GROUP 1 RESEARCH ACTIVITY 2

CASE ANALYSIS- ABI HIGH TECH SUGGESTED SOLUTION

1. Context & Financial Reporting Objective

Role: As the Accounting Manager of ABI High Tech Inc., the role involves overseeing the financial
reporting process and ensuring the accuracy and compliance of the company's financial statements
with relevant accounting standards.

Constraints:

 ABI is one of the smaller public companies listed on Toronto Stock Exchange with a fiscal year
end of December 31, needs to follow IFRS in its financial reporting.
 ABI must maintain a debt-to-equity ratio of less than 1.5 as required by the loan agreement with
the local bank.
 Audited financial statements must be submitted within 3 months of the company's year-end (by
March 31, 2025).
Stakeholders and FRO (bias):

 Management might present financial results in a way to meet targets by applying techniques
such as aggressive revenue recognition, deferring expenses, or manipulating amounts to smooth
earnings or meet expectations.
 Shareholders and investors might pressure management to report strong financial performance
to increase stock prices and dividends.
 Management might present a more favourable financial position to secure better loan terms or
refinancing options. In order to maintain debt-to equity ratio less than 1.5, it can lead to biased
reporting, such as premature revenue recognition or understated liabilities.
 Others: Emphasis on regulatory compliance might overshadow the true economic substance of
transactions.
Summary (Overall FRO): Here ABI High Tech might aggressively apply GAAP (specifically IFRS) and
the associated risks with it.

2.Issue Identification and Analysis

There were two major issues: -
a) Revenue Recognition for the Contract with First Choice Protection
b) Impact of the February 1, 2025, Fire on the 2024 Financial Statements
a) Revenue Recognition for the Contract with First Choice Protection
The primary issue here is Determining how to recognize revenue and expenses for the
contract with First Choice Protection due to its multi-component nature, including computer
hardware, installation, and networking services.
Analysis: According to IFRS 15 "Revenue from Contracts with Customers," revenue
recognition should be based on the following five-step model:
Identify the contract with a customer: - The contract with First Choice Protection is clearly
defined with agreed-upon terms.
Identify the performance obligations in the contract: -The contract has three performance
obligations:
-Delivery of computers
-Installation of computers
-Networking services
Determine the transaction price: -The total transaction price is $75,500.
Allocate the transaction price to the performance obligations: The allocation should be
based on the stand-alone selling prices of each component. The normal retail prices
provided are:
-Computers: $46,000
-Installation: $22,500
-Networking: $10,800
Total stand-alone selling prices: $79,300
Allocation of transaction price: [(Allocated price/Total price) *Transaction Price]
-Computers: 43,798
-Installation: 21,409
-Networking: 10,293
Recognize revenue when (or as) the entity satisfies a performance obligation:
-Computers: Delivered on December 21, 2024, hence revenue for computers ($43,798)
should be recognized in 2024.
-Installation and Networking: These services are to be completed by January 10, 2025.
Hence, the revenue for installation ($21,409) and networking ($10,293) should be
recognized in January 2025.

b. Impact of the February 1, 2025, Fire on the 2024 Financial Statements

Assessing the impact of the fire incident on February 1, 2025, on the financial statements for
the fiscal year ending December 31, 2024, including potential property damage, repair costs,
and insurance claims
Analysis:
According to IAS 10 "Events after the Reporting Period," The fire on February 1, 2025, is a
non-adjusting event because it occurred after the year-end and does not provide additional
evidence about conditions that existed as of December 31, 2024.
However, if the event is material, IAS 10 requires disclosure of the nature of the event and
an estimate of its financial effect, or a statement that such an estimate cannot be made.

3.Recommendations
Revenue Recognition: Recognize $43,798 in revenue for the delivery of computers in 2024.
Recognize the remaining $31,702 in January 2025 for the installation and networking
services.
Fire Event Disclosure: Do not adjust the 2024 financial statements. Disclose the fire event
and its potential financial impact in the notes to the financial statements.

4.Impact:
Implementing these recommendations significantly addresses the identified issues:
For Revenue Recognition Complexity: Reviewing the contract ensures compliance with
accounting standards.
Allocating contract prices enhances financial reporting transparency.
Documenting rationale behind decisions assures stakeholders of sound accounting practices.
For Post-Year-End Event Impact:
Immediate assessment of property damage allows prompt recognition of losses.
Accurate repair cost estimation mitigates financial misstatements.
Transparent communication maintains trust.
Collaboration with insurers speeds up claims processing.
Detailed records ensure compliance and reduce risks.
These steps help the company navigate complex accounting issues and respond effectively
to unforeseen events, ensuring financial integrity and stakeholder confidence.

Group 1 Members
Student Name Student Number
1. Manpreet Singh 220925756
2. Rahul Aggarwal 221019369
3.Priyanka Agarwal 220979670
4. Priya 220139887
5. Diksha 221065198
6. Simar Singh Ahuja 220172136