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Earnings Forecasts

Group E Elizabeth Edward Geoff Smith Hasan Raza Rony Suthermaraj. Earnings Forecasts. IPO. Initial Public Offering Initial Considerations Pre-Transaction Preparation and Organization Drafting and Filing of Preliminary Prospectus The Regulatory Review and Marketing Phase

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Earnings Forecasts

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  1. Group E Elizabeth Edward Geoff Smith HasanRaza RonySuthermaraj Earnings Forecasts

  2. IPO • Initial Public Offering • Initial Considerations • Pre-Transaction Preparation and Organization • Drafting and Filing of Preliminary Prospectus • The Regulatory Review and Marketing Phase • The Final Prospectus Phase • Closing

  3. Globe and Mail, Feb 2nd http://www.theglobeandmail.com/news/technology/tech-news/5-issues-for-facebook-mark-zuckerberg-is-one/article2323697/page2/ Five Challenges For Facebook

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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?

  9. SportsGoodStopCompany

  10. 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%

  11. 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

  12. 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 this • Is this audit feasible in the time constraint? • Preliminary prospectus is scheduled to be sent to the Ontario Securities Commission by this time

  13. 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

  14. 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.”

  15. CICA Section 4250 Investors’ needs • Relevant information • Management assumptions

  16. 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.

  17. Audit of Earnings Forecast • How would we go about auditing the earnings forecast?

  18. General Audit Procedures (to gather evidence)

  19. Discussion Questions

  20. CICA 4250 • What does section 4250 in the CICA handbook cover? • What are some of the criteria mentioned in CICA 4250?

  21. Word Bank • 1) Recalculation 4) Inspection • 2) Enquiry 5) Observation • 3) Analysis 6) Confirmation

  22. Case Questions • Do you think that an earnings forecast is necessary? • Will the investors value reliable over relevant information?

  23. 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?

  24. 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?

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