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MegaKiwi to MegaScreens

The case, Megascreens U. S. A. Inc. is a case on foreign currency in which a company needs to convert its financial statements from a foreign GAAP. The case begins with Jim Cobber, an entrepreneur from New Zealand looking for advice on his latest business venture. The venture involves hardware that can link extremely large computer screens together so that the image appears throughout a stadium. The idea was brought to Jim by younger male computer experts they call the Kiwi Brothers, and he was responsible for working out a deal to produce the product.

At the point of the sale of shares, the brothers began in the shed in their parents’ house, much like Bill Gates. They were introduced to Doug, who loved the product and decided that he wanted to invest. On the financial end, Jim incorporated a company, which he called MegaKiwi, Inc. , to handle the production management. The brothers bought a thousand shares at $1 each, and Jim himself purchased three hundred shares. Jim also lent money to MegaKiwi, and the interest began to add up.

By the beginning ff 2006, MegaKiwi owed Jim $6 million Jim’s partner, Doug, elaborated on the applications for this hardware, including

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entertainment and advertising industries. The down side, of course, is that they would need more funds in order to conduct research. While investigating possibilities for capital in the United States, they found that the same hardware idea was already being pursued by another set of brothers with the last name Trout. The Trout brothers did not want to sell the patent to their product initially, but were swayed by a licensing agreement with MegaKiwi.

They bought out the remaining 14 years on the competitors’ patents in order to clear the way legally for MegaKiwi. The Kiwi brothers would pay $200,000 per year until the $2. 8 million price had been paid off. This cleared the way for the Kiwi brothers to found MegaScreens, USA and have it incorporated in Delaware. The investors from the previous company now had shares in the Kiwi brothers’ venture, and their shares were valued using New Zealand to American exchange rates. After receiving $13 million from venture capitalists, Jim approached Doug for some accounting assistance.

Because MegaKiwi is having an IPO (initial public offering), all statements must be prepared according to U. S. GAAP rather than New Zealand GAAP, and Jim spotted a few problems with the statements for this reason. The first was that the licensing fees were paid in $200,000 U. S. dollars, and Jim wondered if the future fees should also be recognized the same way. MegaKiwi, Inc. is registered in New Zealand and they hold the patents, as well as additional patents for future products and product upgrades. These new patents were amortized over 16 years in New Zealand currency.

MegaKiwi plans to focus on the United States and Japan for its commercial production, eventually looking at European soccer stadiums. While administrative and marketing operations have moved from Auckland to Salt Lake City, Utah, research and development will stay in New Zealand. The product is not yet in full production; however, they were able to deliver three MegaScreen systems to: the football department of a large, private university, a New York City baseball stadium, and a country music star from Nashville. The products were sold at $500,000 each, though the cost of the product was $800,000 each.

Jim is counting on economies of scale to bring the cost down as more products are sold. The draft financial statements show an increase in cash from 2006 to 2007. With the inclusion of patents and trademarks and the cost of amortization, the company has just over a $2 million gain from 2006 to 2007. Between 2006 and 2007, the cost of research and development dropped exactly $500,000 . Unfortunately, the cost of the loan from Jim Cobber is significant. In 2006, the interest expense was $420,455; in 2007, it increased to $600,000. The net loss, while decreasing about $500,000, was still a significant figure at $2. 5 million in 2007.

While exhibit 2 shows sales of $1. 5 million, the cost of goods sold, depreciation and administrative costs are keeping the company in the negative. The accumulated deficit from 2006 to 2007 increased from $200,000 to just over $4 million because of so many costs and so few sales. In addition, the exchange rate will wipe out some of MegaKiwi’s capital, though it is at its highest rate in 3 years at . 7. 2007 was supposed to mark the end of the research and development phase and the beginning of the production and sales phase. All of the major patents have now been registered to MegaKiwi and this company is responsible for the costs.

Legally, they can and have written off all expenses related to research and development. Jim Cobber hired a Chief Financial officer named Sally Wiggins. A Columbia graduate who has worked her way up, Wiggins wants all currency to be converted from New Zealand to U. S. from now on. The case now directs the reader to complete assignments as the accountant for MegaKiwi. The first assignment is the conversation of New Zealand financial statements to U. S. GAAP. This requires a memo to Wiggins regarding the licensing arrangement and revised financial statements from 2006 and 2007.

The second assignment is to translate the company’s assets into U. S. dollars. We receive more details from Doug, including the fact that by 2006, the company is still in New Zealand dollars. These statements show that MegaKiwi was advanced $4 million from MegaScreens and that this balance does not bear interest. MegaKiwi, in turn, used some of the funds to pay on the loan from Jim Cobber. This included 10 percent interest. The third assignment is to remeasure the 2007 New Zealand financial statements to U. S. GAAP. Because the currency was still New Zealand dollars in 2006, it is time to decide if they should be converted to U.

S. dollars for 2007. This requires some thought on whether it will change the company’s accounting policy, how to treat gains and losses from previous years, and if the patents should be restated in the 2007 financial statements. Finally, the last assignment is to consolidate MegaScreens and MegaKiwi. This part of the case is more of a teaching guide, with suggestions as to what actions the students should take, what publications they should reference, and the conclusions they should come to if they follow the directions carefully and according to the current U.

S. standards. The case is intended to demonstrate the steps required to prepare consolidated financial statements that transfer a foreign GAAP to U. S. GAAP. The methods used to find the answers to the assignments are given. For assignment one, the student is required to account for the company’s transactions. They can do this by considering different types of accounting standards, including Accounting Principles Board Opinions. Next, the financial statements should be presented in spreadsheet form and journal entries might be helpful here.

The second assignment was to translate the financial statements after the year ending 2006. It is suggested that students look at the standards in order to determine what should be done about the gain or loss on the Trout loan. As in real life, the students should be able to provide proof of any gains and losses. Another important aspect of the second assignment is the intercompany loan as the parent’s (MegaScreens) net investment in the subsidiary (MegaKiwi). For assignment three, it is necessary to have foreign currency standards at hand.

Students often forget that they are working with the functional currency of the group rather than just the foreign currency of the New Zealand part of the operation (research and development). As the functional currency will have been translated to U. S. by the time the 2007 statement is to be examined, there are only two layers that need to be examined using historic rates. Students should be able to prove the gain or loss resulting form the translating of currency.

Assignment four is a bit more detailed and thus should not be required of students who are beginners at accounting and who have not yet taken an advanced class. While the cash flow statement is often omitted, it is suggested that it remain included because it ties together the consolidation, and the gains and losses from the translation and the exchange. In consolidating MegaScreens and MegaKiwi, students should be able to see how currency gains and losses flow through the group’s financial statements. In the consolidated cash flow statement, students should be encouraged to seek the cause of change.

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