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Module 3 Assignment 1 Practice Case Examination Backgrounder

The background information relating to the Case Examination (Backgrounder) is provided to candidates in advance of the examination date. The Backgrounder contains information about both the company and the industry involved in the case. Candidates are expected to familiarize themselves with this information in preparation for the analysis that will be required during the Case Examination. Candidates should note that they will not be allowed to bring any written material, including the advance copy of this Backgrounder, into the examination centre. A new copy of this Backgrounder, together with additional information about the company and a supplement of formulae and tables, will be provided at the writing centre for the Case Examination. Only the following models of calculators are authorized for use during the Case Examination: 1. Texas Instruments 2. Hewlett Packard 3. Sharp TI BA II Plus (including the professional model) HP 10bII+ (or HP 10bll) EL-738C (or EL-738)

Candidates are reminded that no outside research on the industry related to this case is required. Examination responses will be evaluated on the basis of the industry information provided in the Backgrounder and the question paper (Additional Information).

2013 The Society of Management Accountants of Canada. All rights reserved. / Registered Trade-Marks/Trade-Marks are owned by The Society of Management Accountants of Canada. No part of this document may be reproduced in any form without the permission of the copyright holder.

Backgrounder

Practice Case Examination M3A1

Aqua Fish Canada Inc. (AFC) Backgrounder


May 2002 to April 2011 Overview
Aqua Fish Canada Inc. (AFC) is a privately owned, Canadian company involved in aquaculture in the Maritimes. Aquaculture is the cultivation and harvesting of fish in a natural or manufactured environment. Federally incorporated on May 1, 2002, AFC has established a reputation for delivering a quality product Atlantic salmon on a timely basis from its profitable fish farms and is a growing, commercial operation. AFC builds and maintains fish farm facilities; hatches, feeds, grows, and harvests Atlantic salmon; and distributes the unprocessed fresh fish mainly to customers in Canada and the northeastern U.S.

Company History
In early 2002, three Maritimers with backgrounds in the fishing industry (Joel Palango, Wendy Starky, and Jeanne Poirier) decided to search for potential investment opportunities that would help the local Maritime economy. They observed that, with access to plentiful water and site resources, a large workforce with a background in fishing, and governments eager to create employment, the aquaculture industry was growing along the eastern coast of Canada. Although they knew that there would be no revenue until the first fish grew large enough to sell, they were prepared to wait several years to realize a return and they decided to invest in an aquaculture business. Aqua Fish Canada Inc. was incorporated and the first decision made by the three shareholders was to establish an Atlantic salmon aquaculture farm. Guy Mills, an experienced aquaculture executive, was hired to build the business from the ground up. The first farm site was established within six months and operations began in November 2002 with the first spawning of fish. By October 2004, a sufficient number of farmed fish had reached a marketable weight and AFC harvested its first batch of salmon. Over the next five years, the company established three more salmon farm sites in three provinces as shown in Table 1 below. Table 1 AFC Aquaculture Sites
Site 1 Site 2 Site 3 Site 4 Province New Brunswick Nova Scotia New Brunswick Quebec Date of First Spawning November 2002 November 2003 November 2005 November 2007 Date of First Fish Harvest October 2004 October 2005 October 2007 October 2009

In fiscal 2010, the board of directors decided to put a hold on the expansion strategy and dividends were paid for the first time.

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Backgrounder

Industry Background
The Fishing Industry Worldwide Global capture fisheries production in 2008 was about 90 million tonnes, with an estimated first-sale value of US$93.9 billion, comprised of about 80 million tonnes from marine waters and a record 10 million tonnes from inland waters. Aquaculture continues to be the fastest-growing sector of animal food production and continues to outpace human population growth, with per capita supply from aquaculture increasing from 0.7 kg in 1970 to 7.8 kg in 2008an average annual growth rate of 6.6%. The contribution of aquaculture to the total production of capture fisheries and aquaculture continued to grow, rising from 34.5% in 2006 to 36.9% in 2008. In the period 1970-2008, the production of food fish from aquaculture increased at an average annual rate of 8.3%, while the world population grew at an average of 1.6% per year1. The two main categories of fish are finfish and shellfish (crustaceans and molluscs). Fishing is one of the oldest industries in the world and continues to be an important source of food. However, the worlds oceanic catch has not increased appreciably since 1990 due to overfishing this resource, and thus has fallen far behind the soaring growth in the demand for fish. In response, aquaculture has become the fastest-growing food production system in the world. Generally, fish is regarded as a commodity in the international markets and competes against other protein-based foods, such as meat and poultry. Prices depend primarily on international supply and demand and, to a lesser extent, on quality and source country reputation. Currently, fish producers in countries such as China and Chile are developing high production capacity. In some cases, this is driving prices down. The efficiency of a food production system is measured in terms of the feed conversion ratio (FCR), i.e. the rate at which grain or other feed is converted into protein. Cattle in feedlots require approximately seven kilograms of feed concentrate to produce one additional kilogram of live weight. [Note: Although markets often express measurements of livestock and fish in pounds, Statistics Canada uses metric measurements. For consistency and simplicity, metric measurements are used throughout this case.] For pigs, the ratio is nearly 4:1. Chickens are much more efficient, with a ratio of 2:1. Fish, including both herbivorous and omnivorous species, require less than two kilograms of input concentrate (feed) per kilogram of weight gain. Proponents of aquaculture note that it offers many advantages over capture (wild) fishing. Properly managed, farmed fish is a fully sustainable resource. Usually, the harvest can be taken on demand year-round for maximum freshness, rather than on a seasonal basis. The often dangerous task of deep-sea fishing is avoided and there are no international issues or jurisdictional disputes. The largest disadvantage is that fish must be fed by the operator rather than feed themselves. Beginning in the 1960s in Norway and Scotland, salmon farming developed from the techniques used to enhance stocks of wild salmon, which included hatching and rearing the fish under controlled conditions. Rather than releasing the young fish for a portion of their life
1

The State of World Fisheries and Aquaculture 2010. http://www.fao.org/docrep/013/i1820e/i1820e.pdf (accessed December 20, 2011). Page 3 (18 pages)

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cycle, aquaculturists looked for ways to raise them to maturity in pens close to shore. In this way, they could be harvested easily and delivered quickly to markets that were ready and willing to pay a premium for fresh salmon. Exhibit 1 describes the salmon life cycle and a typical aquaculture set-up. The Canadian Fishing Industry Canada has one of the world's most valuable commercial fishing industries operating in the Atlantic, Pacific, and freshwater areas. Shellfish comprises close to 40% of the domestic catch, and finfish the remaining 60%. The Atlantic fishing industry accounts for 80% of total landings, including both wild and farmed fish. The development of aquaculture with respect to salmon, shellfish, and freshwater fish has contributed to the recent growth in the Atlantic fishing industry. With a limited home market to satisfy, Canada has developed export markets for fresh, frozen and processed fish. The United States is Canada's largest export market, followed by Japan, China, and the European Union. Canada enjoys a reputation worldwide for safe, wholesome finfish and shellfish products because it has vast amounts of clean ocean water and one of the most respected fish inspection and control systems in the world. It also has a reputation for research and innovation in fish production, quality of fish products, and environmental protection of fish habitats. As a result, Canada is one of the top exporters of fish in the world. In many markets, Canadian finfish and shellfish are considered exotic and can be sold at a premium. Recently, the strengthening of the Canadian dollar against the U.S. dollar has had a negative impact on exports to the U.S. Aquaculture in Canada2 A new 2009 report by the Department of Fisheries and Oceans says Canada's aquaculture industry generates $2.1 billion for the economy each year and provides thousands of jobs in coastal and rural communities. The value of aquaculture production in 2008 amounted to $726 million. The breakdown of where the fish were farmed is provided in the table below. 2008 Value of Canadian Aquaculture Production (in $millions) BC Ontario Quebec New Brunswick Nova Scotia PEI Other Total

Amount 409 16 3 197 23 32 46 726

Canadian Industry Reports of Fisheries and Aquatic Sciences. http://www.dfo-mpo.gc.ca/librariesbibliotheques/indus-eng.htm (accessed December 20, 2011). CMA Canada

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Aquaculture is a growing industry, with farming operations in all 10 provinces as well as in the Yukon Territory. In Atlantic Canada, finfish aquaculture is dominated by the production of steelhead and Atlantic salmon, shellfish aquaculture primarily includes the production of blue mussels and oysters, and there is an emerging sea scallop industry. The Canadian aquaculture industry had total revenue of $861 million in 2010, representing a compound annual growth rate (CAGR) of 1.9% for the period 2006-2010. Industry production volumes decreased by 1.4% between 2006 and 2010, to reach a total of 161.9 thousand tonnes in 2010. The performance of the industry is forecast to accelerate, with an anticipated CAGR of 11% for the five-year period 2010-2015, which is expected to drive the industry to a value of $1,451.8 million by the end of 2015. The breakdown of the 2009 Canadian Aquaculture Production is provided in the table below. 2009 Canadian Aquaculture Production Trout Salmon Mussels Oysters Clams Other

% 4% 72% 14% 6% 1% 3%

With respect to finfish, Atlantic salmon is the predominant species farmed in Canada, followed by chinook and coho salmon. The total value of finfish aquaculture in 2009 was over $700 million, representing more than 85% of the total value of aquaculture production. Salmon aquaculture is now a major industry in Canada, operating year-round and creating wealth and jobs in coastal communities. Salmon farming is one of New Brunswicks largest food industries and farmed salmon has become British Columbias most significant agricultural export. Many companies have become vertically integrated operations, running fish farms and hatcheries, raising brood stock, transporting and processing fish, conducting research, and marketing the product internationally. Canada is now the worlds fourth-largest producer of farmed salmon, after Norway, Chile, and the United Kingdom. Shellfish farming is an increasingly important contributor to Canada's expanding aquaculture industry. Prince Edward Island's rope-grown mussels are well-known around the world as is the technology that was developed to culture them. The Canadian aquaculture industry supplies 80% of the blue mussels in the North American market. Current industry growth areas include oysters (Atlantic, Pacific, and European), Manila clams, and scallops. These bivalve molluscs are relatively inexpensive to farm because they feed on the natural plankton available in the ocean and there is no need to purchase feed. As a result, farming shellfish is environmentally friendly. Generally, shellfish farmed in Canada, such as the American oyster, require more growing time than in warmer climates, but the habitat is much cleaner, resulting in top grade quality shellfish that can be sold at premium prices. New software now permits operators in the fishing industry to find customers worldwide. The software matches seller and buyer online with respect to selected criteria, such as product specifications, price, volume, and terms of payment. Exports of Canadian aquaculture
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products have continued to rise, with sharp increases in shellfish. The majority of aquaculture exports are bound for the U.S., with France, Japan, and Taiwan taking most of the remainder. Successful marketing of farmed fish depends on consumer confidence in product safety and quality. The aquaculture industry is supported by the federal and provincial/territorial governments in ensuring water quality and in maintaining the highest standards of product quality and safety. Two national associations support various aspects of the industry: the Canadian Aquaculture Association and the Canadian Aquaculture Institute. In addition, there are several smaller, provincial organizations and an aboriginal association. Salmon Markets Several varieties of salmon, including Atlantic, Pacific, and Alaskan, are fished and marketed worldwide. Developed countries account for the vast majority of total salmon imports worldwide, led by Japan, the United States and the European Union. There is substantial farming of all salmon species in a number of countries, including Norway, Scotland, Chile, Canada, and the United States. Traditionally, salmon was sold smoked or canned for the most part; today, most salmon is sold frozen or fresh. Most smoked salmon is sold in Europe, and most frozen salmon is sold in Japan. The last decade has seen a dramatic growth in markets for fresh salmon in the United States, Japan, and western Europe. The wholesale salmon industry is highly competitive and the various species of salmon are considered commodities. In the past, the seasonality of the capture fishing industry resulted in greatly fluctuating prices. The growth of the aquaculture industry has provided year-round production of fresh farmed salmon, filling the seasonal gap. As a result, prices have decreased but have been more stable throughout the year. From 2000 to 2003, outbreaks of disease in farmed salmon and an increasing general concern regarding the environmental dangers of aquaculture caused prices to decrease further. In 2004, prices began to stabilize as the aquaculture industry made operational changes in an effort to address the environmental issues. In 2006 and 2007, competition from aquaculturists in Chile increased. The salmon farms in that country have substantially lower labour and feed costs that are only partially offset by the higher costs of transporting the product to markets in the United States and Canada. Consequently, Chilean producers have been able to offer lower prices that have put downward pressure on the overall market prices for fresh salmon and salmon products. Canadian farmed Atlantic salmon has maintained a reputation for high quality and, therefore, is sold at a premium in international wholesale markets. Environmental Concerns In recent years, environmental concerns have arisen and such organizations as the David Suzuki Foundation have spoken out loudly against finfish aquaculture for a variety of reasons. From time to time, open net-pen systems are torn apart in storms and farmed fish are released into the natural environment. This can introduce a non-native species to a body of water, such as Atlantic salmon to the Pacific Ocean. In addition to competing for food and spawning habitat, the escaped farmed fish may interbreed with wild specimens, reducing the latters fitness.

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Parasite damage is another concern. Salmon farms in British Columbia have been accused of contributing to the sea lice infestations that have wiped out some species of wild salmon in certain areas. In addition, diseases can spread quickly in aquaculture farms. In the early 1990s, disease nearly destroyed all aquaculture stocks of shrimp in China. In 1998, a mass slaughter of farmed salmon in New Brunswick was necessary to prevent a major outbreak of infectious salmon anemia (ISA). To reduce the spread of disease, salmon farmers employ antibiotics, vaccines and other chemicals, much of which can enter the water through the netpens. Open net-pen systems also permit fish feed, fish waste, and parasites to accumulate in the coastal marine environment in vastly greater concentrations than would occur naturally. A buildup of fish waste can alter the natural environment, increasing the amount of nitrogen and phosphorous in the water. This, in turn, can stimulate the growth of destructive algae. The aquaculture industry has countered these arguments, citing the fact that escaped fish have a low survival rate because they are no longer fed and protected in the wild. The problem of waste accumulation under the net-pens is addressed by using a bag system, whereby the waste is collected and removed. Alternatively, all farming activity at a particular location can be ceased for a period of four to eight months. This fallow period provides an opportunity for the breakdown of the organic matter that has accumulated on the seabed. The fallow method is more commonly used by Canadian fish farms. One solution to many environmental concerns is to use a closed-pen system. Using this system, it is impossible for farmed fish (dead or alive), fish feed, fish waste, or parasites to escape into the coastal marine environment. Few salmon farmers use such a system because it is more expensive to construct and requires very costly oxygen supplements. Environmentalists also oppose the following practices in aquaculture: 1. The use of low value fish to make feed for high value fish, because this depletes global fish stocks and these fish could instead be eaten by people in poor countries; 2. The use of antibiotics, biocides, and harmful chemicals, because these are a form of pollution; and 3. The use of genetically modified fish. Some environmental groups and their followers have advocated a consumer boycott of all farmed fish in Canada and the U.S. However, this does not appear to be the attitude of the general public. Regulation of the Fishing Industry and Aquaculture in Canada Canada's inspection and control system contributes to the countrys reputation for safe, wholesome fish products. It is the intention of the Canadian government to assure buyers worldwide that fish from Canada meets the increasingly rigorous standards of the world's major markets. The Canadian Food Inspection Agency (CFIA) sets the policies, requirements, and inspection standards with respect to fishing vessels, fish products, importers, fish processing establishments, and equipment used for handling, transporting, and storing fish. All facilities that process finfish or shellfish for export or interprovincial trade must be registered federally and must develop and implement a quality management program (QMP). The QMP outlines the controls that ensure that all fish are processed under sanitary conditions, and that the resulting products are safe and meet all regulatory requirements. The Canadian Shellfish

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Sanitation Program (CSSP) helps ensure that all shellfish consumed in the country come from approved (safe) growing areas. With respect to aquaculture, a site licence, issued by the federal government, is required in order to operate a fish farm in a particular location. In addition, all aquaculture sites must be inspected twice each year by the federal government. The export certification program of the CFIA provides Canadian exporters of finfish and shellfish with official documents that guarantee their products will be acceptable to importing countries.

Aqua Fish Canada Inc. (AFC) Operations


Management and Organization A summarized organizational chart for AFC is found in Exhibit 2. Guy Mills is President and Chief Executive Officer (CEO). He holds an undergraduate degree in biology and a masters degree in science and has worked in the aquaculture industry since graduating 18 years ago. Mills is passionate about aquaculture, AFC, and his role in the company. He is based in the head office and has three administrative staff reporting to him as well as four vice-presidents and a director of human resources. Bill Egin is Vice-President, Operations and is comfortable in his leadership role. In this position, he is responsible for all direct fish functions, including facility construction, hatching, growing, and harvesting, as well as research and development (R&D). His responsibility ends when the fish are harvested and handed over for distribution. Rob Vanic is Vice-President, Distribution. A mechanical engineer by profession with experience in the transportation business, his responsibility is to get the fish from the water to the customer. AFCs Vice-President, Sales is Juliette Maise. She has a degree in biochemistry. Her primary responsibility is to lead the sales team to generate customer orders. She is an optimistic, outgoing individual who is very good at managing the sales force. Jacques Dubois, CMA, is Vice-President, Finance, and Chief Financial Officer (CFO). He holds an Executive MBA from a university in the Maritimes. Reporting to Dubois are Adam Rice, Controller, and Justin Singh, Director, Computer Systems. Gale Harper is Director, Human Resources and reports directly to the president. She is responsible for all hiring, evaluation and termination of employees, and for payroll, which is handled through a service. Harper is based in AFCs head office and has a staff of five. Board of Directors The board of directors is comprised of the shareholders and the following three outside parties: Fraser Coupland, a former owner of a capture fishing business in Newfoundland, now retired; Mary-Anne Fisher, a former politician affiliated with the current ruling party in New Brunswick; and Paul Seminole, a prominent Nova Scotia lawyer. Joel Palango is Chair and Guy Mills represents the management team on the board. Every two years, the board reviews the companys strategic plan. At the end of fiscal 2011, they conducted an environmental analysis and updated the corporate mission and vision (see Exhibit 3).

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Backgrounder

Human Resources In the Maritimes, low-cost labour is plentiful for such manual tasks as feeding, harvesting, truck-driving, and maintenance. These employees can be temporarily laid off when they are not needed and they may be eligible to collect employment insurance (EI) during layoffs. Most of these workers are paid only $2.00 per hour more than the provincial minimum wage. As a result of these factors, the level of employee turnover is higher than average. Harper believes that the high turnover rate has no impact on operations because this type of work requires little skill. Aquaculture Operations AFC operates four coastal aquaculture sites and pays a nominal rent to the Crown for the rental of the underwater space. The company has implemented a successful quality management program (QMP) at each site. Each location has a site manager in charge of the operations, a person in charge of hatching, a veterinarian, and many manual labourers who feed and harvest fish and maintain the facility. Each site is of approximately the same size and scale. The site managers report to Bill Egin. When a new site is established, the same number of salmon eggs is incubated and hatched in the fall each year. Because individual growth rates vary, only 50% of the salmon reach harvestable weight within the first 30 months. About three years are required before the level of harvestable fish at the site becomes consistent. In addition to extensive freshwater tanks and pens, each site has a series of open net-pens in the ocean, adjacent buildings, and other necessary infrastructure. The open net-pens float in the ocean in a bay or sheltered area, and nets keep the farmed salmon in and predators out. The pens rise and fall with the tide and are cleansed by the rushing tidewater. Feed is the largest cost component of the operation. Therefore, a critically important success factor is the feed conversion ratio (FCR), i.e. the amount of feed required per unit of output. The FCR can be improved by changing the composition of the feed and the way in which it is distributed to the fish. Salmon are a carnivorous fish that normally feed on a variety of insects, crustaceans, and other fish. This diet produces the rich, orange colour of their flesh. The salmon feed used by AFC is composed of ground crustaceans and fish, such as sardines, anchovies, and menhaden, and is 10% more expensive than the feeds used by many other salmon farms. Because the AFC feed more closely resembles the diet of wild salmon, AFCs farmed salmon have dark orange flesh. Consequently, AFC does not need to use chemical agents to enhance the colour of the fish, and for this it has won favour with environmental groups. The company does not use growth hormones. However, certain government-approved drugs are used to improve the spawning function and to control fungi, parasites, and bacterial infection. In compliance with government regulations, administration of this medication, which is given to the salmon in their feed, is overseen by the licensed staff veterinarians. The staff veterinarians are responsible for ensuring that only healthy, disease-free fish are distributed for human consumption. On a regular basis, samples of fish are given a detailed biological examination. Nets are used to harvest the salmon when they reach market size. All of the harvested fish are inspected visually and those that are certified by the veterinarians are refrigerated before shipment is made to the end customer.
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AFC is a member of the New Brunswick Salmon Growers Association, the Canadian Aquaculture Institute, and the Canadian Aquaculture Association. Some operating statistics are shown in Table 2: Table 2 Operating Statistics for the Years Ended April 30 (in 000s of kg)
Kilograms sold Kilograms exported1 (included in kilograms sold) Inventory of harvestable fish1 (kg) Inventory of growing fish1 (kg) Expected harvested weight of growing fish in stock2 (kg) Number of sites Number of producing sites3
1
1

2011 3,380 1,318 559 1,621 3,861 4 4

2010 3,252 1,234 295 1,648 3,960 4 4

2009 2,730 1,092 235 1,256 3,960 4 3

2008 2,412 941 75 1,227 3,465 4 3

2007 1,933 735 146 862 2,970 3 2

2 3

All fish weights are reported as actual weight less the shrinkage from gutting the fish during harvesting (harvested fish are gutted and washed, but heads are left on). To aid comparability, a standard gutting shrinkage is deducted from the actual weights of the fish not yet harvested (both harvestable and growing). The estimated future yield from all fish that are growing but are not yet of harvestable weight. A producing site is one that has harvestable fish ready for sale.

Research and Development (R&D) Dr. Lily Stern is the director of a small R&D unit composed of scientists and technicians who carry out applied research with the objective of improving the companys short- and long-term profits. To date, the units most significant practical achievement has been to identify the strain of Atlantic salmon that would be the most disease-resistant for the specific environment of each of the companys farm locations. The employees in this unit work on projects that relate to the following: 1. Product quality determining improved diets for fish and better husbandry methods. 2. Fish health focusing on disease resistance, surveillance and detection; and studying the life cycles of causative agents (pests, pathogens, and parasites). 3. Environmental considerations studying the treatment of fish farm discharge and the interaction of aquaculture and the environment; monitoring the carrying capacity and treatment of fish farm discharges at individual sites; and performing other biological and environmental monitoring.

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Backgrounder

Sales AFC salmon is sold fresh and unprocessed in the wholesale market. Ultimately, it reaches the final consumer in one of the following ways: 1. served smoked or freshly cooked in restaurants; 2. sold fresh in retail stores (whole, filleted, or sectioned into steaks, strips for stir-frying, cubes for kebobs, or other sizes); or 3. sold frozen, smoked, or otherwise processed in retail stores. Worldwide, AFC competes against all other sellers of Atlantic salmon, both wild and farmraised. The company also competes indirectly against sellers of other protein-based foods, such as other fish, meat, and poultry. In general, there are three grades of Atlantic salmon in the market. The fish produced by AFC are in the top category and, therefore, can be sold at the highest wholesale market price. Most years, approximately 50% of sales are made by individual purchase orders to fish processors in Canada and the U.S. at market prices. The company has three long-term contracts with Canadian and U.S. grocery retailers, specifying minimum volumes that AFC must deliver twice per week. Because AFC has a superior product, these retailers have agreed to pay 5% more than the market price at the time of delivery. A small amount of product is sold directly to Atlantic region restaurants at 20% more than the market price. Some AFC salmon is sold overseas through large, international fish brokers in Boston, Massachusetts. These overseas customers pay a premium of 10% and AFC pays the broker a 5% commission. Reporting to Juliette Maise is a team of six salespeople who are responsible for selling the companys salmon output in North America and four additional employees who help process orders and assist with the departments paperwork. Two of the salespeople are desk-bound; the others travel within Eastern Canada and the northeastern U.S., with each assigned to a particular sales territory. The salespeople earn a commission of four percent of the value of product sold. All export sales are in U.S. dollars. Normally, terms are net 30 days and product returns are rare and small. In fiscal 2011, sales distribution was about 60% to customers in Canada, 35% to buyers in the U.S. and 5% to markets outside North America. The company maintains a website that provides product information and sales contacts. The website also describes employment opportunities and provides hiring contacts. AFC owns several refrigerated trucks to deliver product to its customers. During busy periods, the overflow volume is contracted out to independent trucking companies. Some customers pick up product at the aquaculture facilities. Deliveries to overseas customers are by commercial refrigerated air cargo. Accounting, Budgeting and Taxation The company uses the BalancesNow accounting system for the general ledger, accounts payable, and accounts receivable. The system has worked reasonably well since it was installed by Duboiss predecessor in 2005. BalancesNow allows up to eight general ledgers per organization; currently, AFC uses one general ledger for the head office and one for each of the aquaculture sites. In addition, the system permits up to four concurrent users; normally, there are only three. BalancesNow handles transactions in two currencies, Canadian and U.S. dollars; no other currencies are needed.
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Revenue from the sale of harvested fish is recognized on delivery to the customer. Inventories consist of fish feed and the live fish that are in the hatchery and net-pens. The full costs of the fish hatching and growing operations (i.e. direct variable and fixed hatching and growing costs plus site amortization costs) are inventoried until the fish are harvested and sold, at which time they are charged to cost of sales. The direct costs of harvesting and delivering the fish are also charged to cost of sales. Capital assets, such as tanks, nets, and other structures, are amortized over their expected useful lives using the straight-line method. The company pays income taxes at a blended rate of approximately 30%. The planning and budgeting function is led by Rice, the controller. The companys annual budget is prepared by the end of March and is approved by the board of directors. It is reviewed and updated each quarter, and has been well received by staff both within and beyond the finance area. The budgeting process has proven to be fairly accurate. Since inception, the company has been audited by the same, mid-sized, New Brunswick accounting firm. Historic, audited financial results for the company are found in Exhibit 4. Accounting Standards for Private Enterprises (ASPE) As the company is a private company, it was decided that the accounting standards for private enterprises would be adopted for 2011. Consequently, the companys date of transition is May 1, 2009. The statements for the fiscal year ending April 2010 were restated under ASPE and the 2011 statements were prepared using ASPE. On transition, the following changes and elections were made: 1. Employee defined benefit plan The company has a defined benefit pension plan for its key managers. Prior to transition, the company had used the corridor approach for recognizing actuarial gains and losses arising from the plan. On transition, at May 1, 2009, the company elected to measure its benefits using the funding valuation method. As a result, the amount reported on the balance sheet as an obligation increased to a net obligation of $130,000 from $60,000 at May 1, 2009. Retained earnings at May 1, 2009 were decreased by $70,000 to reflect this adjustment. During the fiscal year ending April 30, 2010, the net benefit obligation had decreased to $120,000 resulting in a credit to the pension expense of $10,000 in 2010 under ASPE. 2. Investments The company owns a small investment in three publicly traded companies. Under pre-changeover Canadian GAAP, investments for a private company could be recorded at cost. On transition to ASPE, if the shares have a quoted market price, then the shares must be shown at fair value with any changes in fair value reported in net earnings. At May 1, 2009, the investments had a fair market value of $215,000, which increased to $220,000 by April 30, 2010. As a result, the opening retained earnings at May 1, 2009, have been adjusted by $65,000 and net earnings for 2010 were increased by $5,000, recognizing the increase in value during 2010. 3. Income taxes Under ASPE, the company chose to adopt the income taxes payable method, which recognizes only the current income taxes due as an expense. In previous years, the company had been following this method after obtaining unanimous approval from the shareholders allowing AFC to make this election under differential reporting.

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Banking and Financing Because Joel Palango had a long relationship with the Eastern Bank of Canada, AFC has always banked with this financial institution. The bank has provided the company with a $2 million operating line of credit as well as an $8 million property, plant and equipment financing loan, repayable over eight years at six percent. Each aquaculture site, except the one adjacent to the head office, has a bank account from which urgent local expenses can be paid. These accounts are replenished from time to time via electronic transfer from the companys main account.

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Exhibit 1 Salmon Aquaculture The Atlantic salmon is an anadromous species, spending part of its time in fresh water and part in sea water. In the wild, a young salmon spends between one and three years in freshwater rivers and streams before migrating downstream to the ocean. The fish then lives in sea water for one to five years before returning as an adult salmon to its river of origin to spawn. After spawning, most adult salmon die. The life cycle of a wild salmon is between two and six years in length. Salmon farming mimics the natural salmon life cycle while controlling many factors that affect growth, such as water temperature, feed, predators, and disease. The fish adapt well to living the first eight months to two years in fresh water in tanks and pens, and the next year or two in seawater in open net-pens. The floating net-pens are generally 20 metres deep and are held in place with moorings. Nets surround all sides of each pen, including the top and bottom, preventing the farmed salmon from escaping and keeping predators out. Each farm site is located in a protected area along the coastline and the net-pens are clustered together in groups of 8-20 to form a site serviced by platforms for storage of feed and supplies. Net-pen systems cover several hectares of surface water. Throughout their lives, the salmon are fed a special diet of fish meal pellets, vitamins, and minerals, and good growth rates are achieved. To prevent the spread of disease, either the fish are inoculated or antibiotics are added to the fish feed. Once they reach a market weight of between two and five kilograms, they are harvested. Overall, the life cycle of farmed fish is between 20 months and four years in length.

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Backgrounder

Exhibit 2 Aqua Fish Canada Inc. Summarized Organizational Chart As at April 30, 2011

Board of Directors Joel Palango (Chair) Wendy Starky Jeanne Poirier Fraser Coupland Mary-Anne Fisher Paul Seminole Guy Mills

President and CEO Guy Mills

Vice-President, Finance and CFO Jacques Dubois

Vice-President, Operations Bill Egin

Vice-President, Distribution Rob Vanic

Vice-President, Sales Juliette Maise

Controller Adam Rice

Director, Research and Development Dr. Lily Stern

Director, Human Resources Gale Harper

Director, Computer Systems Justin Singh

CMA Canada

Page 15 (18 pages)

Backgrounder

Practice Case Examination M3A1

Exhibit 3 Environmental Scan April 2011 Strengths Highest grade of salmon is produced and sold at highest market price Reputation for timely delivery Competent management and staff Dark colour of salmon caused by superior feed, not chemical agents Growth hormones are not used Three long-term contracts provide some stability Good relationship with bank Member of provincial and national industry associations R&Ds success in identifying disease resistant strains of salmon yield has improved Opportunities The Canadian aquaculture industry is expected to experience double-digit growth in the future Growing demand for salmon and shellfish in international markets Canadas reputation for safe, wholesome fish receive premium prices in foreign markets Availability of government funding Large markets for fish in U.S., Japan, China, and European Union Plentiful low-cost labour in the Maritimes Aqua Fish Canada Inc. Vision: AFC feeds the global community. Aqua Fish Canada Inc. Mission: AFC provides a sustainable source of fresh, disease-free fish to domestic and export markets through aquaculture farming. AFC strives to exceed environmental and quality standards and regulations, provide a safe environment for our employees, and generate reasonable financial returns to our shareholders. Weaknesses High employee turnover Open net-pen damage caused significant loss of fish in 2010 High cost of fish feed Limited overseas exports Accounting system supports only two currencies Decreased operational efficiencies

Threats Competition from other salmon suppliers (e.g. Chile) and suppliers of other fish, poultry, and meat Demand for salmon is maturing Increased government regulation of the industry Increasing fuel prices Environmental concerns Strengthening Canadian dollar Fluctuating prices for fish in international markets Increasing cost of fish feed

Page 16 (18 pages)

CMA Canada

Practice Case Examination M3A1

Backgrounder

Exhibit 4 Aqua Fish Canada Inc. (AFC) Balance Sheets as at April 30 (Audited) (in 000s)
Assets Cash Accounts receivable, net Inventory Other current assets Investments Property, plant and equipment (net) Liabilities and Shareholders Equity Current liabilities Employee pension obligation Long-term debt Total liabilities Shareholders Equity: Common shares Retained earnings (deficit) Total liabilities and shareholders equity 2011 ASPE $ 871 1,135 6,521 86 8,613 210 5,281 $14,104 $ 4,940 127 4,000 9,067 4,850 187 5,037 $14,104 2010 ASPE $ 892 1,119 5,746 85 7,842 220 6,648 $14,710 $ 4,563 120 5,000 9,683 4,850 177 5,027 $14,710 2010 C-GAAP $ 892 1,119 5,746 85 7,842 150 6,648 $14,640 $ 4,563 70 5,000 9,633 4,850 157 5,007 $14,640 2009 C-GAAP $ 1,118 968 5,105 84 7,275 150 8,035 $15,460 $ 4,439 60 6,000 10,499 4,850 111 4,961 $15,460 2008 C-GAAP $ 586 868 4,282 82 5,818 150 9,526 $15,494 $ 4,280 40 7,000 11,320 4,850 (676) 4,174 $15,494

CMA Canada

Page 17 (18 pages)

Backgrounder

Practice Case Examination M3A1

Exhibit 4 (continued) Aqua Fish Canada Inc. (AFC) Income Statements for the Years Ended April 30 (Audited)
2011 ASPE $14,187 11,546 2,641 878 365 7 1,359 10 2,619 22 12 $ 10 177 $ 2010 ASPE $13,984 11,080 2,904 809 335 (10) 1,251 (5) 2,380 524 153 371 111 $ 2010 C-GAAP $13,984 11,080 2,904 809 335 10 1,251 2,405 499 153 346 111 $ 2009 C-GAAP $12,095 8,761 3,334 709 301 20 1,171 2,201 1,133 346 787 (676) $ 2008 C-GAAP $10,854 8,436 2,418 654 256 20 1,169 2,099 319 102 217 (893)

Revenue Cost of sales Expenses: Selling Research and development Pension costs General and administrative Fair value change on investments Income before taxes Income taxes Net income Opening retained earnings (deficit) Retrospective changes on transition to ASPE Employee pension plan Investments Dividends Closing retained earnings

(70) 65 0 187 (300) 177 (300) 157 0 111 0 (676)

Page 18 (18 pages)

CMA Canada