Wellness Medical System Inc. (“Wellness”) is a privately held company specializing in medical software for mental healthcare professionals in Canada. The company has been operating from its headquarters in Vancouver since January 2, 2018. The company financial statements are unaudited and prepared in accordance with ASPE.

Wellness’ customers are mainly mental healthcare professionals, such as psychiatrists, psychologists, family physicians, and licensed counselors and therapists across Canada.

Revenue

The cost of the Wellness system solution is $42,000 per medical practitioner over a 4-year period.

Since its inception, the company has always recognized all its revenue at the time of sale upon receipt of a signed contract. Each contract takes an average of six (6) months to complete, i.e. from project implementation, hardware setup, to training. For example, if Wellness receives a signed contract on August 1, 2022, the company will record $42,000 in revenue on that date.

At the end of 4 years, there is an annual fee for the software license renewal which is $2,400 per healthcare professional. The amount is automatically and fully recorded at the time when the software license expires. For example, if the software expires on March 1, 2022 for Dr. Smith, the company will automatically record $2,400 on March 1, 2022, assuming that Dr. Smith will renew its software.

Here are the annual historical revenues:

YE 2021

Accounts Receivable

$1,200,000 1,600,000 2,100,000 3,000,000

YE 2018

YE 2019

YE 2020

Given that their clients are financially sound, Wellness only writes off when any payment becomes uncollectible.

In late 2020, to improve the cash flow and liquidity, the company decided to factor in $80,000 of its receivables with recourse. The company removes $80,000 from its accounts receivable and recorded an interest expense of $5,000.

Computer Equipment

When the computer equipment was initially purchased in 2018, the company had to arrange for long-distance transportation from Texas, costing $12,000. Insurance while in transit was $10,000. The company also had to pay technical engineers to install and set up the equipment, costing $13,000. Start-up and testing costs were $5,000. Import duties paid were $10,000. A total expenditure of $50,000 was fully expensed in 2018.

In January 2021, the company traded one of its IBM servers (Model 2018) with a newer HP server (Model 2020). Below are the details of the exchange. Based on the technical specifications, the new HP server will result in an improved level of efficiency for the development team at Wellness. At the same exchange, Wellness recorded the transaction as having no commercial substance.

The historical cost of IBM server

Accumulated depreciation of IBM server

The fair market value of IBM server

The fair market value of HP server

Cash paid

$195,000 35,000 170,000 185,000 15,000

For the year ended Dec 31, 2021, the company controller gathered the following information on the computer equipment. Despite evidence from internal reporting showing performance below expectations, no impairment was recognized. The company has not conducted any revaluation or impairment since its inception.

Refer to P10-19

Original cost

Accumulated depreciation

Fair value

Costs to sell

Incremental cash flow 2018

Incremental cash flow 2019

Incremental cash flow 2020

Incremental cash flow 2021

Incremental cash flow from 2022 to 2027

$650.000 260,000 370,000

10,000 90,000 80,000 70,000 60,000 20,000

Cost of capital 2%

Government Grant

The Canadian government is actively promoting eHealth solutions for both patients and medical professionals across Canada. In 2018, the federal government provided a forgivable loan of $200,000 to assist Wellness with the purchase of computer equipment which is supposed 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 Wellness. The company has managed to fulfill this condition except in 2020 when it did not hire any recent graduates in the software development department.

Investment

In 2019, Wellness purchased 6,000 Telus shares for $31 per share (a total of $186,000). Wellness designated 50% of Telus shares as FVPL while irrevocably elected to record the remaining 50% as fair value changes through OCI. P7-35

Wellness held these shares until October 2021, when it sold them for $36 per share. During these three years, Telus paid dividends of $1 per share on November 31. On Wellness’ fiscal year end on December 31, Telus shares closed at $34, $29, and $38 in 2019, 2020, and 2021 respectively. However, Wellness has always recorded its share price at $31 every fiscal year.

At the year-end of December 31, 2021, Wellness has decided to put the business up for sale in order to capitalize on the tech boom in the medical healthcare industry. GenX Corporation is a prospective buyer. Before proceeding with a full review and due diligence on Wellness, GenX has hired your auditing company to conduct some initial reviews on Wellness’ financial transactions. GenX’s accounting policies are based on the IFRS framework.

2. Project Report (95%) – DUE Aug 5/11:59 pm Based on the list of issues you have initially submitted, you will then be required to provide a comprehensive report outlining: What accounting policies have been violated for each of the above transactions? What implications do they have on the financial statements? What problems do you see arising based on GenX’s perspective as the potential buyer? What should have been the correct journal entries and calculations for these transactions in order to comply with IFRS and ASPE? What adjustments should be made now in order to reflect a reliable, accurate financial statement for year-end 2021?