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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.
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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 ba
el. 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
y XXXXXXXXXXThis 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 Fe
uary 23, 2020, www.
itannica.com/topic/whiskey.
2 All cu
ency 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
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value of whisky considerably. The surge in popularity had led to a rising trend of whisky ba
els being
purchased by collectors and investors around the world, particularly in Asia. Whisky ba
els 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 ba
els
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 bou
on ba
els, Highland decided to use
the much rarer—and thus, more valuable—Spanish she
y ba
els. Ultimately, Highland’s production
volumes would be limited by the availability of these ba
els, 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 ba
el,
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 she
y ba
el.
Each ba
el, 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 ba
el of whisky a unique opportunity.
Highland’s Internal Processes
Customers could place orders for ba
els 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
ands 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 ba
el 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
a
els for the customer. After the order was filled and the reserved ba
el 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
efund 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=refe
al&utm_campaign=Paid_globenewswire.
4 Ba
els 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 Fe
uary 23, 2020, https:
thewhiskeywash.com/whiskey-styles/american-whiskey/what-is-the-angels-share.
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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 ba
els 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