Environmental Inc. operates in Canada and the United States. Its basic business is high-temperature treatment services for contaminated soil. In its 2020 financial statements, the company had a loss of $9.3 million (and an accumulated deficit of $43.7 million).
In the notes to the financial statements, the company stated that it deferred certain transportation costs and recorded them as assets. These costs relate to shipping contaminated materials to the treatment plant. They are reimbursable under the terms of the contract. Per Note 10, the company can only run efficiently when it operates continuously for extended periods; however, demand for the services is sporadic. Therefore, the company’s business model is structured such that it shuts down operations and otherwise stockpiles inventory. These shutdown periods are followed by active periods during which it processes the stockpiled inventory. Revenues for 2020, a shutdown period, were $0. In addition, the company received a subpoena from the U.S. Department of Justice regarding conspiracy to commit fraud with respect to the bidding process on a government project. During 2020, the courts stayed proceedings, essentially halting them for the time being.

Instructions

Assume that the financial statements must be issued prior to the resolution of the lawsuit. Discuss the financial reporting issues. The company’s shares are publicly traded.