EARNINGS FORECASTS

Group EElizabeth Edward

Geoff SmithHasan Raza

Rony Suthermaraj

IPO Initial Public Offering

1. Initial Considerations2. Pre-Transaction Preparation and

Organization3. Drafting and Filing of Preliminary

Prospectus4. The Regulatory Review and Marketing

Phase5. The Final Prospectus Phase6. Closing

FIVE CHALLENGES FOR FACEBOOK

Globe and Mail, Feb 2ndhttp://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 calculationsObservation • Physical observationConfirmation • Statements by independent partiesEnquiry • Statements by client personnelInspection • 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 calculationsB) • Physical observationC) • Statements by independent partiesD) • Statements by client personnelE) • 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?