel with the team.

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EVALUATION GUIDE PAPER III, SIMULATION 3 FOOTBALL PRIMARY INDICATORS OF COMPETENCE The reader is reminded that the solutions are developed for the UFE candidate, therefore all the complexities of a real life situation may not be fully reflected in the following solution. The UFE Report is not an authoritative source of GAAP. DRAFT REPORT To: Marie Caisse From: CA Subject: Engagements entrusted to McMaster & Caisse, Chartered Accountants (M&C) by the UFL Players Association (UFLPA) Primary Indicator #1 The candidate realizes that some of the accounting treatments used by CCL are not in accordance with GAAP and recommends appropriate accounting treatments. The candidate demonstrates competence in Performance Measurement and Reporting. The following items are those for which the accounting treatment adopted by Calgary Cowboys Limited (CCL) is not or may not be in accordance with GAAP and therefore could distort the analysis of CCLs financial viability. 1. Push-down accounting CCL appears to have used push-down accounting to record the sale of CCL shares to Crystal Roberts Management (CRM). However, under CICA Handbook Accounting, Part II, Section 1625, pushdown accounting would not be applicable because it does not meet the following criteria (Section 1625.4): (a) All or virtually all of the equity interests in the enterprise have been acquired, in one or more transactions between non-related parties, by an acquirer who controls the enterprise after the transaction or transactions; or (b) The enterprise has been subject to a financial reorganization, and the same party does not control the enterprise both before and after the reorganization; and in either situation new costs are reasonably determinable. Despite the sale of 100% of CCLs shares to CRM on January 1, 2007, actual control of CCL has not changed hands since Crystal controls CCL both before and after the transaction. The transaction only affects the legal form of the relationship between Crystal and CCL and not the economic substance. As a result of the revaluation, the value of the non-competition clause was increased to $100 million. This accounting treatment triggers a significant increase in the amortization expense because the intangible was being amortized at the rate of $150,000 a year, whereas in 2007 and 2008 the annual amortization expense related to this asset was about $5 million. A major part of the $6 million net loss in each of the last two years is due to this $4,850,000 yearly excess amount being charged to amortization.

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(Candidates were expected to question the substantial increase in the value of the non-competition clause recorded as a result of a comprehensive revaluation undertaken by CCL. Many candidates seemed unfamiliar with this type of transaction, but candidates should have been aware that they could refer to Section 1625 for help in understanding the context of the adjustment that had been made. Even without referring to the Handbook, candidates could have used common sense to question the nature of the revaluation amount: since Crystal had sold the company to herself, there was no real economic substance to the transaction that would justify an increase in the companys assets.) 2. Foreign currency translation CCL capitalized as deferred gains the exchange gains related to current salaries payable resulting from the decrease in value of the US dollar. According to CICA Handbook Part II,, Section 1651.20, An exchange gain or loss of the reporting enterprise that arises on translation or settlement of a foreign currencydenominated monetary item or a non-monetary item carried at market shall be included in the determination of net income for the current period. Therefore, exchange gains resulting from the translation of monetary items on foreign currencydenominated transactions should be recognized in income during the period. Therefore the accounting treatment is incorrect. Because of the accounting error, CCLs net income for 2008 is understated by $442,000 ($566,000 $124,000). We do not have the information for 2006, so I have assumed for the time being that all the deferred exchange gains recognized on the 2007 balance sheet were realized in 2007. Therefore, net income for 2007 is understated by $124,000. (Most candidates reached the correct conclusion: that it was inappropriate to defer the exchange gain and that it should be recognized during the year. However, not all of these candidates were able to support this conclusion with the appropriate Handbook guidance.) 3. Salary expense and accrued liabilities for Jimmy Swagger CCL charged the salary expense and recorded a liability in 2008 for Jimmy Swaggers salary for the years 2009 and 2010, since he will likely be traded to another club and will no longer be playing for the Cowboys. The contract should be examined to determine exactly what obligations the Cowboys and Jimmy have with regards to this situation. For example, is Jimmy required to play until he is traded? What happens if CCL cant find another team to pick up his contract? I suspect these questions have been directly addressed in the contract. However, without access to the contract, I will use the general accounting principles regarding liabilities to analyze the Cowboys accounting treatment. According to CICA Handbook Accounting, Part II, Section 1000.29, Liabilities have three essential characteristics: (a) They embody a duty or responsibility to others that entails settlement by future transfer or use of assets, provision of services or other yielding of economic benefits, at a specified or determinable date, on occurrence of a specified event, or on demand; (b) The duty or responsibility obligates the entity leaving it little or no discretion to avoid it; and (c) The transaction or event obligating the entity has already occurred. The first criterion is met as CCL does have a responsibility to transfer assets at a future date. However, the second criterion is less straightforward. There is a way CCL can avoid responsibility: if Swagger is traded, the contract with CCL will be terminated and the new team will be responsible for any future
2011 Institute of Chartered Accountants of Ontario

salary. As for the third criterion, the event obligating the entity has not occurred. While CCL has a legal obligation to pay Swagger, the amount due is related to his performance in 2009 and 2010. Therefore, whether he is traded or not, the $3 million liability should not be recognized on the balance sheet as at December 31, 2008. Either he is traded and the Cowboys will not have to pay this amount at all, or he will renew his contract with the Cowboys and this amount will represent compensation for future services, and is therefore not a liability as at December 31, 2008. The $3 million liability and related expense should not be included in the Cowboys 2008 financial statements. Income is therefore understated by $3 million. (Candidates performed well on this issue by debating whether a liability existed. Strong candidates considered the characteristics of a liability, linked them to the relevant simulation facts, and then made an appropriate conclusion.) (On the other hand, many candidates oversimplified the case facts and assumed that Jimmy had already been traded to another team. These candidates were more inclined to jump to a conclusion and not discuss why the treatment adopted by the Cowboys was inappropriate. They simply concluded that because Jimmy Swagger would no longer play with the team, his salary should not have been recorded as a liability.) (Some candidates were confused by the accounting entry recorded by the Cowboys and did not seem to understand the transaction. Some of these candidates discussed single-sided transactions (for example, do not expense the salary but record a liability) or discussed the salary as if it had previously been capitalized as an asset and concluded that it should now be expensed.) 4. Signing bonuses CCL expenses the signing bonuses it pays to players. The question here is whether the signing bonuses result in an asset. According to CICA Handbook, Part II, Paragraph 1000.24 Assets are economic resources controlled by an entity as a result of past transactions or events and from which future economic benefits may be obtained. In addition, according to CICA Handbook Accounting, Part II, Section 3064, the item must be identifiable in order to be considered an intangible asset. Therefore, the item must be four things: 1. 2. 3. 4. controlled by the entity; embodying a future benefit; resulting from a past transaction; and identifiable.

Signing bonuses are offered as incentives for players to sign a long-term employment contract with CCL. Once the contract is accepted, it provides CCL with the exclusive use of the player in question for the period agreed to. Presumably, if CCL is willing to offer the player a signing bonus, it is because it believes the player will be a valuable contribution to the team and, as a result, will bring CCL identifiable future benefits that arise from a contractual right in the way of wins or increased interest from fans. According to CICA Handbook Accounting, Part II, Paragraph 3064.21, an intangible asset should only be recognized if the item meets the definition of an intangible asset and if the recognition criteria are met. Paragraph 21 contains the recognition criteria:

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An intangible asset should be recognized if, and only if: a) b) it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and the cost of the asset can be measured reliably.

I believe that both of these criteria have been met. We are told that the signing bonus is refundable within the first year should the player decide to leave, therefore the signing bonus guarantees that the entity will derive a future benefit from having that player on the team for a minimum of a year. Also, the cost of the signing bonus is known. As a result, the signing bonus should be capitalized as an asset in the financial statements. Because a recognized intangible asset should be amortized over its useful life, the next step is determining the useful life of the asset. The contracts are, on average, for a period of two to four years with an additional one-year renewal option. In addition, the bonus becomes refundable should a player leave within the first year. Therefore, the signing bonuses have a definite life that could be as short as one year or as long as five years, assuming the renewable option is exercised. One could argue that the average life of a contract, three years, should be used, but the argument for a useful life of one year is also valid, seeing as there is no guarantee that the player will stay beyond the first year, as demonstrated by Jimmy Swagger, the defensive tackle who has asked to be traded. For purposes of the calculation, I have assumed a useful life of one year. There were $5 million in signing bonuses expensed in 2008. We know that $1 million of this total relates to Jimmy Swagger and was paid at the start of the 2008 season, which would have been the beginning of July 2008. As the statements are as at December 31, 2008, only six months have passed by year-end, and therefore only half of the signing bonus related to Jimmy should have been amortized up to that point. While we know that Jimmy asked to be traded after year-end, the contract requires him to stay with the team for the full year or refund the bonus, so either way, his signing bonus still has value. With regards to the remaining $4 million in bonuses expensed in 2008, we do not know when these contracts were signed and therefore cannot calculate the exact amount of amortization. If we assume that the contracts and related signing bonuses were paid evenly throughout the year, then we can assume that approximately half of the balance should be amortized by December 31, 2008. Therefore, the 2008 signing bonus expense should be decreased by half ($500,000 for Jimmy and $2 million for the rest). This adjustment increases the 2008 net income figure by $2.5 million. If we make a similar assumption for 2007, then the 2007 net income figure increases by $2 million [$4 million 50%]. This also means that the 2008 net income figure should be reduced by $2 million to recognize the second half of the 2007 signing bonus expense. (Candidates performed relatively well on this issue. However, some candidates jumped to a conclusion before adequately analyzing both sides of the issue. Several case facts were provided to allow the candidates to discuss whether the signing bonuses resulted in an asset. Strong candidates discussed whether the signing bonuses resulted in an asset, focusing their discussion on future benefits and tying into their discussion the length of the contract or the fact that the signing bonus was refundable if the player left in the first year. Some candidates used the matching principle as the sole support for their recommendation; these discussions lacked depth.) 5. Related party transactions (TV rights and interest) The contract CCL signed with the Calgary Sports Channel is a related party transaction since the TV network is owned by Crystals holding company. CCL billed the network for $1.5 million, even though an unrelated entity was prepared to pay $8 million for these rights. The transfer price is therefore significantly lower than the fair value of the service provided. The question is whether CCL recorded this transaction in accordance with GAAP.
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Per CICA Handbook Accounting, Part II, Paragraph 3840.18, A monetary related party transaction, or a non-monetary related party transaction that has commercial substance, shall be measured at the exchange amount when it is in the normal course of operations, unless paragraph 3840.22 applies. The transaction between CCL and the Calgary Sports Channel is monetary. One could argue that this transaction was not done in the normal course of business due to the magnitude of the difference between the agreed-upon amount ($1.5 million) and the fair value of the TV rights ($8 million). The fact that these contracts are negotiated only once per year or every few years could also put the normal course of business concept in question. On the other hand, this transaction appears to be in the normal course of operations as it is not uncommon for a sports team to enter into a contract with a TV network for the right to broadcast its games. I conclude that this transaction should be measured at the exchange amount. Per Section 3840.23, The exchange amount reflects the actual amount of the consideration given for the item transferred or service provided. Therefore, it was appropriate for CCL to record the transaction at $1.5 million, the amount paid by the Calgary Sports Channel. As with the local TV revenue, interest on the advance from the parent company is a related party transaction that should be measured at the exchange amount because it is a monetary transaction conducted in the ordinary course of business. Therefore, it has been recorded in accordance with GAAP. However, CCL should disclose the nature and amount of the related party transaction in its financial statements. (Many candidates did not adequately support their discussion of the broadcast rights issue. They concluded that the transaction had been done in the normal course of business but did not support this statement with simulation facts. Some candidates seemed to have a difficult time accepting that the transaction had been recorded correctly, and therefore concluded that the broadcast rights should be recorded in the financial statements at $8 million without using accounting knowledge to support this conclusion.) (There were many transactions in this simulation that had been properly recorded but that candidates concluded were in violation of GAAP, such as parking revenue and travel expenses. These candidates seemed anxious to find adjustments that needed to be made to net income, but they did not take the time needed to analyze the issues before reaching a conclusion.) These adjustments would result in the following revised income: 2008 Income before income taxes per current statements Adjustments: Amortization non-competition clause Exchange gains Salary expense for Jimmy Swagger 2008 signing bonuses ($500,000 + $2 million) 2007 signing bonuses Adjusted income before income taxes per GAAP $ (6,025,000) 2007 (6,524,000)

4,850,000 442,000 3,000,000 2,500,000 (2,000,000) 2,767,000 $

4,850,000 124,000 2,000,000 450,000

(Most candidates attempted to quantify the adjustments they had identified and calculated a revised net income figure for the Cowboys.)
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For Primary Indicator #1 (Performance Measurement and Reporting), the Percent candidate must be ranked in one of the following five categories: Awarded Not addressed The candidate does not address this primary indicator. Nominal competence The candidate does not attain the standard of reaching competence. Reaching competence The candidate addresses some of the accounting policies used by CCL. Competent The candidate discusses some of the accounting policies used by CCL and determines the impact on the financial statements. Highly competent The candidate discusses most of the accounting policies used by CCL, determines the impact on the financial statements, and recalculates net income. 0.1% 20.9%

46.9%

31.9%

0.2%

(Candidates were required to determine whether CCL had a net loss in accordance with GAAP. To do so, candidates should have discussed some of the companys current accounting treatments to determine whether they were in accordance with GAAP.) (This is the Performance Measurement and Reporting indicator that candidates had the most difficulty with. Although candidates attempted to address most of the issues, their overall performance did not meet the Boards expectations. Candidates discussions lacked depth, and the Board was disappointed with the level of accounting knowledge demonstrated and the poor use of simulation facts to support discussions.) (CCLs inappropriate comprehensive revaluation of its assets and liabilities was the most important issue because it had a significant impact on the teams net income. The majority of candidates either did not discuss this issue or struggled with how to approach it. Some candidates also seemed to misunderstand some of the more simple transactions, at times recommending single-sided transactions when discussing Jimmys salary or the signing bonuses. Overall, candidates struggled to demonstrate their competency in Performance Measurement and Reporting on this simulation. Many candidates went directly to a recommended treatment without using all the case facts provided to first understand the issue and then analyze it using GAAP.)

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Primary Indicator #2 The candidate analyzes CCLs financial viability based on the restated statements. The candidate demonstrates competence in Finance. Billy Baker has asked us to evaluate the financial viability of the team. In order to do so, all revenues directly associated with running the football team must be included in the income statement. Due to the organizational structure used by CRM, various football revenues are in related companies. This makes CCLs income statement less useful for evaluating the teams viability. Therefore, the following adjustments are required. 1. Local television contract While it was appropriate under GAAP for CCL to record the sale of local television rights at $1.5 million, it underestimates the potential viability of the company since these rights could have been sold for $8 million. Therefore, for purposes of evaluating the viability of CCL, I believe the transaction should be valued at $8 million. If it is up to CCL to decide who to sell the television rights to, then it is giving up that additional $6.5 million as a result of a management decision, and the players should not be held responsible for that decision. Therefore, a $6.5 million adjustment will be made to the 2008 income statement. 2. Interest on advance from the parent company It seems to me that the 20% interest rate is significantly higher than the market rate as it currently stands. CCLs operations do not seem very risky revenues are stable and foreseeable, the largest expense is at the discretion of the team, the other expenses are fixed and easily foreseeable, and the debt/equity ratio is very low. I believe that a rate of 8% would be more reasonable for a long-term corporate loan. By using an interest rate of 8% instead of 20%, CCLs income for 2008 increases by $206,400 ($344,000 12% 20%) and CCLs income for 2007 increases by $330,600 ($551,000 12% 20%). 3. Parking revenue In practical terms, since the team plays 10 home games per season and spectators fill the 15,000 parking spaces at $10 each every time, I estimate that $1.5 million in parking revenue is earned each year. The parking lot is leased by CRM from the city for only one dollar per year. The parking lot is adjacent to the stadium, and we can assume that the only reason the city leases the lot to CRM for such a low fee is because it was an incentive offered to encourage Crystal to open the football franchise. CRM would not be able to make such a profit off the parking lot if it did not own the Cowboys; the revenue is related to spectators using the lot during games and the cost of the lot is next to nothing because CRM owns the franchise. Therefore, this revenue should be included in the calculation of the viability of the franchise. 4. Food and beverage revenue It is not clear where the food and beverage revenue has been recognized, but it does not appear to be on CCLs income statement. Since 40,000 spectators spend an average of $25 per game each on food and beverages, I estimate gross revenue from this activity at about $10 million. By conservatively estimating the contribution margin at 50% of sales, this adds up to an additional $5 million in income taken out of CCL. Again, this revenue is directly linked to owning the franchise since it is money earned during the games.
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5. Travel expenses Finally, the expenses related to Crystals private jet are entirely charged to CCL, even though she uses the jet for other activities. If CCL were to fly commercial, the travel expenses would total approximately $1 million per year (50 people $2,000 10 trips) instead of the $2 million CCL is now paying. I estimate that only $1 million should be charged to CCL for the purpose of evaluating its viability, which means that its income increases by an additional $1 million. As a result of these findings, the adjustment to CCLs net income for 2007 and 2008, when applying GAAP and including all revenues generated by the Cowboys and only those expenses relating specifically to the teams operations, is as follows: 2008 Adjusted income before income taxes per GAAP Adjustments: Local TV broadcast rights Interest on advance from parent company Parking revenue Food and beverage revenue (net) Travel expenses Adjusted income before income taxes Amortization non-competition clause Amortization signing bonuses Signing bonus payments Operating cash flow $ $ $ 2,767,000 $ 2007 450,000

6,500,000 206,400 1,500,000 5,000,000 1,000,000 16,973,400 150,000 4,500,000 (5,000,000) 16,623,400 $ $

6,750,000 330,600 1,500,000 5,000,000 1,000,000 15,030,600 150,000 2,000,000 (4,000,000) 13,180,600

Far from being in a loss position, CCLs operations generate adjusted income before income taxes of $17 million in 2008 and $15 million in 2007. Since the stadium is leased, capital investment is immaterial, and the investment in working capital (inventories, accounts receivable) is negligible, CCLs operating cash flows can be used as a cash cow for Crystals other investments. Once the income is converted into cash flow, results are just as good. The amortization expense for the non-competition clause ($150,000 per year) has no impact on cash flow, but the signing bonuses do have a direct impact on them. This cash flow is extremely attractive for Crystal. CCL has no outside debt, and the advance from the parent company is completely offset when we include the revenues generated by the Cowboys that are currently distributed to the parent company. The long-term debt/equity ratio is therefore virtually nil. Consequently, I feel it is wrong to claim that the current player compensation system jeopardizes the survival of the Calgary Cowboys. This may not be the case for other teams, but based on the information presented, my analysis shows that CCL appears to be a highly profitable enterprise, very solvent, and in no way threatened with extinction.
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For Primary Indicator #2 (Finance), the candidate must be ranked in one of the Percent following five categories: Awarded Not addressed The candidate does not address this primary indicator. Nominal competence The candidate does not attain the standard of reaching competence. Reaching competence The candidate attempts to analyze CCLs financial viability. Competent The candidate analyzes CCLs financial viability. Highly competent The candidate performs an in-depth analysis of CCLs financial viability. 3.4% 33.8%

31.9% 30.6% 0.3%

(Candidates were asked to evaluate the financial viability of CCL. In order to do so, it was necessary to include all revenue directly associated with running the football team in the assessment. Due to the organizational structure used by CRM, various football revenues were directed to the parent company, which made CCLs income statement less useful in evaluating the teams viability. Candidates were expected to discuss some of the adjustments needed to net income in order to fully assess the teams financial viability.) (Candidates performance on this indicator was below the Boards expectations. Many candidates failed to see that the current income statement was not the best measure of viability and that adjustments, above and beyond those to make the statements accord with GAAP (Primary Indicator #1), were required if a proper viability assessment was to be made. These candidates attempted to adjust for the above items from a purely accounting context even when they were already recorded in accordance with GAAP. Strong candidates were able to identify some of the necessary adjustments and conclude on the viability of CCL.) Primary Indicator #3 The candidate realizes that management chose several accounting policies and made a number of decisions relating to the corporate structure that significantly reduced CCLs net income as per the statement of income. The candidate demonstrates competence in Pervasive Qualities and Skills. My analysis indicates that CCL adopted several overly conservative accounting treatments. In addition, the corporate structure of CCL, its parent company (CRM), and the other subsidiaries of CRM is such that revenues directly related to the football teams operations are accounted for in the parent company, while expenses relating to the parent company are recorded in CCL. As can be seen, each adjustment that I previously noted related to the choice of accounting policy increases CCLs net income compared with the amount shown in the income statement prepared by the teams management. This would suggest that CCL deliberately selected overly conservative accounting policies to project a less rosy viability picture and add weight to the owners argument at the negotiating table. The organizational structure of Crystal Roberts companies means that some of the Cowboys operating revenues are recognized outside CCL while expenses of the parent company are recognized in CCL. For example, the parking revenue is earned by the parent company, which benefits from spectator attendance
2011 Institute of Chartered Accountants of Ontario

at the Cowboys games. In a similar vein, revenue from the sale of food and beverages at the stadium during the games is not reported by CCL, so I assume its reported by CRM. In addition, the travel expenses include the full operating costs of the private jet owned by Crystal, even though CCL uses the jet for only 10 trips per year. Clearly, the income statement shows a significantly understated income figure that is of little use in evaluating the teams actual viability. Once the necessary adjustments are made to show a net income that is more representative of the actual viability of the Calgary Cowboys income before taxes for 2008 goes from negative $6 million to positive $17 million. This systemic bias is a result of the negotiation process with the UFLPA. The team owners have an incentive to show a poor financial position so that the players will accept the newly proposed compensation system. Since the Cowboys are one of the teams claiming to be facing extinction because of financial difficulties resulting from the current player compensation system, it is not surprising that CCLs accounting policies have an obvious bias. The team owners claim that most of the teams have a negative bottom line and chose to present CCLs financials as an example of a troubled team. Therefore, it is possible that what is occurring at CCL is also occurring across the league: other teams may be manipulating their results in the same fashion as CCL. The other teams financials may need to be reviewed before the new compensation plan proposed by the owners can be properly evaluated and before strike negotiations can be resolved. For Primary Indicator #3 (Pervasive Qualities and Skills), the candidate must be Percent ranked in one of the following five categories: Awarded Not addressed The candidate does not address this primary indicator. Nominal competence The candidate does not attain the standard of reaching competence. Reaching competence The candidate identifies Crystals intentional manipulation of the financial statements and/or corporate structure to understate the teams profitability. Competent The candidate discusses Crystals intentional manipulation of the financial statements and/or corporate structure to understate the teams profitability. Highly competent The candidate discusses in depth Crystals intentional manipulation of the financial statements and/or corporate structure to understate the teams profitability. 22.5% 24.1%

25.2%

28.0%

0.2%

(Candidates were not directed to this indicator. To achieve competency on this indicator, candidates were expected to demonstrate, by using examples from the simulation, that management had intentionally manipulated the financial statements or the corporate structure to understate the teams profitability.) (While many candidates did not address this indicator at all, some candidates were able to demonstrate they understood that managements intention was to understate net income. Most candidates supported this statement by referring to the accounting policies chosen by CCL, while a few used the corporate structure to discuss this issue.)

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(Many candidates fell short as they pointed out the general bias for CCL to understate net income but did not support this statement with simulation facts or explain why management would have a bias. These candidates did not convince the Board that they clearly understood there was intentional manipulation of the financial statements in order to understate the teams profitability. Some candidates also appeared reluctant to clearly state there were signs of intentional manipulation, and would simply hint at the issue. Given the pervasive nature of the manipulation and the strong motive management would have to understate profitability, candidates should not have hesitated to conclude that it was intentional.) Primary Indicator #4 The candidate identifies and discusses the significant engagement planning considerations related to the special annual engagement proposed by the UFLPA. The candidate demonstrates competence in Assurance. I have examined the special engagement that the UFLPA would like to entrust to our firm regarding the gross football revenues of the 28 UFL teams. I have identified the various engagement risks for M&C as well as the planning considerations arising from these risks. 1. Resource constraints This engagement would be a major undertaking since we would have to simultaneously perform our work in 28 different entities across Canada and the US. We would have to make sure that our firm has the necessary resources to complete this engagement. (Candidates who addressed this issue were able to do so briefly. The Board was pleased to see the practical nature of the comments made by the candidates on this issue.) 2. Defining the purpose of the audit It is essential that both parties (the UFL and the UFLPA) agree on the definition of gross football revenues since it can be interpreted in many ways. Should it include the revenue generated by the parking lot, the sale of food at the stadium, and the sale of promotional items? Should it include an estimate of the benefits the team generates for other related companies (increased sales of a brewery that owns a football team, for instance)? Should gross revenues be determined according to GAAP or another basis? (Many candidates addressed this issue, and their discussion was usually clear and direct.) 3. Revenue completeness audit approach Since the main risk in this engagement involves revenue completeness, we would not be able to use a purely substantive approach. At the moment, only an adequately functioning internal control system can give us some assurance concerning revenue completeness. We should keep in mind that there is likely a significant amount of cash sales and that the controls surrounding these sales may be lacking. We would need a detailed description of the internal control system of each of the 28 teams (and any affiliated companies earning gross football revenues) to determine whether, on paper, the system is sufficiently reliable to comfort us with respect to revenue completeness. If we determined that the systems are reliable, we would have to test each system to ensure that it functioned as expected throughout the year. Substantive testing would have to be performed to ensure that revenues from ticket sales and corporate boxes are fully recognized. In addition to the internal control system, we could also perform an analytical review of each source of gross football revenue using data such as game attendance (for parking and food revenues) and the
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teams ranking (for ticket sales revenue). Since we would be auditing 28 teams simultaneously, a comparison of various ratios between the teams could point us to unusual or missing items. Some types of revenue could be confirmed by external sources. For example, we could obtain confirmation of the value of the national TV broadcast rights from various networks and look at the contracts signed between the networks and the UFL. Confirmations could also be obtained for advertising revenue. We could also contact the provincial and state government authorities to obtain the lists of companies that are related to the companies that officially own the teams and to seek to gain access to the accounting records of all these companies. This would significantly reduce the likelihood that football revenues would be hidden in these other entities without our noticing it. (Although most candidates attempted to address this issue, the quality of the procedures provided was often lacking. Candidates had a difficult time proposing valid and practical procedures. They suggested impractical procedures such as counting ticket stubs or observing peoples eating habits at the games to evaluate the reasonability of the revenue from the games. In addition, some candidates did not realize that their focus should be on verifying the completeness of revenue. Many of these candidates took a purely substantive approach without realizing that such an approach would not give them the comfort they needed and would not adequately address the risk in this case.) 4. Type of report I believe that an audit report on single financial statements and specific elements, accounts, or items of a financial statement would be appropriate in this case (CICA Handbook Assurance, Part I, Canadian Auditing Standard 805). Considering the amounts involved (55% of the revenues from 28 entities), I am convinced that the required level of assurance would be high, a level that only an audit could provide. The report would set out the results of our audit of the calculation of gross football revenues for each of the 28 teams. It would mention that we are providing an audit opinion confirming that these amounts actually represent the football revenues of each team, in all material respects, in accordance with the definition given to this expression under the agreement signed by the two parties. (Most candidates discussed the type of report that should be provided. However, some discussions were lengthy and not useful to the client because candidates lost sight of the UFLPAs objective. This led them to a general discussion of all the available reports, without any reference to simulation facts that would make the discussion relevant for the UFLPA. Some candidates provided a good discussion of the reports but failed to conclude on the best report to use in the circumstances.) 5. Engagement risk The materiality level associated with this engagement should be relatively low. The UFLPA would be looking closely at our findings since total player compensation is based directly on the revenue figure on which we would be expressing an opinion. Therefore, before the engagement begins, we would need to sit down with the UFLPA and discuss what materiality level the players are comfortable with. Every dollar change in revenue could affect the players compensation, so we could set materiality at one dollar if the UFLPA wishes. However, the UFLPA needs to understand that the lower materiality is, the higher the cost of the engagement. Such a low materiality level may not be necessary given that salaries are typically in millions of dollars. Team owners will have a tendency to camouflage revenue in order to reduce compensation paid to the UFLPA. Our analysis of CCLs historical financial statements has shown that this tendency has turned
2011 Institute of Chartered Accountants of Ontario

into concrete action on the part of that teams management. We have no knowledge of the 28 internal control systems of these entities. In fact, our firm would be taking on 28 new clients. In addition, based on the Calgary Cowboys case, these teams could be owned in part by conglomerates that use their sports teams as promotional tools or simply to generate synergies that benefit other related companies. Our work would have to take into account the fact that these related companies might be diverting some of the gross football revenues. For these reasons, I feel this engagement would be risky for the firm. (Most candidates addressed the risk of the engagement and the materiality level that should be used. The Board was pleased with the candidates responses in this section.) For Primary Indicator #4 (Assurance), the candidate must be ranked in one of Percent the following five categories: Awarded Not addressed The candidate does not address this primary indicator. Nominal competence The candidate does not attain the standard of reaching competence. Reaching competence The candidate identifies some of the significant engagement planning considerations related to the special annual engagement proposed by the UFLPA. Competent The candidate discusses some of the significant engagement planning considerations related to the special annual engagement proposed by the UFLPA. Highly competent The candidate discusses several of the significant engagement planning considerations related to the special annual engagement proposed by the UFLPA. 0.5% 10.9%

50.6%

37.9%

0.1%

(Candidates were expected to identify and discuss the significant engagement planning considerations related to the special annual engagement proposed by the UFLPA to audit the gross football revenues of each of the league teams.) (Candidates performed poorly on this indicator. Although most candidates were able to identify some of the relevant issues, and thereby achieve breadth, their discussion of each individual issue was too weak to demonstrate their competence in Assurance. Candidates struggled to sufficiently discuss engagement planning considerations that would be specific to this particular engagement. Some candidates spent a lot of time exploring the different reports that could be issued to the client, discussing every possible report in detail. Candidates should have limited themselves to discussing only those reports that would be appropriate. Several candidates attempted to provide procedures, but they did not always focus on the completeness of the revenue, which was the most important issue in this specific situation. Some candidates seemed to recognize that revenue completeness was the major concern, but then provided procedures that would test occurrence. Strong candidates used the case facts to focus on the key engagement planning concerns in this case.)

2011 Institute of Chartered Accountants of Ontario

EVALUATION GUIDE PAPER III, SIMULATION 3 FOOTBALL SECONDARY INDICATORS OF COMPETENCE Secondary Indicator #1 The candidate discusses the tax issue raised by Billy Baker regarding the players residence status. The candidate demonstrates competence in Taxation. I would like to take this opportunity to comment on Billys concerns about the significant tax burden on Canadian players. This is an important issue given that Canadas tax rates are high. Salaried individuals are normally taxed in their country of residence, not in their country of birth. The key is the principal residence; in other words, the place where the individual normally lives. For a Canadian player to be considered a US resident, he must prove that he has severed all main residential ties with Canada (cancelled provincial health insurance card, sold Canadian residence, cancelled Canadian drivers licence, etc.) and that he normally lives in the United States. In such a case, for Canadian tax purposes, the player would have to declare only the income he has earned in Canada in other words, the income associated with games held in Canada. All other income would be excluded from the Canadian tax return and thus from the unfavourable tax rate. As a US resident, the player would declare all his income to US tax authorities, but would be entitled to a US tax credit for Canadian income taxes paid on Canadian income. This favourable tax treatment is only available to players who live in Canada 182 days or fewer during the year. Otherwise, they are deemed to be Canadian residents for the entire year and will be taxed accordingly at the Canadian rate. Based on the duration of the season, it appears that the players who are on Canadian teams may be in Canada for more than 182 days a year. If their team makes the playoffs, the football season will last seven months, which is roughly 210 days. We therefore recommend that football players who want to be considered US residents move to the United States and live in Canada for fewer than 183 days per year. For example, a Canadian player with the Calgary Cowboys could buy a house in the United States and rent a place in Calgary during the football season. If the player complies with the 182-day rule, he will be taxed for Canadian purposes on income earned for games played in Canada only. For Secondary Indicator #1 (Taxation), the candidate must be ranked in one of the following three categories: Not addressed The candidate does not address this secondary indicator. Nominal competence The candidate does not attain the standard of competent. Competent The candidate discusses the tax issue raised by Billy Baker regarding the players residence status.

(Many candidates attempted to respond to Billy Bakers question as to what he would have to do to avoid being taxed as a Canadian resident. Candidates appear to be familiar with the tax residency rules and were generally able to explain to Billy what the main considerations would be (family ties, residential ties, length of stay in Canada, etc.)

2011 Institute of Chartered Accountants of Ontario

(Overall, the Board was disappointed with candidates performance on this simulation. Many candidates appeared to struggle with their role and what they were asked to do. Most candidates seemed to focus on the performance measurement indicator and attempting to find GAAP deviations, even when there were none. This seemed to cause candidates to lose sight of the fact that they had also been asked to analyze the financial viability of the team, which is not the same as restating net income per GAAP. Also, many candidates spent a considerable amount of time discussing the reporting options on the Assurance indicator. A more concise discussion of some of these issues would have left more time to discuss other issues in the accounting and assurance sections and would have also left more time for candidates to step back and address the Pervasive Qualities and Skills indicator.)

2011 Institute of Chartered Accountants of Ontario