4. Role & Constraints Saturday, February 12, 2011 RCAS Case Competition Key Constraint: Canadian GAAP & Conceptual Framework Members of the audit committee at Livent Inc Division Daniel Rodic, Katie Furgoch, Josh Xu, Winter Li Members
7. Timeline of Typical Production Cycle Post Production Opening Night Saturday, February 12, 2011 RCAS Case Competition Pre-Production Rights Acquired 12 – 24 Months 5+ Years Cost of $5 Million to $11 Million Rev. Rec Period Kicks-Off Process
8. Stakeholders Saturday, February 12, 2011 RCAS Case Competition Shareholders: Moderate, to reflect true economic state of Livent. Livent & Mangement: Aggressive, for performance metrics. Securities Commission: Conservative, to get reliable information. Constrained by GAAP
10. There are multiple alternatives that can be used to account for pre-production costs. Saturday, February 12, 2011 RCAS Case Competition Expense all costs Defer costs (Similar to R&D) Amortize relative to forecasted revenues Status Quo Issue #1: Accounting for Pre-Production Costs The company has an issue with revenue recognition because… There are three types of valuations one can use to triangulate equity value. Issue #1: Accounting for Pre-Production Costs Alternatives
11. Livent can continue to use the status quo method. Saturday, February 12, 2011 RCAS Case Competition Risk: This method is considered aggressive by the market. Issue #1: Status-Quo Amortization of pre-production costs is equal to net income, until the pre-production costs are covered. Explanation of Method This method is familiar to the company, Benefits of Method
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13. Expense All Pre-Production Costs Saturday, February 12, 2011 RCAS Case Competition Risk: This method will result in extremely volatile earnings. Issue #1: Expensing Method All pre-production costs will be expensed as they are incurred. Explanation of Method This method is conservative and allows for more disclosure of costs incurred. Benefits of Method
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16. Since all five criteria has been met, we may select the R&D method Saturday, February 12, 2011 RCAS Case Competition The R&D deferral method may be selected Result Higher asset value at beginning with lower expense, expenditures increase in future Issue #1: R&D Method R&D Expense Deferral Criteria Product / process is clearly defined and the costs attributed to it are easily identified Technical feasibility has been established Management has indicated intent to produce or use the product / process Future market for the product is clearly defined Adequate resources exist or are expected to be available
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18. Livent can mimic the live film industry and use the percentage of expected revenue method. Saturday, February 12, 2011 RCAS Case Competition Risk: This method relies heavily on reliable forecasts which many perceive as volatile. Issue #1: Percentage of Expected Revenue Method Amortization of pre-production costs are relative to the ratio of current revenues to the total anticipated revenues of the production. Explanation of Method This method matches expenses to revenues in the period generated, which fulfills the fundamental criteria of matching. Benefits of Method
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21. Here is an example of how the method would be used Saturday, February 12, 2011 RCAS Case Competition
24. We recommend the use of the Percentage of Expected Revenue Method RCAS Case Competition Saturday, February 12, 2011
25. Implementation Plan Saturday, February 12, 2011 RCAS Case Competition High Priority Time from Today Talk to Public about disclosure Medium Low Retroactively restate prior year financial statements Discuss change in accounting policy in note disclosures Launch and maintain PR Campaign Continue to monitor pre-production costs going forward. 1 Year+ 1 Month 1 Week
![Accounting for Pre-Production Costs Livent Inc. ,[object Object],Saturday, February 12, 2011](https://image.slidesharecdn.com/teamc1-110410000816-phpapp01/85/Livent-Accounting-Policy-1-320.jpg)
