Memo To: Denise Toulouse From: CPA, Investigation Team RE: Elcar analysis Variance analysis of Platinum costs Based on the analysis performed in exhibit 1, Elcar has spent 96558 additional amount is costs, then the budget, and produced 30 fewer units. The reason for this variance is driven by a higher cost per gram of platinum, the lack of accountability of wastage. Wastage should be expensed as cost of goods sold and credit inventory to remove the asset from the balance sheet. K3Press Contract Elcar is currently determining whether to cancel the K3Press contract as units required to be purchased compared to units required by the company are significantly higher. As per exhibit 2, the quantitative analysis suggests continuing with the contract as this results in lowest costs for Elcar. Elcar can cancel the contract today, and purchase the 2000 units required in 2021 at the market price of $160 per unit. This results in a total cancelling cost of 535,000. If they keep the contract, and sell the 5900 units they don't require in operations, the total cost of the contract is $527,220. From a qualitative perspective, it is also beneficial to continue with the contract as Elcar may need to do business with K3Press in the future, and don't want a bad relationship with the supplier. If the contract is cancelled and additional units are purchased from another supplier, Elcar cannot be assured the quality and timing of units required will be ideal. Key Measures Report NHC's objective with its investment in Elcar is to make a 25% return and potentially sell the business. NHC wants to better monitor Elcar's financial results and whether to further fund Elcar Therefore, NHC is interested in key measures related to profit and cashflows. Number of vehicles ordered, number of staff and grams of platinum purchased do not provide with any useful information regarding funding. In order to determine whether El car requires funding, NHC is comparing cash in vs cash out, and the excess or deficiency that exists. The total costs of vehicles ordered, salaries, and platinum purchased provide a more clear picture of funding required. The current ratio also assists in providing an understanding of the financial position of the company, as the ability to pay debt is expressed. Other key measures which would assist in NHC's objectives would be accounts receivables balances, debt repayments, and financing acquired.
Foreign currency transactions Issue: A new accounts payable module was implemented on April 19, 2020 causing glitches. Implication: Some accounts payable accounts were translated at the April month end date instead of the May 30 spot rate, as required by IFRS for current assets and liabilities. Recommendation: Adjust the accounts payable balances to reflect the correct CAD amounts as calculated in Exhibit 3. The adjustments will result in an exchange loss and increase in accounts payable. Car Sales made under new marketing program Issue: Battery is replaced on vehicles purchased when a new model is available, with no requirement to return the old battery. Analysis: 1. Identify the contract (a) the parties to the contract have approved the contract (in writing, orally or in accordance with other customary business practices) and are committed to perform their respective obligations; - MET - obligation to provide car and battery (b) the entity can identify each party's rights regarding the goods or services to be transferred; - met - customer provides cash, Elcar provides vehicle and battery (c) the entity can identify the payment terms for the goods or services to be transferred; - met cost of car is $37,806, battery price is $9,000 (d) the contract has commercial substance (ie the risk, timing or amount of the entity's future cash flows is expected to change as a result of the contract); and - Met - company receives cash from customer (e) it is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. In evaluating whether collectability of an amount of consideration is probable, an entity shall consider only the customer's ability and intention to pay that amount of consideration when it is due. The amount of consideration to which the entity will be entitled may be less than the price stated in the contract if the consideration is variable because the entity may offer the customer a price concession -MET - no indication of cash collectability issues 2. Determine the performance obligations (a) a good or service (or a bundle of goods or services) that is distinct; or - vehicle and battery and separate goods which can will be satisfied over different period of time (b) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer 3. Determine the transaction price - $37,806 4. Allocation the transaction price - as per exhibit 4
5. Record revenue as performance obligations are satisfied An entity shall recognise revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (ie an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset.- vehicle obligation will be recognized upon delivery. Battery obligation will be satisfied over time when batteries become available and are replaced. Recommendation: Currently, Elcar is recording the full amount of revenue. As the new generation batteries are not ready for production, an estimate of the allocation to each performance obligation cannot be determined. Once this information is available, a deferred revenue amount will need to be recorded, and then recognized as revenue when the battery is replaced. K3Press Contract Issue: to determine the obligation that is unavoidable upon the cancellation of an onerous contract. Analysis: As calculated in exhibit 5, the cost of fulfilling the contract is 207,250. The cost to currently cancel the contract is 215,000. IFRS requires the lower of the two amounts to be recorded as a provision. Recommendation: A onerous contract expense and onerous contract liability should be recorded for the amount of $207,250. Future dismantling of battery construction facility Issue: new environmental legislation was passed that requires companies with battery construction facilities to properly decommission those facilities at the end of their useful lives in order to remediate any environmental damage. Elcar has obtained a quote from a third party, who is willing to dismantle the battery construction facility and contents and clean up the site for $185,400 in today's dollars. Analysis: A provision shall be recognised when: (a) an entity has a present obligation (legal or constructive) as a result of a past event; - MET - legally required to dispose of the asset (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and - met - will need to pay a company to dismantle the battery (c) a reliable estimate can be made of the amount of the obligation. - met - price is 185,400 in today's dollars
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