Reference no: EM132492256
Point 1: Solstice Fitness Co. (Solstice) is a privately owned chain of high-end fitness clubs offering a range of services and amenities to its members, including state-of-the-art fitness facilities, group fitness classes, and luxury spa treatments. In an effort to further expand its range of offerings, Solstice acquired 100% of the shares of Onyx Health Bar (OHB) on January 1, 2020. OHB is an oxygen and IV-drip bar offering customers flavour-enhanced oxygen and vitamin IV infusions, which have been shown to boost the immune system, reduce stress, and enhance alertness.
Point 2: OHB's services are a perfect fit with the high-end, health-conscious image promoted by Solstice. While OHB currently has only one stand-alone location in Toronto, Solstice intends to eventually incorporate OHB-branded oxygen and IV-drip bars in all of its fitness clubs across Canada.
Point 3: It is now February 16, 2020. You, CPA, are a senior financial analyst at Solstice, and the controller, Jennifer Lee, has asked for your help dealing with a few issues she has noted since the acquisition. Solstice and OHB are still in the process of integrating their financial reporting systems. While Solstice has established financial reporting processes and systems controls in place, Jennifer is skeptical about the manual processes in place at OHB. Both Solstice and OHB apply accounting standards for private enterprises (ASPE).
Question 1: Identify any risks that may exist related to the integration of the two systems and, where possible, provide recommendations to alleviate these risks.
OHB system
Robyn maintains a schedule of property, plant, and equipment in an Excel document on her laptop. When a fixed asset is purchased, Robyn manually adds it to the schedule, and a formula is used to calculate the monthly depreciation to be taken on each asset. Based on this, Robyn prepares monthly journal entries to record new additions, disposals, and depreciation on the fixed assets.
Solstice system
Solstice maintains a fixed asset register within its customized cloud accounting system, AirTrack. Details of additions and disposals are entered manually into the system but require electronic approval from a secondary reviewer who compares the entry to an electronic copy of the original invoice. Monthly depreciation is automatically calculated by the system using the straight-line method over the useful life recorded at the time of the addition. The system prepares and posts an automated journal entry to record the depreciation each month.
Conversion plan
Robyn will send staff from the Solstice IT department a copy of OHB's records. The IT staff will then manually enter the data into the AirTrack system, where the assets will be tagged with different company numbers to differentiate between Solstice and OHB assets. As it would be time-consuming to have someone review each new record, the IT staff will override the system controls to mark the OHB asset additions as reviewed and approved when entered. All assets will be entered at their carrying value on the date of entry. Going forward, AirTrack will automatically calculate depreciation for both the OHB and Solstice assets. Once all of the data has been entered, IT will give Robyn approval to delete the original records from her laptop.