Question:
Fantasyfootball.net (FFN) is a company whose primary activities are hosting a real-time, online fantasy football website and writing and publishing an annual magazine that discusses fantasy football strategies, predictions, and articles. FFN has an August 31 year end. This year end was selected as the main football season begins in September.
FFN is a privately held company, owned by Danny Chen and Manny Schwaid, two friends who started the business to build on their affinity of fantasy football and capture a portion of the $800-million industry. Danny holds a computer science degree, and Manny holds an Honours Bachelor of Commerce degree and is a professional accountant. By providing faster service, along with more statistics, projections, and game play options, Danny and Manny felt that they could offer a unique service that differentiates their website from all of the competitors. In addition, FFN is seeking to expand its services by offering fantasy coverage of American college and Canadian professional football, to go along with American professional football.
Given the significant growth in the industry, FFN has recently received many offers to sell the business. Danny and Manny are unsure about selling their business as they enjoy their jobs, and believe that there will be much room for future business growth. However, the owners also know that fantasy football could be just another fad that is currently at its peak. In addition, the rate of change in the online gaming industry could lead to a possible alternative platform. Therefore, the owners feel it is prudent to at least consider the offers to sell.
A general review of the purchase offers suggests that fantasy football companies generally sell for an average of two times revenues and four times net earnings. The owners review the internal financial statements for 2020, which report revenues of $975,000 and earnings of $536,250. Danny quickly determines that FFN could be sold for $2,047,500 or just over $1 million for each owner. This is a considerable sum of money given that they have invested only five years with FFN. However, Manny states that the internal financial statements are only draft at this stage because he has yet to consider the impact of the following events:
- FFN writes an annual fantasy football magazine. The magazine goes on sale in July, and is sold through the company’s website and through various retailers. This year, FFN secured a large contract with Books, a large book and magazine retailer in Canada. The contract allows Books to return any unsold magazines at the end of October (history suggests that annual magazines no longer sell after October as they become outdated and lose their relevance). A total of 40,000 magazines were shipped to Books in July. Books will be required to pay FFN $3 per magazine if all 40,000 are sold, $3.50 per magazine if less than 40,000 but more than 20,000 magazines are sold, and $4 per magazine if less than 20,000 are sold. The magazines have a retail price of $6.99.
The cost to develop the content and publish the magazine was incurred in the months of April to July. Accordingly, Manny recorded $120,000 in revenue when the magazines were shipped. Historically, FFN has sold 70% of its stock prior to August. Danny and Manny believe that the amount of foot traffic at Books should increase the percentage of magazines sold.
Based on the given information, assume the role of Manny and determine the revised revenue and net earnings amounts in accordance with ASPE.
This is a case from the past assignment. What kind of issues are related to with ASPE standard?
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