Accounting

Question 1

Accounts Receivable Aspe

Answer 1

• Considered a financial instrument (financial asset), as it represents a contractual
right to receive cash or another financial asset from another party
• As such, accounts receivable must be tested for impairment at the end of the
reporting period if significant adverse changes during the period cast doubt on
collectability
• If impaired, then should be written down to the amount expected to be collected
through the use of an allowance account
• The amount of the reduction shall be recognized as a bad debt expense in net
income.
Reference: ASPE 3856.05(h),

Question 2

Inventory valuation (ASPE

Answer 2

• Inventories shall be measured at the lower of cost and net realizable value
(NRV).
• The cost of inventories shall comprise all costs of purchase, costs of conversion,
and other costs incurred in bringing the inventories to their present location and
condition.
• NRV is the estimated selling price in the ordinary course of business less
estimated selling costs
• Estimates of NRV are based on the most reliable evidence available, at the time
the estimates are made, of the amount the inventories are expected to realize
upon sale.
Reference: ASPE 3031.07, .10-12, .29

Question 3

,Inventory costs (ASPE)

Answer 3

• The cost of inventories shall comprise all purchase, conversion and other costs
incurred in bringing the inventories to their present location and condition
• Trade discounts, rebates and other similar items are deducted in determining the
costs of purchase
• Storage, administrative overhead, and selling costs are specifically excluded from
the cost of inventories
Reference: ASPE 3031.11, .12, .17

Question 4

Internally generated intangible assets – R&D (ASPE)

Answer 4

• Research costs are always expensed when incurred
• Accounting policy choice to either capitalize or expense development costs
• Development costs can be capitalized if all of the following exist:
o Technically feasible
o Intention to complete it
o Ability to use or sell it
o Availability of adequate technical, financial and other resources to
complete the development
o Ability to reliably measure the expenditures attributed
o Probable future economic benefits will be generated

Question 5

Goodwill and intangible assets – Amortization (ASPE)

Answer 5

• Intangibles are to be amortized over their estimated useful lives unless they are
considered to have an indefinite life
• Assets with indefinite lives are not to be amortized until the life is no longer
considered indefinite (however it must still be tested for impairment)
• Amortization method and useful life should be reviewed annually
• The expected useful life must consider:
o expected use of the asset,
o expected useful life of related assets,
o contractual, legal and regulatory provisions and other economic factors
Reference: ASPE 3064.56, .57, .61

Question 6

Investments (ASPE)

Answer 6

• Investments subject to significant influence can be accounted for using the equity
or cost method
• Investments without significant influence:
o Not quoted on an active market – accounted for using cost method
o Quoted on active market – accounted for at fair value
Reference: ASPE 3051 and 3856.11 - .15

Question 7

Financial instruments – Impairment (ASPE)

Answer 7

• Financial instruments tested for impairment at the end of each reporting period.
Where impairment exists, reduce the carrying value to the highest of:
o Present value (PV) of cash flows expected from holding the asset
o Net realizable value (if asset sold)
o Amount entity expects to realize from exercising its right to collateral
• Impairment can be reversed if asset subsequently recovers in value
Reference: ASPE 3856.16 - .19

Question 8

Revenue recognition – Consignment sales (ASPE)

Answer 8

• Consignment sales include goods shipped but not yet billed
• They could be returned if not sold or only billed for to the extent sold
• Performance is not considered complete upon delivery for such goods, as the
risks and rewards are deemed not to have been transferred from the seller to the
buyer because of the seller’s continuing involvement
• As such, revenue cannot be recognized up until either the goods can no longer
be returned or a payment is made in regards to them
Reference: ASPE 3400.13 - .15

Question 9

Asset criteria (ASPE)

Answer 9

Definition of an asset:
• Future benefit
• Entity can control the benefit
• Event that caused benefit already occurred
Reference: ASPE 1000.25

Question 10

PPE – Betterments (ASPE)

Answer 10

• A “betterment” enhances service potential (increase in physical output or service
capacity, associated operating costs are lowered, useful life is extended, or
quality of output is improved)
• If the expenditure can be classified as a betterment → capitalize asset
• If the expenditure cannot be classified as a betterment → expense as repair and
maintenance
Reference: ASPE 3061.14

Question 11

Non-monetary transactions (ASPE)

Answer 11

Non-monetary transactions (ASPE)
• Asset exchanged in a non-monetary transaction should be measured at the more
reliably measurable of the fair value of the asset given up and the fair value of the
asset received, unless the transaction lacks commercial substance or neither the
fair value of the asset received nor the fair value of the asset given up is reliably
measurable, in which case, it should be measured at the carrying value of the
asset given up
• A non-monetary transaction has commercial substance when the entity’s future
cash flows are expected to change significantly as a result of the transaction, i.e.
o the risk, timing and amount of the future cash flows of the asset
received differ significantly from the risk, timing and amount of the cash
flows of the asset given up; or
o the entity-specific value of the asset received differs from the entity-
specific value of the asset given up, and the difference is significant
relative to the fair value of the assets exchanged

Question 12

Non-monetary transactions (IFRS)

Answer 12

• Asset exchanged in a non-monetary transaction should be measured at the more
reliably measurable of the fair value of the asset given up and the fair value of the
asset received, unless the transaction lacks commercial substance or neither the
fair value of the asset received nor the fair value of the asset given up is reliably
measurable, in which case, it should be measured at the carrying value of the
asset given up
• A non-monetary transaction has commercial substance when the entity’s future
cash flows are expected to change significantly as a result of the transaction, i.e.
o the risk, timing and amount of the future cash flows of the asset
received differ significantly from the risk, timing and amount of the cash
flows of the asset given up; or
o the entity-specific value of the asset received differs from the entity-
specific value of the asset given up, and the difference is significant
relative to the fair value of the assets exchanged
Case: Dogani
Reference: IAS 16.24-.26

Question 13

Impairment of long-lived assets (ASPE)

Answer 13

Impairment of long-lived assets (ASPE)
• Steps:
1. Determine if factors indicating impairment exist
2. Group asset with other assets/liabilities to form group at the lowest
level that generates cash flow (i.e. cash generating unit)
3. Determine if there is impairment by comparing net book value to
recoverable amount (i.e. undiscounted future cash flows)
4. Calculate impairment by comparing carrying amount to fair value)
• Cannot reverse write-downs
Case: TankCo, Ferguson Real Estate
Reference: ASPE 3063.04-.09, .12, .18

Question 14

Impairment of assets (IFRS)

Answer 14

• An entity is required to assess whether there are any indicators of impairment at
the end of each reporting period. If an indication of impairment exists, the asset
will need to be tested for impairment.
• To test for impairment, compare the asset’s recoverable amount to the carrying
value. The extent to which the carrying value exceeds the recoverable amount (if
any) is the impairment loss.
• Recoverable amount: Higher of the fair value less costs to sell and value in use
o Fair value less costs to sell: price that would be received to sell an
asset or paid to transfer a liability between market participants, less
incremental costs directly attributable to the disposal of the asset
(excluding finance cost and income tax expense)
o Value in use: Present value of the future cash flows from the continuing
use of the asset and its ultimate disposal
• Impairment can be reversed if the asset subsequently recovers in value, but not
to more than the “would be” value had the impairment not been recognized.
Reference: IAS 36

Question 15

Investments – Equity method (IFRS)

Answer 15

Investments – Equity method (IFRS)
• IAS 28: an entity with significant influence over an investee shall treat the
investee as an associate and account for its investment in the associate using
the equity method
• Significant influence can be demonstrated by owning (directly or indirectly) 20%
or more of the voting power of the investee
• The entity may be able to demonstrate influence, even with less than 20%
ownership. Evidence of influence can include:
o Representation on the board of directors
o Participation in policy-making processes
o Material transactions between the entity and its investee
o Provision of essential technical information
• Under the equity method, the investment is initially recognized at cost, and is
adjusted for the post-acquisition change in the investor’s share of the investee’s
net assets
Reference: IAS 28

Question 16

Accounting for subsidiaries (ASPE)

Answer 16

32
Accounting for subsidiaries (ASPE)
An enterprise can make an accounting policy choice to account for its subsidiaries using
one of the following methods:
• Cost method
• Equity method
• Consolidation method
** Once a method has been selected, it must be applied consistently (i.e. all subsidiaries
must be accounted for using the same method)
Reference: ASPE 1591, ASPE 3051

Question 17

PPE – Costs (ASPE)

Answer 17

• PPE costs represent the amount of consideration given up to acquire, construct,
develop, or better a PPE and comprise of all costs directly attributable to the
acquisition, construction, development or betterment, including installing it at the
location and in the condition necessary for its intended use
• PPE costs include direct construction or development costs (such as materials
and labour) and overhead / carrying costs directly attributable to the construction
or development activity
• The cost of each item of PPE acquired as part of a basket purchase (i.e. when a
group of assets is acquired for a single amount) is determined by allocating the
price paid for the basket to each item on the basis of its relative fair value at the
time of acquisition
Reference: ASPE 3061.03, .06, .08

Question 18

Capital lease criteria – Lessee (ASPE)

Answer 18

• Must meet one of the criteria:
o Transfer of ownership or bargain purchase option at the end of the
lease term
o Lease term at least 75% of economic life of asset
o PV of minimum lease payments at least 90% of FV of leased asset
▪ Discount rate = lower of lessee’s incremental borrowing rate
and implicit rate in the lease
Case: TankCo, King Street Theatre, StillGood Food
Reference: ASPE 3065.0

Question 19

Capital lease criteria – Lessor (ASPE)

Answer 19

• Capital lease if all of the following exist:
• Credit risk is normal
• Unreimbursable costs are estimable
• Any one of the following criteria are met:
o Transfer of ownership or bargain purchase option at the end of
the lease term
o Lease term at least 75% of economic life of asset
o PV of minimum lease payments at least 90% of FV of leased
asset
▪ Discount rate = implicit rate in the lease

Question 20

Types of capital leases – Lessor (ASPE)

Answer 20

36
Types of capital leases – Lessor (ASPE)
• Sales-type lease
o Arise when a dealer uses leasing as a way to sell their products
o Record as sale
• Direct financing lease
o At inception, FV of the leased property is equal to its carrying
value
o Usually arises when a lessor acts as intermediary between
manufacturer and lessee
o Record as lease receivable (payments to be received and
guaranteed residual value, if any)
o Difference between lease receivable and carrying value should be
recorded as unearned finance income
o Finance income will be recognized each year
Reference: ASPE 3065.29, .30, .37

Question 21

Compound Financial Instruments (ASPE)

Answer 21

• Financial instruments, or their component parts, should be classified as a liability or equity in
accordance with the substance of the contractual arrangement on initial recognition and the
definitions of a liability and an equity instrument
• Financial instruments that contain both a liability and an equity element, including warrants or
options issued with and detachable from a financial liability, should be separated into
component parts, as follows:
o The equity component is measured as zero, i.e. the entire proceeds of the issue
are allocated to the liability component; or
o The less easily measurable component is allocated the residual amount after
deducting from the entire proceeds of the issue the amount determined for the
component that is more easily measurable
• The sum of the carrying amounts assigned to the liability and equity components on initial
recognition is always equal to the carrying amount that would be ascribed to the instrument
as a whole, i.e. no gain or loss can arise from recognizing and presenting the components of
the instrument separately
Reference: ASPE 3856.20 - .22

Question 22

Capital Budgeting – Buy vs. Lease (Finance)

Answer 22

• Calculate NPV of each option and compare to determine which option is cheapest
• NPV of buy option – consider:
o Cost of asset
o PV of tax shield
o Maintenance costs
• NPV of lease option – consider:
o PV of after tax lease payments
• Other factors to consider:
o Impact on covenants
o Cash flows (leasing lessens the current cash burden)
o Leasing may be easier to come by if company has trouble obtaining financing
o Purchasing the asset might provide more flexibility (ownership of asset)
o Leasing might insulate company from severe declines in asset value
o Possible tax advantages (no capital leases for tax purposes – CRA sees all
leases the same so cash payments would be deductible, however no CCA)

Question 23

Revenue recognition criteria – Completed contract method (ASPE)

Answer 23

• The completed contract method would only be appropriate when performance
consists of the execution of a single act or when the enterprise cannot
reasonably estimate the extent of progress toward completion.
• NOTE: There is no equivalent recognition criteria under IFRS.
Case: TankCo, Ferguson Real Estate
Reference: ASPE 3400.18

Question 24

Revenue recognition criteria – Percentage-of-completion method (ASPE)

Answer 24

The percentage-of-completion method is appropriate when:
• performance consists of the execution of more than one act, and
• revenue would be recognized proportionately by reference to the performance of
each act.
For practical purposes, when services are provided by an indeterminate number of acts
over a specific period of time, revenue would be recognized on a straight line basis over the
period unless there is evidence that some other method better reflects the pattern of
performance.
The amount of work accomplished would be assessed by reference to measures of
performance that are reasonably determinable and relate as directly as possible to the
activities critical to the completion of the contract.
Case: TankCo, Ferguson Real Estate
Reference: ASPE 3400.17

Question 25

Revenue recognition – Effect of uncertainties (returns) (ASPE)

Answer 25

Recognition of revenue requires that the revenue is measurable and that ultimate collection
is reasonably assured.
• If significant and unpredictable amounts of goods being returned, do not
recognize revenue
• If the amount of returns can be reasonably estimated based upon experience, it
may be possible to provide for an allowance for a returns expense.
Reference: ASPE 3400.19-.21

Question 26

Inventory measurement – Cost formulas (specific identification) (ASPE)

Answer 26

• The cost of inventories of items that are not ordinarily interchangeable and goods
or services produced and segregated for specific projects shall be assigned by
using specific identification of their individual costs.
Reference: ASPE 3031.22

Question 27

Inventory measurement – Allocation of overhead (ASPE)

Answer 27

• The allocation of fixed production overheads to the costs of conversion is based
on the normal capacity of the production facilities.
• The actual level of production may be used if it approximates normal capacity.
• Unallocated overheads are recognized as an expense in the period in which they
are incurred.
Reference: ASPE 3031.14

Question 28

Intangible assets (ASPE)

Answer 28

• In order to meet the definition of an intangible asset, assets must meet the
identifiability, control, and future economic benefits tests.
• An asset meets the identifiability criterion in the definition of an intangible asset
when it:
o is separable, or
o arises from contractual or other legal rights
• An entity controls an asset if the entity has the power to obtain the future
economic benefits flowing from the underlying resource and to restrict the access
of others to those benefits.
• An intangible asset shall be recognized if, and only if:
o it is probable that the expected future economic benefits that are
attributable to the asset will flow to the entity; and
o the cost of the asset can be measured reliably.
Case: TankCo
Reference: ASPE 3064

Question 29

Lease inducements (ASPE)

Answer 29

• Lease inducements are an inseparable part of the lease agreement and,
accordingly, are accounted for as reductions of the lease expense over the term
of the lease.
Reference: ASPE 3065.27

Question 30

Internally generated intangible assets (IFRS)

Answer 30

Internally generated intangible assets (IFRS)
• Research is defined as original and planned investigation undertaken with the prospect of
gaining new scientific or technical knowledge and understanding
• Development is defined as the application of research findings or other knowledge to a plan
or design for the production of new or substantially improved materials, devices, products,
processes, systems, or services before the start of commercial production or use
• Research costs are always expensed
• Development costs must be capitalized if all of the following exist:
o Technically feasible
o Intention to complete it
o Ability to use or sell it
o Probable future economic benefits will be generated
o Availability of adequate technical, financial and other resources
o Ability to reliably measure the expenditures attributed
• Costs meeting the tangible asset criteria should not be capitalized as intangible
Reference: IAS 38.4, .8, .54, .57

Question 31

Intangible assets – Definition and recognition (IFRS)

Answer 31

• To meet the definition of an intangible asset the item must be: identifiable, the entity must
have control over the future benefit and the item must meet the recognition criteria
• The asset is identifiable if it either:
o It can be separated from the entity
o Arises from contractual, legal right that allow it to be transferrable or separable
• The entity controls the asset if it has the power to obtain future economic benefits
• Recognition criteria:
o Probable that the expected future economic benefits will flow to the entity
o Cost of the asset can be measured reliably
Reference: IAS 38.12, .13,.17 .21

Question 32

Intangible assets – Amortization (IFRS)

Answer 32

• Intangibles are to be amortized over their estimated useful lives unless they are
considered to have an indefinite life
• Assets with indefinite lives are not to be amortized until the life is no longer
considered indefinite, but they must be tested for impairment annually
• Assets with definite lives can be reported following either the cost model or the
revaluation model
• Amortization method and useful life should be reviewed annually
• Consider expected use, life of related assets, contractual provisions, product life
cycles and other economic factors
Reference: IAS 38.72, .88, .97, .104, .107, .109

Question 33

Discontinued operations (IFRS)

Answer 33

• A component of an entity where its operations and cash flows can be clearly
distinguished operationally and for financial reporting purposes, from the rest of
the entity and it has been disposed of or classified as held for sale
• Report results of discontinued operations on the statement of comprehensive
income for current and prior periods, net of tax, segregated as follows:
o the post-tax profit or loss of discontinued operations
o the post-tax gain or loss recognized on the measurement to fair value
less costs to sell or on the disposal of the assets or disposal group(s)
constituting the discontinued operation.
Reference: IFRS 5.03, .31 - .33

Question 34

Assets held for sale (IFRS)

Answer 34

• Non-current assets (or disposal group) to be disposed of other than by sale
should continue to be classified as held and used until they are disposed of
• Non-current assets (or disposal group) to be sold should be classified as held for
sale when all of the following are met:
o Management commits to a plan to sell
o Steps to locate a buyer and complete the sale have started
o It is being actively marketed at a reasonable price
o It is available for immediate sale in its present condition
o The sale is probable and expected to occur within a year
o Actions required to complete the sale indicate it’s unlikely significant
changes to the plan will be made or that the plan will be withdrawn
• Non-current assets (or disposal group) held for sale should be measured at lower
of carrying amount and fair value less costs to sell, and should not be amortized
Reference: IFRS 5.06 - .15, .25

Question 35

Borrowing costs (IFRS)

Answer 35

56
Borrowing costs (IFRS)
• Interest and financing costs that an entity incurs in connection with the borrowing
of funds
• Capitalize borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset
• Possible qualifying assets:
o Inventories
o Manufacturing plants
o Intangible assets
o Investment properties
Reference: IAS 23.05, .07, .08

Question 36

Share-based compensation (IFRS)

Answer 36

• For equity-settled share-based payment transactions, the entity shall measure
the goods or services received, and the corresponding increase in equity,
directly, at the fair value of the goods or services received, unless that fair value
cannot be estimated reliably, in which case fair value of the equity instruments
granted is used
• Transactions with employees and others providing similar services require use of
the fair value of the equity instruments granted measured at grant date, because
typically it is not possible to estimate reliably the fair value of the services
received
Reference: IFRS 2.10, .11

Question 37

Revenue recognition criteria (ASPE)

Answer 37

Revenue from sales and service transactions shall be recognized when:
• Performance is complete (risks and rewards transferred, significant acts
performed, no continuing managerial involvement)
• Consideration is measurable
• Collection reasonably assured
Case: TankCo, Ferguson Real Estate, Elder Care Centre and Spa
Reference: ASPE 3400.04 - .06

Question 38

Revenue recognition – performance criteria (ASPE)

Answer 38

Performance would be regarded as being achieved when all of the following criteria have
been met:
• Persuasive evidence of an arrangement exists
• Delivery has occurred or services rendered
• Price to the buyer is fixed or determinable
In determining if the seller’s price to the buyer is fixed or determinable, an entity would
consider the impact of the following factors:
• Cancellable sales arrangements;
• Right of return arrangements;
• Price protections and/or inventory credit arrangements; and
• Refundable fee for service arrangements.
Case: TankCo, Ferguson Real Estate, Elder Care Centre and Spa
Reference: ASPE 3400.07, .10

Question 39

Revenue recognition – multiple deliverables (ASPE)

Answer 39

66

• Evaluate all deliverables to determine whether they represent separate
deliverables
• If you can identify separate deliverables, revenue recognition criteria should be
assessed for each deliverable separately
• If two or more transactions are linked together in such a way the commercial
effect can’t be understood without reference to the series of transactions as a
whole, then the recognition criteria will be applied to the series of transactions as
one
Case: Elder Care Centre and Spa
Reference: ASPE 3400.11

Question 40

Government assistance (ASPE)

Answer 40

• Assistance for non-capital items:
o Include in net income for period when incurred
o When government assistance relates to expenses of future accounting
periods, the appropriate amounts shall be deferred and amortized to
income as related expenses are incurred.
• Assistance for capital items:
o Reduce cost of capital item with any depreciation computed on the net
amount; or
o Defer and amortize on the same basis of depreciation
• Provided there is reasonable assurance that the enterprise has complied and will
continue to comply with the conditions for receipt of the government assistance,
the accrual basis of accounting for the assistance is appropriate
Case: TinyCo
Reference: ASPE 3800

Question 41

Discontinued operation (ASPE)

Answer 41

8

• A discontinued operation is a component of an entity where its operations and
cash flows can be clearly distinguished from the rest of the entity and it has been
disposed of or classified as held for sale
• Report results of discontinued operations on I/S for current and prior periods, net
of tax
Reference: ASPE 3475.03, .30

Question 42

Assets held for sale (ASPE)

Answer 42

• Long-lived assets to be disposed of other than by sale should continue to be
classified as held and used until they are disposed of
• Long-lived assets to be sold should be classified as held for sale when all of the
following are met:
o Management commits to a plan to sell
o It’s available for immediate sale in its present condition
o Steps to locate a buyer and complete the sale have started
o The sale is probable and expected to occur within a year
o It’s being actively marketed at a reasonable price
o Actions required to complete the sale indicate it’s unlikely significant
changes to the plan will be made or that the plan will be withdrawn
• Asset held for sale should be measured at lower of carrying amount or fair value
less cost to sell, and should not be amortized
Reference: ASPE 3475.04, .08, .13

Question 43

Accounting changes – change in estimate (ASPE)

Answer 43

• The use of reasonable estimates is an essential part of the preparation of
financial statements and does not undermine their reliability
• An estimate may need revision if changes occur in the circumstances on which
the estimate was based or as a result of new information or more experience
• By its nature, the revision of an estimate does not relate to prior periods and is
not the correction of an error.
• The effect of a change in an accounting estimate is recognized prospectively by
including it in net income in:
o the period of the change, if the change affects that period only; or
o the period of the change and future periods, if the change affects both.
Reference: ASPE 1506.20 - .23

Question 44

Related Party Transactions (ASPE)

Answer 44

• For transactions carried out in the normal course of operations
o monetary related party transactions, or non-monetary RPT with commercial
substance should be recorded at their exchange amount, unless
▪ it is a non-monetary RPT that is an exchange of a product/property to be
resold in the same line of business. This type of RPT will be recorded at
carrying amount, adjusted for any additional consideration/
• For transaction NOT in the normal course of business
o monetary RPT, or non-monetary RPT with commercial substance should be
recorded at their exchange amount, IF
▪ the change in ownership interest in item transferred/service provided is
substantive, and
▪ the exchange amount is supported by independent evidence
• When the RPT has been measured at carrying amount, any difference between the
carrying amounts of items exchanged, together with any related tax amounts, shall be
booked to equity.
Reference: ASPE 3840.08-.09, .18, .22, .29

Question 45

Lease Accounting – Land & Building (ASPE)

Answer 45

When a lease contains both land and building, it must first be determined whether the terms
allow ownership to pass or provide for a bargain purchase option.
o If yes, the lessee will capitalize the land separately from the building, based
upon fair values.
o If no, is the FV of the land at the inception of the lease significant in relation to
the total FV of the leased property?
▪ If yes, the land and building(s) are considered separately for purposes of
classification. The lessee and lessor allocate the minimum lease
payments between the land and building(s) in proportion to their fair
values. Both parties classify the portion of the lease applicable to land as
an operating lease.
▪ If no, the land and building are considered a single unit, and the
economic life of the building is considered the economic life of the unit.

Question 46

Subsequent Events (ASPE)

Answer 46

• In general, there are two types of subsequent events:
o those that provide further evidence of conditions that existed at the financial
statement date; and
o those that are indicative of conditions that arose subsequent to the financial
statement date.
• Financial statements shall be adjusted when events occurring between the date of the
financial statements and the date of their completion provide additional evidence
relating to conditions that existed at the date of the financial statements.
• Disclosure shall be made of those events occurring between the date of the financial
statements and the date of their completion that do not relate to conditions that existed
at the date of the financial statements but:
o cause significant changes to assets or liabilities in the subsequent period; or
o will, or may, have a significant effect on the future operations.
Reference: ASPE 3820

Question 47

Contingencies (ASPE)

Answer 47

• Existing condition involving uncertainty as to a possible gain or loss
• Uncertainty will result in a range of probabilities
o likely
o unlikely
o not determinable
• Contingent losses
o must be accrued if the future event is likely and a reasonable estimate
of the loss can be made
o disclosed if the future event is likely but a reasonable estimate of the
loss CANNOT be made
o disclosed if the future event is not determinable
• Contingent gains
o must NOT be accrued
o disclosed if the future event is likely
Case: TankCo, Ferguson Real Estate
Reference: ASPE 3290

Question 48

Revenue Recognition (IFRS)

Answer 48

1

In a transaction involving the sale of goods or provision of services, the amount of revenue
to recognize and how it is measured is determined by applying the following five steps:
• identify the contract with the customer
• identify separate performance obligations in the contract
• determine the overall transaction price
• allocate the transaction price to the separate performance obligations in the
contract
• determine when the performance obligation(s) is satisfied, as revenue is
recognized when (or as) the entity satisfies the performance obligation
o revenue is recognized as control is passed, either over time or at a
point in time
Case: Solar Panel Solutions, Elcar
Reference: IFRS 15

Question 49

Accounting Policies, Changes, Errors (IFRS)

Answer 49

82

Accounting policies are the specific principles, bases, conventions, rules and practices
applied by an entity in preparing and presenting financial statements. Changes in
accounting estimates result from new information or new developments and, accordingly,
are not corrections of errors.
Only change a policy if:
• Standard/interpretation requires it, or
• Change will provide more relevant and reliable information to users
Apply changes to policy retrospectively unless it is impractical.
Changes to accounting estimates should be applied prospectively.
Corrections to errors should be applied retrospectively unless it is impractical
Reference: IAS 8

Question 50

Property, Plant and Equipment (IFRS)

Answer 50

Initial recognition if:
• The future economic benefits associated with the asset will flow to the entity, and
• The cost of the asset can be reliably measured.
Initial measure- recorded at cost.
Subsequent measurement
• Carried at cost less accumulated depreciation, and impairment losses, OR
• Carried at revalued amount, i.e. FV, less subsequent depreciation if FV can be
reliably measured
o An increase in value is credited to OCI, unless it is a reversal of a
revaluation decrease previously recognized as an expense
Significant components are required to be depreciated over their estimated useful life.
Reference: IAS 16

Question 51

Agriculture (IFRS)

Answer 51

84

This standard is intended to apply to the following which relates to agricultural activity
• Biological assets
• Agricultural produce at the point of harvest
• Government grants related to biological assets
Initial recognition if:
• The entity controls the asset as a result of a past event.
• The future economic benefits associated with the asset will flow to the entity, and
• The cost of the asset can be reliably measured.
Initial measurement at:
• FV, less estimated point of sale costs
• Cost, if no reliable measurement of FV is available.
Subsequent measurement
• FV, less estimated point of sale costs
• Cost, less accumulated depreciation if no reliable measurement of FV is available.
Reference: IAS 41

Question 52

Revenue Recognition – Identification of the performance obligations (IFRS)

Answer 52

85

Performance obligations are identified as each promise to transfer to the customer either:
• a good or service (or bundle of goods or services) that is distinct; or
• a series of distinct goods or services that are substantially the same and have the
same pattern of transfer to the customer
A good or service that is promised to a customer is distinct if:
• the customer can benefit from the good or service on its own or together with
other resources readily available to the customer; and
• the entity’s promise to transfer the good or service to the customer is separately
identifiable from other promises in the contract
Two or more promises are not separately identifiable if the nature of the promise, within the
context of the contract, is to transfer a combined item in which the promised goods or
services are inputs.
If a promised good or service is not distinct, it is combined with other promised goods or
services until the entity identifies a bundle of goods or services that is distinct.
Case: Solar Panel Solutions Reference: IFRS 15.22-.30

Question 53

Provisions, Contingent Liabilities, Contingent Assets (IFRS)

Answer 53

86

Provisions- a liability of uncertain timing or amount. May be recognized when:
• The entity has a present legal or constructive obligation as a result of a past event,
• It is probable that an outflow of economic benefits will be required to settle the obligation; and
• A reliable estimate can be made of the amount of the obligation
Contingent losses → NOT recognized:
• A possible obligation that arises from past events, whose existence will be confirmed only by
the occurrence or non-occurrence of one or more uncertain future events not wholly in the
control of the entity;
• A present obligation that arises from past events is not recognised when an outflow of future
economic benefits is not probable or the amount of the obligation cannot be measured
reliably.
Contingent gains→ NOT recognized:
• – possible asset that arises from past events and whose existence will be confirmed only by
the occurrence or non-occurrence of one or more uncertain future events not wholly within
the control of the entity.
Case: Solar Panel Solutions, Elcar
Reference: IAS 37

Question 54

Warranties (IFRS)

Answer 54

• Two types of warranties:
o those that provide a customer with assurance that the related product
will function as the parties intended because it complies with agreed-
upon specifications
o those that provide the customer with a service in addition to the
assurance that the product complies with agreed-upon specifications
• Warranty shall be accounted for in accordance with IAS 37 (Provisions,
Contingent Liabilities and Contingent Assets) if:
o The customer does not have the option to purchase a warranty
separately, and
o The warranty does not provide the customer with a service in addition
to the assurance that the product complies with agreed-upon
specifications.
Case: Solar Panel Solutions
Reference: IFRS 15.B28 – B31

Question 55

Business combinations (IFRS)

Answer 55

• For a business combination to occur, there must be:
o an acquirer who has gained control, and
o a business that has been purchased
▪ A business is defined as “an integrated set of activities and
assets that is capable of being conducted and managed for
the purpose of providing a return in the form of dividends,
lower costs or other economic benefits directly to investors
or other owners, members or participants.
▪ “Determining whether a particular set of assets and activities
is a business should be based on whether the integrated set
is capable of being conducted and managed as a business
by a market participant.”
Case: Solar Panel Solutions
Reference: IFRS 3

Question 56

Earnings per share (EPS) (IFRS)

Answer 56

3

• Basic EPS: Net earnings available to common shareholders / weighted average
common shares outstanding (WACSO) during the year
• Diluted EPS: Hypothetical measure of company earnings attributable to each
common shareholder assuming all dilutive securities have been converted to
common shares; dilutive elements must be ranked from most to least dilutive in
completing the diluted EPS calculation.
o Stock options: the difference between the number of ordinary shares
issued from exercising the options and the number of ordinary shares
that would have been issued at the average market price during the
period — difference is treated as an issue of ordinary shares for no
consideration (no impact on the earnings in the EPS calculation).
o Convertible bonds: dilutive impact if the after-tax interest per share that
would be issued is less than the basic EPS — the after-tax interest on
the bond increase earnings and the number of shares issued on
conversion is added to the WACSO.
Case: Solar Panel Solutions
Reference: IAS 33

Question 57

Foreign currency transactions (IFRS)

Answer 57

128

• Initial measurement:
o At the functional currency, by applying to the foreign currency amount the spot
exchange rate between the functional currency and the foreign currency at the
date of the transaction.
• Subsequent measurement:
o Monetary items should be translated at the closing rate on the financial reporting
date.
o Non-monetary items measured at historical cost should be translated using the
exchange rate on the date of the transaction.
o Non-monetary items measured at fair value should be translated using the
exchange rate on the date when the fair value was measured.
Case: Elcar
Reference: IAS 21.21-23

Question 58

Foreign currency transactions (IFRS)

Answer 58

Foreign currency transactions (IFRS)
* Initial measurement:
o At the functional currency, by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction.
* Subsequent measurement:
o Monetary items should be translated at the closing rate on the financial reporting date.
o Non-monetary items measured at historical cost should be translated using the exchange rate on the date of the transaction.
o Non-monetary items measured at fair value should be translated using the exchange rate on the date when the fair value was measured.

Reference: IAS 21.21-23
 

Question 59

Stock options (ASPE)

Answer 59

• Initial measurement:
  o The fair value is initially estimated based on the stock price at the grant date of stock options.
  o The stock options are recorded as contributed surplus, which is an equity account.
• Subsequent measurement:
  o The fair value of an option estimated at the grant date is not subsequently adjusted for changes in the price of the underlying stock or its volatility, the life of the option, dividends on the stock, or the risk-free interest rate.
  o The compensation cost is recognized as an expense over the period in which the related employee services are rendered.
  o An entity can choose whether to set up full compensation cost in the year of issuance or use the best available estimate of the stock options expected to be exercised.

Reference: ASPE 3870.24-.51
 

Question 60

Stock appreciation rights (ASPE)

Answer 60

• Initial measurement:
  o The initial compensation expense is calculated as the amount that the market value of the shares of the enterprise’s stock covered by the grant exceeds the value of the rights specified.
  o The compensation cost is recorded as a liability.
• Subsequent measurement:
  o Increases or decreases in the market value of those shares between the date of grant and the measurement date result in a change to compensation expense.
  o The compensation cost is recognized as an expense over the period in which the related employee services are rendered.
  o An entity can choose whether to set up full compensation cost in the year of issuance or use the best available estimate of the rights expected to be exercised.

Reference: ASPE 3870.24-.51