The company has provided a 2008 $501 million write-off for its construction in-progress account, which was caused by its restatement of MAPLE facilities transaction. The company has provided that its write off does not affect related AECL long-term notes receivable and Canadian government notes payable. This researcher finds reasonable basis not to contradict such decision since write off is actually has the tendency to reduce income hence its rather prudent for the company to do the same.

2.1.b. Restructuring charges in 2007 and 2008

This researcher has reviewed the company’s restructuring charges for 2007 and 2008 and finds sufficient basis to sustain the same. The company has done the same in its initiatives to refocus itself as a globally competitive life science company. The charges are for workforce reductions and contract cancellations. These are verifiable matters by the company’s internal and external auditor and in the absence of proof that they could be wrong,  there is no basis to effect change in net income or cash flow.

2.1.c. Impairment of goodwill in 2008

The amount of impairment of goodwill reached about US$320 million for 2008 and not quite surprisingly, the notes do not provide much detail on how it was arrived at.  Since recording impairment would reduce income of the company and therefore considered as conservative act, this research finds no reason to adjust the same.  Moreover, to record impairment there is need to compare market value and carrying value of the related assets. Market values may have changed from the date of recognition of adjustment but there still no reason that finding as of this writing.

2.1.d. Discontinued operations in 2006 and 2007 (see note 5 to the financial statements)

The company appears justified in reflecting accounting information for its discontinued operations.   It Note 5 to its financial statements  showed that during 2008 it had adopted a plan to dispose an office building located in Arizona which is no longer needed as the company has moved to another facility.

As per its determination, the carrying value of the building amounting to $6 million has not exceeded its market value resulting to non-provision of impairment loss (MDS, Inc., 2009).  There is no basis therefore to adjust discontinued operation accordingly since the company complied with SFAS No. 144.    Two product lines of the company failed to meet requirement of discontinued operations and therefore there is also no basis to adjust the same.

2.1.e. Office building held for sale in 2008 (see note 5)

Note 5 of the company’s financial statements mentioned that it was during 2008 that the company adopted a plan to dispose an office building located in Arizona, which is no longer needed as the company has moved to another facility. Per company’s determination, the carrying value of the building amounting to $6 million has not exceeded its market value and thus the company provided not impairment loss (MDS, Inc., 2009).  This researcher agrees with such decision of the management and hence no adjustment in income and cash should be made.

2.1.f. Acquisitions of Blueshift Biotechnologies Inc. in 2008 and Molecular Devices Corporation in 2007 (see note 4).

MDD reported to have acquired 100% of the commons shares of Blueshift Biotechnologies Inc.  in June 2008 to utilize the latter’s technologies in its analytical instrumentation and related product offerings (MDS, Inc., 2009).

Since the company has complied with SFAS No. 141 regarding Business Combinations, there is no reason to disturb the recorded amounts.   The same finding may be said to have been accomplished in case of its acquisition of Molecular Devices Corporation in 2007.

2.1.g. Investment in asset-backed commercial paper (see note 10(d))

The fact that the company has estimated the fair market value of its investments using currently available information and assumptions that market participants would use in pricing such investments would prove that the use of estimates on the company’s investment in asset-backed commercial paper as per note 10(d).

The company has already effected adjustments of its investments by recording an impairment loss based on its valuation estimates of the underlying assets and general economic conditions (MDS, Inc., 2009).  The company’s adjustment was indeed made when the financial statements and the same may be subject to further adjustments as admitted by the company’s management.

In the absence of an evidence to make further adjustment at this point, this researcher takes the position that no adjustment in the income and cash flow should be made at this point.

2.1.h. Tax benefit of losses carried forward (see note 21)

The tax benefit of losses carried forward appears justified.  Since the same account takes the nature of increasing the net income assuming the tendency is to bloat income, this researcher finds on reason to adjust the same based on the justifiable amount as determined. As reported in its note 21, its gross reserves for uncertain tax positions excluding interest and penalties amounted to $29 million and $26 million as of October 2008 and November 2007 respectively (MDS, Inc., 2009).

Although the company believes that gross reserves decrease  by $6 million due to the settlement of open tax authority audits during the 12 months ended October 31, 2009 but there is still no basis to adjust the same until the tax audit is completed under accounting standard on recognition of liabilities.

2.1.i. Any other significant unusual or non-recurring items that you believe should be adjusted.

This researcher finds no other or non-recurring items requiring adjustments.

2.2  Five questions to be answered in order to develop forecast for MDS’ revenues and expenses for 2009.

a. How much was historical growth in the sales revenues of the company?

b. What is historical gross margin, operating margin and net profit margin of the past few years?

c. Is the company making capital investments in the coming year that was not made for the past few years? If yes, how big it is to be in relation to the total assets of the company for 2008?

d. Will the macroeconomic variables like the interest rates, inflation, and economic growth be maintained in the coming year as compared with the previous years?  If not what are the changes?

e. How will the company adjust to planned changes in the external macroeconomic variables as answered in number if there are indeed such changes?

2.3 Provide your opinion on the overall quality of the financial statements (is it high, medium or low?) and explain your rationale by providing specific examples to support your opinion.

The overall quality of the financial statements is high considering that the external auditor has expressed an unqualified opinion on the company’s financial statements (MDS, Inc., 2009) and based on evaluation of certain items earlier in the paper.

The fact that no adjustment must be done to change the financial statements of the company, would proved the financial statements could be reliable as a way of determining its quality to be high.

2.4 Factors that the potential lender of US&200 million to MDS should consider in determining financing should be provided

The lender should evaluate the credit worthiness of MDS based on the five C’s of credit, which include the company’s cash flow, condition, capacity, character, and collateral (Pride, et. al, 2002). Cash flow refers to the company’s liquidity on whether projected cash flows could sustain the loan amortization.

Condition refers to the external condition in the economy in terms of macroeconomic variables like interest rates and inflation before determining whether the company’s operation could survive the upcoming macroeconomic conditions (Samuelson and Nordhaus, 1992).   Capacity refers to the company’s assets and financial strength on whether the long –term loan could reach maturity assuming that the loan would be long-term.

Character refers to the attitude of MDS in treating its creditors on whether it has the good credit standing of really paying its loan on time. Collateral refers to the assets that could secure the loan and if MDS has them.

3. Conclusion

The paper finds items reviewed to be taken correctly and require no adjustments as they are reported and restated in the financial statements of MDS for 2007 and 2008 due to absence of enough evidence to change them. Most of the items reviewed are about expenses that could reduce net income and cash flows.

Since management could be expected to understate or not recognize expenses, the company is reporting and recognizing them is rather conservative to consider and could add to the objectivity objectives of financial statement’s qualitative characteristics.

The fact the internal auditor has issue an unqualified opinion as to the fairness of the financial statements  which included the income statement and the cash flow statement lends some degree of reliabilities of the reported and restated accounts in the company’s financial statements.