Roman Systems Case Solution
Roman Systems Incorporation, a private Canadian firm, was incorporated by its sole shareholder Marge Roman, 12 years ago. The key business of Roman Systems Inc. involves the manufacturing, installation and support services of the surveillance cameras. The company approached a high growth during the period of 7th to 9th years of its incorporation. The rapid expansion of RSI was based upon debt financing and due to the huge number of contracts signed by the company with different banks, for the installation of the security cameras at different branches of the banks.
As a result of high growth, it was pretty sure that the company would go public in the next fiscal year. Based on such anticipation, Marge Roman wanted to bring the high sales growth highlights in the year end press meeting. Before going public, Marge wanted the financial statement to be adjusted in a way that investors get attracted towards the company, by looking at the high sales growth, ultimately maximizing the net income and the shareholder’s equity. In addition, the Canadian public companies are required to follow the IFRS reporting standards, but the RSI Company had been following the IFRS standards in preparation of its financial statements since its incorporation, though the company is required to prepare the financial statements in compliance with the IFRS guidelines. As the company is going public now, it is necessary for the company to prepare financial statements in accordance with IFRS guidelines for multiple years of its operation.
The interim audit over the interim financial statements have shown a few issues, which need to be solved in accordance with IFRS standards. The issues include the accounting related to new general ledger software costs, maintenance and the contract revenue recognition, ABM business related revenue recognition, the accounts receivable of Mountain and the debentures.
According to IFRS standards, the capitalization of the asset should include the ancillary charges and the capitalized interest for placing the asset into the desired location. Ancillary charges should be related directly to the asset acquisition, such as freight charges, professional fee, site preparation or asset installment charges. In the case of RSI, the whole costs of $720,000 have been capitalized in the balance sheet. However initial asset recommendations, training and other consultancy are not directly associated with the acquisition of the new accounting software. Moreover, the salaries of the employees, who have worked on the accounting software project are also capitalized. Rather, these salaries and expenses must not have been capitalized and these should be recorded as expenses in the income statement as an expense item, on an accrual basis.
In addition, the company’s accounting for revenue needs to be adjusted with the IFRS guidelines. It is because the company recognizes its revenue after the sign off by the customer and it has been noticed the sign offs usually took after a month or two………………………
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