Hi There,I've attached the prompts for the assignment. I believe the excel tables are mostly correct but need to be corrected. I also need the 1 page writeup and the financial ratios.
Microsoft Word - 9B20B013.docx 9B20B013 HIGHLAND MALT: ACCOUNTING POLICY CHOICES IN FINANCIAL STATEMENTS Erik Stein wrote this exercise under the supervision of Vaughan Radcliffe and Mitchell Stein solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e)
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[email protected]. i1v2e5y5pubs Copyright © 2021, Ivey Business School Foundation Version: 2021-03-15 In January 2020, after having recently graduated from a prestigious MBA program, Katharine Mackinnon was working as a financial accountant for a renowned private equity firm in Glasgow, Scotland. Although the work hours were long, Mackinnon enjoyed her new job and the learning experiences that accompanied the role. She knew that if she worked hard and developed a thorough technical expertise, a promotion was within reach. One evening, Mackinnon was up late reviewing a valuation model, when a calendar reminder popped up with a notification of her father’s retirement the coming week. Mackinnon’s father, who had enjoyed success in the private equity industry, was a key inspiration behind Mackinnon’s career path. She had to find the perfect gift to show her appreciation for his guidance. While considering the ideal gift for her father, an email appeared in her inbox from Highland Malt Inc. (Highland), offering a unique opportunity for a premium whisky. Mackinnon had forgotten all about signing up for this newsletter, but was grateful for the perfect timing. Her father was a whisky connoisseur, and he would be proud to own such a unique product. The email announced the introduction of the company’s new Highland whisky.1 The Scotch whisky, which would only be offered in a limited quantity, was promoted as an investment. Unlike ordinary bottled whiskies, Highland was selling this new line solely by the barrel. Collectors would have to pay the full amount upfront, but could request a full refund within 180 days if unsatisfied with the product. The refund period allowed the collector to visit the distillery and inspect the purchase to ensure it met all expectations. Mackinnon wondered if the purchase would make a great investment and gift for her father. WHISKY INDUSTRY In 2018, the global whisky industry was valued at US$59 billion,2 and was projected to grow to $84 billion by 2025.3 This increase in demand, combined with a recent supply shortage from Scotland, had raised the 1 The term whisky was derived from the Scottish Gaelic uisge beatha, which meant “water of life.” Although the spelling of the word “whisky” had been altered to “whiskey” in Ireland and in the United States, Scots and Canadians still used the original spelling; The Editors of Encyclopaedia Britannica, “Whiskey: Distilled Liquor—Alternative Title: Whisky,” Encyclopaedia Britannica, January 6, 2020, accessed February 23, 2020, www.britannica.com/topic/whiskey. 2 All currency amounts are in US dollars unless otherwise specified. 3 “Whiskey Market Size By Product (Scotch Whiskey, American Whiskey, Canadian Whiskey, Irish Whiskey, Other Whiskey), By Distribution Channel (On-Trade, Off-Trade) Industry Analysis Report, Regional Outlook, Growth Potential, Price Trends, Competitive A ut ho riz ed fo r us e on ly b y S m ar tly M B A fr om A pr 1 3, 2 02 1 un til D ec 1 3, 2 02 1. U se o ut si de th es e pa ra m et er s is a c op yr ig ht v io la tio n. Page 2 9B20B013 value of whisky considerably. The surge in popularity had led to a rising trend of whisky barrels being purchased by collectors and investors around the world, particularly in Asia. Whisky barrels were considered a status symbol that increased in value over time, which explained their appeal to whisky connoisseurs. Some distilleries had noticed the trend and encouraged it by making the purchase of barrels more accessible to private buyers. With sales to collectors and investors expected to grow, the timing was ideal for distilleries to enter the whisky market. Highland Malt Inc. Highland was appropriately located in Inverness, a city in the Highlands of Scotland. As a low volume producer, Highland aimed to differentiate itself from the market through the quality of its whisky. Although competitors traditionally produced Scotch whisky in American bourbon barrels, Highland decided to use the much rarer—and thus, more valuable—Spanish sherry barrels. Ultimately, Highland’s production volumes would be limited by the availability of these barrels, further emphasizing the exclusivity and premium nature of the whisky. Highland decided to adapt to these consumer trends and exclusively offered Scotch whisky by the barrel, thereby skipping the final step in whisky production (see Exhibit 1). The decision was intended to appeal to investors, who would not only collect the whisky but also own an exclusive sherry barrel. Each barrel, which was priced at $10,000, produced 175 bottles of 40 ounces (approximately 1.2 litres).4 At approximately $60 per bottle, the initial price of Highland’s whisky was lower than notable premium whiskies. However, collectors also had to cover annual storage costs for the 12-year period, which placed Highland in a class of its own. Investors reserved the privilege to inspect and evaluate their whisky as it aged over the 12-year period, thus making a reserve barrel of whisky a unique opportunity. Highland’s Internal Processes Customers could place orders for barrels by calling a toll-free telephone number or by using the company’s e-commerce website. Highland’s management had developed a working relationship with Spencer’s Spirits (Spencer’s), a global corporation that owned many leading brands of beer, wine, and spirits. Spencer’s agreed to manage all online marketing and e-commerce services for Highland, having gained considerable expertise in this area over the years. In exchange for handling all online sales, Spencer’s received a 10-per- cent commission on each customer order. Spencer’s was responsible for receiving whisky barrel orders and collecting the $10,000 payment from each customer. Once the order was received, Spencer’s notified Highland, who reserved the specified number of barrels for the customer. After the order was filled and the reserved barrel was set aside, a certificate of purchase and authenticity was prepared and sent to the customer. At the same time, a notification was sent to Spencer’s requesting a transfer of funds. Spencer’s would then transfer $9,000 to Highland for the order, keeping 10 per cent of the order as commission. If a collector returned the product within the 180-day refund period, Highland would send a cheque for the full amount of $10,000 to the customer, but the 10- per-cent commission would not be requested from Spencer’s. Market Share & Forecast, 2019 – 2025,” Global Market Insights, accessed April 1, 2020, www.gminsights.com/industry- analysis/whiskey-market?utm_source=globenewswire.com&utm_medium=referral&utm_campaign=Paid_globenewswire. 4 Barrels were initially filled to a volume of 250 bottles of 40 ounces (approximately 1.2 litres). However, 2–3 per cent of the whisky evaporated annually. After 12 years, the volume would be reduced by as much as 40 per cent. The whisky lost through this evaporation process was known as the angels’ share; Jonathan Houston, “What Is the Angel’s Share?,” The Whiskey Wash, April 20, 2016, accessed February 23, 2020, https://thewhiskeywash.com/whiskey-styles/american-whiskey/what-is-the-angels-share. A ut ho riz ed fo r us e on ly b y S m ar tly M B A fr om A pr 1 3, 2 02 1 un til D ec 1 3, 2 02 1. U se o ut si de th es e pa ra m et er s is a c op yr ig ht v io la tio n. Page 3 9B20B013 Contributing to the uniqueness of the Highland whisky was its production’s oversight by renowned master distiller Fraser Adger. Highland had paid a fee of $50,000 to Adger in 2019 for his services as master distiller, and a second fee of $30,000 was due and payable to Adger in 2020 for his continuing services provided subsequent to 2019. After thoroughly deliberating on the production method, Highland’s management decided to produce batches of 50 barrels every six months, beginning in January 2018, and to increase production starting in 2019 (see Exhibits 2 and 3). However, due to a shortage of skilled labour, higher material expenses, and rising overhead costs, Highland was increasingly paying significantly more for the production of whisky batches (see Exhibit 3). INCORPORATION AND START-UP Highland was incorporated in January 2018. The company’s stock was sold for a total of $750,000 to a group of private investors, some of whom were involved with the internal management of the company. One significant investor