Creative Systems Co. ("Creative") is a privately held corporation specializing in learning management systems solutions in the digital environment. Their proposed solutions, similar to Blackboard, for example, are implemented in small post-secondary education institutions across Canada. The company has been operating from its headquarters in Vancouver since January 2, 2020. Creative financial statements are unaudited and prepared in accordance with ASPE.

Revenue

The selling price of Creative system solution is $40,000 per educational institution over a 4-year period. The price covers both, the access to a platform interface and the hardware (such as workstation, projector, and printer) at $30,000 and $10,000 respectively per client.

Additionally, Creative also provides customized software solutions to cater to the specific educational issues. Such customization will be an additional cost for the post-secondary institutions.

Creative prides itself in providing a one-stop system solution for their clients. As such, the company has partnered with Stellar Technologies Co. (Stellar) that provides the hardware to Creative' clients. Through this partnership, Stellar pays Creative a referral fee which is 10% of hardware cost for every sale.

Since its inception, the company has recognized all its revenue at the time of sale upon receipt of a signed contract.

From the date the contract is signed, Creative takes an average of three (3) months to establish functionality: from project implementation, hardware setup, to training.

At the end of 4 years, there is an annual fee for the software license renewal which is $1,500 per each contract sold to the post secondary education institution. The amount is automatically and fully recorded at the time when the software license expires.

Here are the annual historical revenues:

Year 2020 $1,200,000

Year 2021 1,600,000

Year 2022 2,100,000

Year 2022 3,000,000

Accounts Receivable

Given the relation developed with the customers, Creative writes off only when any payment becomes uncollectible. In late 2022, to improve the cash flow and liquidity, the company decided to factor $80,000 of its receivable with recourse. The company removes $80,000 from its accounts receivable and recorded an interest expense of $5,000.

Computer Equipment

In 2020, Creative had purchased its computer equipment in Gander (Newfoundland and Labrador). Related transportation cost amounted to $12,000. Insurance while in transit was $20,000. The company also had to pay technical engineers to install and setup the equipment, costing $13,000. Start-up and testing costs were $5,000. Total expenditure $50,000 was fully expensed in 2020.

In January 2023, the company traded one of its IBM server (Model 19) with a newer HP server (Model 23). Below are the details of the exchange. Based on the technical specifications, the new HP server will result in improved level of efficiency for the development team at Creative. At the same of exchange, Creative considered the transaction without commercial substance.

Historical cost of IBM server 20	$195,000
Accumulated depreciation of IBM server 20	35,000
Fair market value of IBM server 20	170,000
Fair market value of HP server 23	185,000
Cash paid	15,000

For the year ended Dec 31, 2023 the company controller gathered the following information on the computer equipment. Despite evidence from internal reporting shows performance below expectations, no impairment was recognized. The company has not conducted any revaluation or impairment since inception.

Original cost $650.000

Accumulated depreciation 260,000

Fair value 370,000

Costs to sell 10,000

Incremental cash flow 2020 90,000

Incremental cash flow 2021 80,000

Incremental cash flow 2022 70,000

Incremental cash flow 2023 60,000 Incremental cash flow 2024 to 2029 20,000

Cost of capital 2%

Government Grant

The Canadian government is actively promoting e-solutions to assist small post-secondary education institutions across Canada. In 2020, the federal government provided a forgivable loan of $200,000 to assist Creative with the purchase of computer equipment which is estimated to have a useful life of 10 years. When the funding was received, the company treated it as a normal expense debiting cash and crediting other income.

The loan would be forgiven over five years on the condition that the company employs at least two recent graduates per year in the software development at Creative. The company has managed to fulfill this condition except in 2022 where it did not hire any recent graduates in the software development department.

Investment

During 2021, Creative purchased 6,000 Royal Bank shares for $31 per share (total $186,000). Creative designated 50% of Royal Bank shares as FVPL while irrevocably elected to record the remaining 50% as fair value changes through OCI.

Creative held these shares until October 2023, when it sold them for $36 per share. During these three years, Royal Bank paid dividends of $1 per share on each November 31. On Creative' fiscal year end at December 31, Royal Bank shares closed at $34, $29 and $38 in 2021, 2022 and 2023 respectively. However, Creative has always recorded its share price at $31 at every fiscal year.

At year end December 31, 2023, Creative has decided to enter negotiations to sell the business, in order to capitalize on the tech boom in the postsecondary education industry. Avenir Co. is a prospective buyer. As a preliminary step, Avenir Co. has hired your auditing company to conduct an initial evaluation of Creative financial transactions. Avenir Co. follows the IFRS framework.

PROJECT REQUIREMENTS

A. Project Summary (5%) Your group represents the consultants/auditors for Avenir Co. Based on the information presented in the scenario, list the key issues. Note: The summary should be no more than one page.

B. Project Report (95%) Following the summary of issues, you have identified in part A of this project, provide a comprehensive report outlining:

What accounting policies have been violated for each transaction identified as problematic?

Prepare the required calculations and journal entries that would convert the problematic transactions identifies in part A, from ASPE to IFRS compliance.

What adjustments you would recommend to Creative, to ensure that the financial statement at year-end 2023 reflect a reliable, accurate information?