Global Solutions Ltd. (GLS) provides technology solutions to manufacturing companies. GLS is a wholly owned subsidiary of Northern Technologies Inc. (NTI), a publicly owned company. In 2016 GLS was performing poorly and NTI considered selling the company for the best offer. As a last resort NTI hired turnaround specialist Benjamin Sisko to more effectively manage and salvage GLS. Mr. Sisko signed a three-year employment contract specifies that in addition to an annual salary he would receive a $10 million cash bonus after the end of the 2019 fiscal year if GLS meets a number of performance objectives over the 2017 to 2019 period. For 2017 and 2018 Mr. Sisko achieved the objectives. To meet the performance objectives for 2019 GLS must report net income in excess of $30 million. Mr. Siskos employment contract ends on May 1, 2020 and he has stated he will leave the company at that time.

It is now January 25, 2020. GLSs financial statements for the year ended December 31, 2019 have been received at NTIs corporate offices. GLSs net income for 2019 is $30,550,000. NTIs CFO has examined the financial statements and is satisfied with most aspects of them but is concerned with the reporting of some transactions and economic events. The issues of concern are described in Exhibit A. The CFO has asked you, a CPA in the finance department, to prepare a report evaluating the issues. Mr. Sisko has already called the CFO to arrange a meeting to discuss the financial statements and the payment of the bonus. The CFO wants your report to explain the problem in each issue, identify reasonable alternatives, and provide full support for your recommendations.

NTI and GLS report using IFRS.

Required:

Prepare the report requested by the CFO.

Exhibit A

Issues Identified by the CFO on GLSs 2019 Financial Statements

1. On July 29, 2019 the company made a payment of $250,000 to a computer hacker who obtained access to the computer code to GLSs proprietary software that is used to produce some of GLSs products. The hacker had given the company ten days to pay or she would sell the information to a competitor. Management believed that if the information was obtained by a competitor it would have significant negative consequences for the company. GLS has capitalized the amount of the payment and is amortizing it over the remaining life of the related assets.
2. GLS has always shut down for one week in the late December for routine maintenance of the companys equipment. The annual maintenance is essential to ensure that the equipment can meet the precise specifications of customers. For the past three years, maintenance has been completed by the end of December. The annual maintenance originally scheduled for December 2019 was delayed until the first week of January 2020 because of scheduling problems with the company that does the maintenance and because GLS had a number of contracts it wanted to complete by the end of December. The last maintenance was done in December 2018. GLS paid $425,000 for January 2020 maintenance work.
3. In the last week of December 2019 GLS delivered a $1,250,000 order to a new customer. A contract was signed between GLS and the customer in September 2019. The customer has been having financial difficulties so GLS provided special financing terms that gave the customer 18 months to pay instead of the usual 30 days. Payment is guaranteed by the company that owns the customer. GLS also included in the price an expanded two-year warranty that provides on-site service within 24 hours, which is normally available to customers for an additional $150,000. The product is a standard item with only minor modifications to meet the needs of the customer. The contract stipulated that the order was to be delivered on January 15, 2020 but because of an opening in the production schedule GLS was able to complete the order several weeks early. Once the order was completed it was shipped to the customer. The customer agreed to accept early delivery before GLS shipped the order and GLS gave the customer a $100,000 discount as a result. The customer indicated that it would have no use for the items delivered until mid-January and would not be able to test or install it until that time. The cost of the order was $700,000. GLS recognized revenue when the good were delivered, which is its revenue recognition policy.