Did anyone read the auditor report? Highlighted the two key issues of the company.
1. Recognize revenue upfront but then make estimates on how much things will cost in the future. Oops, inflation happened.
2. Only $49 million of value for the ETC acquisition on the books. $102 million for (ummm, gulp) "intangible" assets
Key Audit Matter
Revenue recognition – Intelligent Transportation Systems
The Company’s Intelligent Transportation Systems segment sells integrated systems with distinct performance obligations which involve the design, manufacturing and installation, maintenance and warranty of long-term projects that can span over periods beyond one year. Revenues for these fixed price integrated systems contracts are recognized over the progress towards completion of the performance obligations of the contract using a percentage-of-completion method. This method is measured by reference to costs incurred relative to the total estimated costs. The Company’s policy for revenue recognition together with the related significant accounting estimates and assumptions is described in note 2 of the consolidated financial statements. For the year ended December 31, 2021, the Company’s Intelligent Systems segment recognized $100 million of revenue which includes revenues earned from fixed price integrated systems contracts.
The determination of the estimated costs to complete for each integrated system fixed price contract that is open as at the reporting date requires significant judgment in order to determine the amount of revenue to be recognized.
We determined that revenue recognition for open contracts for the Intelligent Transportation Systems segment is a matter of significance to the audit due to the significant judgment made by management in determining the estimated costs to complete for fixed priced contracts and, where applicable, the estimation of any loss on a project. Remaining costs to complete including material, labor and subcontracting costs, among others, are unique to each project, resulting in a high degree of auditor judgement, subjectivity and effort in performing procedures related to testing these estimates as of the reporting date.
Business Combination – valuation of acquired intangible assets
As disclosed in note 4 of the consolidated financial statements, the Company acquired all of the issued and outstanding shares of Electronic Transaction Consultant (“ETC") for cash consideration of $151 million.
The acquisition is accounted for as a business combination in accordance with IFRS 3, the estimates of which are subjective in nature in determining the fair values of identified intangible assets.
The primary element of the valuation and purchase price allocation process was to assess the fair value of intangible assets of $102 million in the form of customer relationships, technology and trade name.
Business combinations is a key audit matter in the audit due to significant management judgement in evaluating the inputs and assumptions used in the determination of fair value. The key inputs and assumptions include revenue growth, customer attrition, earnings margin and discount rate. Changes to these significant assumptions could have a significant impact on the fair value of acquired intangible assets.