EARNINGS FORECASTS

Group E

Elizabeth Edward

Geoff Smith

Hasan Raza

Rony Suthermaraj

IPO

Initial Public Offering1. Initial Considerations

2. Pre-Transaction Preparation and Organization

3. Drafting and Filing of Preliminary Prospectus

4. The Regulatory Review and Marketing Phase

5. The Final Prospectus Phase

6. Closing

FIVE CHALLENGES FOR FACEBOOK

Globe and Mail, Feb 2nd

http://www.theglobeandmail.com/news/technology/tech-news/5-issues-for-facebook-mark-zuckerberg-is-one/

article2323697/page2/

1. Mobile Phone Market

Problem: They currently do not have advertisements on mobile phone facebook apps

More people are using Facebook on their phones presenting another market to enter

Facebook generates money from 3rd party ads

Investors will encourage the use of ads on all Facebook pages

2. Chinese Market Restrictions

Problem: Facebook faces restrictions on accessing the Chinese market

3 other well-established social networks in China create more barriers to enter the market

Government restrictions create problems regarding the content and the security features of Facebook

3. Diversification

Problem: Main source of revenue is games and ads

In 2011 85% of revenues came from ads In 2011 Zynga Games represented 12%

of facebook revenues

4. User Growth

Problem: How will facebook attract new users

2 billion Internet users in the world 800 million Facebook users in the world They plan to expand into Brazil,

Germany, Japan, Russia, South Korea, and India which will equal 45% expansion

5. Mark Zuckerberg

Problem: As creator, CEO, and major shareholder controller he controls management’s decisions

Even after the IPO he will maintain this control

If this creates a problem to managing the company, how difficult will it be to unseat him?

SPORTSGOODSTOP COMPANY

Company Summary

Brand name sports attire company Began in 1988 Currently has 15 retail outlets

throughout western Canada Multiple Franchise agreements Expected to expand into eastern

Canada Requires a debt to total assets ratio of

80%

Company Summary

Steven Snipes, CA, works for Sloan & Travis

Derek Jeffries owns SportsGoodStop and wants to go public

Investment dealer for SportsGoodStop suggested creating an earnings forecast to obtain a better IPO

Issue

Derek wants audit assurance of earnings forecast by Wednesday (3 days)Threatened to move to another larger

accounting firm if S&T could not do thisIs this audit feasible in the time constraint?

Preliminary prospectus is scheduled to be sent to the Ontario Securities Commission by this time

CICA Section 4250

Future-Oriented Financial Information Guidance for future-oriented financial information

Recent changes to securities laws emphasize the importance of exercising appropriate due diligence when disclosing forward-looking information

CICA Section 4250

Forward-looking information is defined in securities legislation as:

“Disclosure regarding possible events, conditions or results of operations that is based on assumptions about future economic conditions and courses of action and includes future-oriented financial information with respect to prospective results of operations, financial position or cash flows that is presented either as a forecast or a projection.”

CICA Section 4250

Investors’ needs Relevant information Management assumptions

CICA Section 4250

Criteria for presenting forward-looking information: The information must be based on

assumptions that are reasonable in the circumstances;

The information must be limited to a period for which it can be reasonably estimated; and

The information must use accounting policies that are expected to be used to prepare the historical financial information for the period covered by the forward-looking information.

Audit of Earnings Forecast How would we go about auditing the

earnings forecast?

General Audit Procedures (to gather evidence)

Technique Types of EvidenceRecalculation • Auditors calculations

Observation • Physical observation

Confirmation • Statements by independent parties

Enquiry • Statements by client personnel

Inspection • Documents prepared by independent parties

• Documents prepared by the client• Physical inspection of tangible assets

Analysis • Data interrelationships

DISCUSSION QUESTIONS

CICA 4250

What does section 4250 in the CICA handbook cover?

What are some of the criteria mentioned in CICA 4250?

Technique Types of EvidenceA) • Auditors calculations

B) • Physical observation

C) • Statements by independent parties

D) • Statements by client personnel

E) • Documents prepared by independent parties

• Documents prepared by the client• Physical inspection of tangible assets

F) • Data interrelationships

Word Bank1) Recalculation 4) Inspection2) Enquiry 5) Observation3) Analysis 6) Confirmation

Case Questions

Do you think that an earnings forecast is necessary?

Will the investors value reliable over relevant information?

Case Questions

Do you think managements assumptions in the forecast are reasonable?

Will there be any issues with the 80% debt to assets ratio after the audit?

What would you recommend Steven Snipes to do?

Ethical Issues

What are some of the ethical issues that present themselves in the case?

What are some of the ethical issues that present themselves in the Facebook IPO article?