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You are the CFO at ABC Inc., a public company listed in Toronto Stock Exchange (TSX). Its basic business is high-temperature treatment services for contaminated soil. It is now December 9^th, 2022, and you just came back from a preliminary meeting with John Back, a bank loan officer who expressed concerns over the draft financial statements for fiscal year ending November 30, 2022. The purpose of your meeting with John was to seek an additional loan of $15 million as soon as possible. John suggested that the additional loan could not be advanced based on current profitability ratio and that ABC was actually in violation of covenants on existing debt of $10 million. As such, the bank could even demand repayment immediately if final financial statements show the same ratios.

In its 2022 financial statements, the company had a loss of $9.3 million (and an accumulated deficit of $30.5 million).

In the notes to the financial statements, the company stated that it deferred certain transportation costs and recorded those costs as assets. These costs relate to shipping contaminated materials to the treatment plant and are reimbursable by the customer under the terms of the contract. Per Note 10, the company can only run efficiently when it operates continuously for extended periods of time; however, demand for the services is sporadic. Therefore, the companys business model is structured such that it shuts down operations and otherwise stockpiles the contaminated soil inventory. These shutdown periods are followed by active periods during which it processes the stockpiled inventory. Revenues for 2022, a shutdown period, were $0.

Required

Assume the role of ABCs CFO, and discuss the financial accounting issue you identified in preparation of final financial statements for fiscal year ending November 30, 2022 (use the case analysis framework covered in the course, refer to the Discussion Section for reference if needed).

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