Assurance Role Cap 2 Cards Flashcards
Accounts Receivable - Financial Reporting (ASPE) Core Level A
Accounts Receivable (ASPE)
- considered a financial instrument (financial asset) as it represents a contractual right to receive cash or another financial asset from another party
- therefore, AR must be tested for impairment at the end of the reporting period if significant adverse changes during the period cast doubt on collectibility
- if impaired, write down to the amount expected to be collected through the use of an allowance account
- amount of the reduction shall be recognized as a bad debt expense in net income
ASPE 3856
Inventory Valuation - Financial Reporting (ASPE) Core Level A
Inventory Valuation (ASPE)
Inventories shall be measured at the lower of cost and NRV
- Cost of inventories = all costs of purchase, conversion, and other costs incurred in bringing the inventories to their present location and condition
- NRV = 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 of the inventories expected to realize upon sale
ASPE 3031
Inventory costs - Financial Reporting (ASPE) Core Level A
Inventory costs (ASPE)
- the cost of inventories = 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, admin overhead, and selling costs are specifically excluded from the cost of inventories
ASPE 3031
Internally generated intangible assets - R&D - Financial Reporting (ASPE) Core - Level A
Research costs are always expensed when incurred
Accounting policy choice to either capitalize or expense development costs
Steps:
1) General intangible asset definition:
A) Identifiable - separable and arises from contractual/legal rights
B) Control
C) Existence of future benefits
2) Recognition Criteria
A) Reliably measurable
B) Probable it will generate future economic benefits
3) Specific criteria for development costs (all met):
A) Technically feasible
B) Intention to complete it
C) Ability to use or sell it
D) Availability of adequate technical, financial and other resources to complete the development
E) Ability to reliably measure the expenditures attributed
F) Probably future economic benefits will be generated
ASPE 3064
Goodwill and intangible assets - Amortization - Financial Reporting (ASPE) Core Level A
- intangibles amortized over their estimated useful lives unless considered to have an indefinite life
- assets with indefinite lives are not amortized until the life is no longer considered indefinite (however, must still be tested for impairment)
- amortization method and useful life should be reviewed annually
- Expected useful life must consider:
1) Expected use of the asset
2) Expected useful life of related assets
3) Contractual, legal and regulatory provisions and other economic factors
ASPE 3064
Investments - Financial Reporting (ASPE) Core Level A
- Investments subject to significant influence can be accounted for using the equity or cost method
- Investments without significant influence:
1) Not quoted on an active market - accounted for using the cost method
2) Quoted on an active market - accounted for at fair value
ASPE 3051
Financial instruments - impairment - Financial Reporting (ASPE) Core Level A
Financial instruments tested for impairment at the end of EACH reporting period
Where impairment exists, reduce the carrying value to the highest of:
1) PV of cash flows expected from holding the asset
2) Net realizable value of the asset if sold
3) Amount entity expects to realize from exercising its right to collateral
Impairment can be reversed if asset subsequently recovers in value
ASPE 3856
Deductibility of expenses - Taxation - Core Level B
General limitation:
to be deductible, expense or outlay must be made or incurred by the taxpayer for the purpose of gaining, producing, or maintaining income, and be expected to generate income related to the taxpayer’s business or property
Common business expenses DISALLOWED
Common business expenses disallowed:
1) Amortization/impairment/accounting gains and losses (deducted as CCA)
2) Personal expenses and membership/club dues
3) Charitable donations - deduction to determine taxable income for a corporation
4) Political contributions - limited tax credit available for an individual. Federal Accountability Act deems corporate political contributions to be illegal, resulting in no deduction or credit
5) Taxes, interest and penalties related to tax
6) Meals and entertainment (50% for business purposes; 100% deductible for remote or temporary work sites, or special events for employees)
7) Expenses re: issue or sale of shares and refinancing costs (deductible over 5 years)
8) Life insurance premiums (except where the policy has been assigned as collateral)
9) Unpaid amounts and unpaid remuneration (accrued salary which is unpaid 180 days after fiscal perod is deemed not to have been incurred until actually paid)
10) carrying charges on vacant land (non-deductible portion added to ACB)
11) soft costs on construction of building (include interest, legal, accounting fees, insurance, property taxes; must be capitalized)
Basic Earnings Per Share (EPS) FR - IFRS Core Level A
Basic EPS = Net earnings available to common shareholders/weighted average common shares outstanding during the year
Diluted EPS Defn
Hypothetical measure of EPS assuming all dilutive securities have been converted to common shares; dilutive elements must be ranked from most to least dilutive
Diluted EPS Calc
- rank dilutive elements from most to least dilutive
Stock options: the difference between the # ordinary shares issued from exercising the options and the # of ordinary shares that would have been issued at the average market price during the period - affects numerator; difference is treated as an issue of ordinary shares for no consideration (no impact on the earnings in the EPS calculation)
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 increased earnings and the number of shares issued on conversion is added to denominator
Using the work of Internal Auditors (Assurance) Level A
Can work be used for audit purposes?
- External auditor determines whether the work of internal audit can be used for the purposes of the audit by evaluating:
1) Extent to which org status and procedures support objectivity of independent auditors
2) Level of competence of internal audit function
3) Whether internal audit function applies a systematic and disciplined approach, including quality control
Using the work of Internal Auditors (Assurance) Level A
Factors to consider in determining nature and extent of work that may be assigned to internal auditors
Consider:
1) Amount of judgment involved in planning/performing audit procedures, and evaluating the audit evidence
2) Assessed risk of material misstatement
3) Existence of significant threats to objectivity and competence of internal auditor
Reporting alternatives - Specific Items - CAS 805 (Assurance) Level A
CAS 805 - Audit of a single financial statement and specific elements, accounts or items of a FS
- report providing audit level assurance on individual FS or accounts rather than FS as a whole
Audit must
- comply with all CASs relevant to the audit (CAS 200)
- determine the acceptable financial reporting framework to be applied and document the agreed terms of the audit engagement, including the expected form of any reports to be issued (CAS 210)
When forming an opinion in a CAS 805, requirements in CAS 700 must be adapted as necessar
General Assurance Standards - Requirements for auditors
1) Before undertaking engagement, practitioner should have a reasonable basis for believing engagement can be completed in accordance with the relevant standards
2) Practitioner should seek management’s acknowledgement of responsibility for the subject matter as it relates to the objective of the engagement
3) Practitioner should have adequate proficiency and possess adequate knowledge of the subject matter
Responsibility of the Auditor for the Assessment of the Going Concern Assumption
General
1) Obtain sufficient appropriate audit evidence about mgmt’s use of going concern assumption in prep of the FS
2) Conclude if material uncertainty exists that the entity cannot continue as a going concern
3) Determine the implication on audit report
4) Communicate with those charged with governance if events/conditions cast doubt on the going concern assumption
Responsibility of the Auditor for the Assessment of the Going Concern Assumption
Additional Audit Procedures when Conditions Identified
1) If no assessment has been made by management, request one
2) Evaluate mgmt’s plan for future actions
3) Where there is a CF forecast and the forecast is a significant factor:
a) evaluate the reliability of underlying data
b) Assess assumptions’ support
4) Consider additional info
5) Request written representations from mgmt regarding future plans and feasibility
Responsibility of the Auditor for the Assessment of the Going Concern Assumption
Impact on Auditor’s report if material uncertainty exists
1) If adequately disclosed in FS, unmodified opinion but include emphasis of matter in auditor’s report
2) If adequate disclosures not made, qualified or adverse opinion
Eligible vs non eligible dividends Taxation Core B
Must include actual dividend plus gross up in net income for tax purposes
Grossed up dividend = taxable dividend
Non-eligible: paid out by CCPCs out of after tax ABI eligible for SBD
- 16% gross up; tax credit as fraction of gross up: 8/11
Eligible: paid out by public companies or CCPCs out of general rate income pool (GRIP)
- 38% gross up; tax credit as fraction of gross up: 6/11
CCPC - GRIP Balance - Taxation
GRIP = eligible dividends received + 72% active business income (ABI) not eligible for SBD
Filing and payment deadlines - Corporate - Taxation - Core B
Income taxes
Filing deadline six months after year end (company)
Tax balances owing due 2 months after year end (3 months for CCPCs eligible for SBD)
Filing and payment deadlines - Taxation - Core B
GST
Annual taxable supplies of:
1) $1.5M or less = annual reporting
2) Between $1.5M and $6M = quarterly reporting
3) More than $6M = monthly reporting
Annual or quarterly filers have the option of filing more frequently
Quarterly and monthly filers must file and remit bal owing within 1 month after end of reporting period
Annual filers must file and remit the balance owing within 3 months after fiscal YE
Annual filers required to pay quarterly instalments if net GS owing in PY was more than $3K
Contribution Margin - Finance - Core B
Determines how much variable profit is available to cover F and generate a profit
Determine CM by:
1) Calculate variable revenues per unit (hour, day, year, quantity)
2) Offset by variable costs of same unit
Break even analysis - Finance - Core B
Can be expressed in number of units, total revenues, or a percentage of projected revenues
BEP = FC / CM per unit
Warranties - Financial Reporting (IFRS) Core A
2 Types of warranties
1) Warranties providing customer with assurance that the related product will function as the parties intended because it complies with agreed-upon specifications
2) Warranties providing the customer with a service in ADDITION to the assurance that product complies with agreed-upon specifications
Warranties - Financial Reporting (IFRS) Core A
Account for Warranties
Warranty shall be accounted for in accordance with IAS 37 (provisions, contingent liabilities and contingent assets) if:
1) customer does not have the option to purchase a warranty separately, and
2) Warranty does not provide the customer with a service in addition to the assurance that the product complies with agreed-upon specifications
Business Combinations - Financial Reporting (IFRS) Core A
For A business combination to occur there must be…
IFRS 3:
For a business combination to occur there must be:
1) An acquirer who has gained control, and
2) A business that has been purchased
- business = 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
Business Investment Loss - Taxation - Core B
In the year a corp declares bankruptcy
In the year a corp declares bankruptcy or is insolvent, shareholders may file an election to deem the shares to have been disposed of for proceeds = $nil
This will yield a capital loss equal to the ACB of the shares
Business Investment Loss - Taxation - Core B
Capital loss
Capital loss of small business corporations is given special treatment and is deemed to be an Allowable Business Investment Loss (ABIL) (ABIL is 50% of BIL)
- small business corp is small business that has 90+% of assets used in active business in Canada
- half of the business investment loss is deemed to be an ABIL and can be applied immediately against income from any source
- if the ABIL is not used by the end of the 10 years, it will become a capital loss
Moving expenses - Taxation - Core B
To be eligible relocation
Eligible relocation:
- occuring as a result of a new work location within Canada
- the new residence is at least 40km to the new work location than the old residence
Moving expenses - Taxation - Core B
Deductible moving expenses include
1) Selling costs related to the old residence
2) Costs to transport household goods (moving company etc)
3) Legal fees associated with the purchase of a new residence
4) Disconnecting and connecting utilities, revising legal docs to reflect new address, replacing driver’s licenses
5) Travelling costsq
6) Meals and lodging not exceeding 15 days (these dont include travel days)
7) Costs of cancelling a lease on the old residence
8) Up to $5K of interest, property taxes, insurance, heating and utilities costs on the old residence
NON DEDUCTIBLE EXS:
1) Home renos for old property in advance of the sale - these are capital in nature and would be added to the capital cost of the old property
2) Travel expenses for a house-hunting trip
Principal Residence Exemption (PRE) Taxation Core B
Formula
Enables the capital gains arising on the disposition of a principal residence to be received tax-free
PRE = A x (1 + B)/C A = capital gain on disposition B = number of years the property is designated as principal residence C = number of years the property was owned by the taxpayer
Principal Residence Exemption (PRE) Taxation Core B
Requirements
1) only 1 property can be designated as a principal residence for a taxpayer and family in given year
2) principal residence is an accomodation that is ordinarily inhabited by the taxpayer/family in the year
- to be ordinarily inhabited, needs to have been lived in at some pt during the year by taxpayer/family
3) If more than one property owned in the year, will have to choose 1 to designate as the principal residence
4) TO MIN TAXES it is most advantageous to designate the residence with the highest average capital gain per year as the principal residence
Replacement Property Rules - Taxation - Core B
Description
Must file an election
1) in arm’s length transaction when one property is exchanged for another property, it is deemed to be disposed of for proceeds equal to FMV - any excess of proceeds over ACB is a capital gain
2) If replacement property criteria are met, election is available to fully defer any recapture/capital gain arising on deemed disposition by reducing the UCC/cost base of the acquired property by the amount of the recapture/capital gain
Replacement Property Rules - Taxation - Core B
Replacement property rules that must apply to be eligible to defer the gain:
1) Reasonable to conclude that property was acquired by the taxpayer to replace the former property and put it to the same or similar use
2) Where the former property was used by the taxpayer or a person related to the taxpayer for a business, new property also acquired for generating income in same or similar business or for use by a person related to the taxpayer for that purpose
3) Where the former property was a taxable Canadian property of the taxpayer, the new property is also a taxable Canadian property of the taxpayer
Refundable Dividend Tax On Hand (RDTOH) Taxation Core C
Two types and transition
2 Types of RDTOH balances starting in 2019:
1) Non-eligible RDTOH
2) Eligible RDTOH
At the date of the transition, eligible RDTOH balance will be calculated as the lesser of:
1) existing RDTOH balance
2) 38 1/3 % of the General Rate Income Pool (GRIP) Balance
Refundable Dividend Tax On Hand (RDTOH) Taxation Core C
Non-eligible RDTOH
Includes refundable pt 1 taxes (lesser of pt 1 tax, 30.667% on AII, and 30.6667% on (TI-SBD)) on investment income and Part IV tax on non-eligible portfolio dividends
- only the payment of a non-eligible dividend can trigger a refund from this account
Refundable Dividend Tax On Hand (RDTOH) Taxation Core C
Eligible RDTOH
Tracks refundable taxes (38.3333%) paid on eligible dividends received by the corporation
- Any type of dividend (either eligible or non-eligible) can trigger a refund out of this account
- however, when non-eligible dividends are paid, the refund must come out of the non-eligible RDTOH first
Common CCA Classes Building General catch all Motor vehicles Tools and Application Software Leasehold Improvements Landscape costs Patents, trademarks, copyrights (limited and unlimited life) Computers Manufacturing equipment
Building - Class 1
Catch all - Class 8
Motor vehicles - CLass 10 and 10.1 (max cost of 30K + GST and PST)
Tools, Application software - Class 12 - (still have half year rule)
Leasehold improvements - lesser of:
- straightline over 5 years
- 1/(number of years of lease to max of 40)
Limited life (including internally generated as long as not customer list) intangibles (patents, registered trademark or copyrights) - Class 14 Unlimited life intangibles - Class 14.1
Landscaping costs - NOT capitalized but deductible
Computers - Class 50
Manufacturing equipt - Class 53
Patents, licenses etc - straightline based on legal life (no 1/2 year rule - weight for days owned in the year)
Revenue Recognition - Steps in IFRS 15
1) ID contract
2) ID performance obligations
3) Determine transaction price
4) Allocate transaction price to separate performance obligations in the contract
5) Recognize revenue as performance obligations are satisfied (revenue is recognized as control is passed, either over time or at a point in time)
Revenue Recognition - IFRS 15 - Identification of the performance obligations - defn
Performance obligations = each promise to transfer to the customer either:
1) a good or service (or bundle of goods or services) that is distinct; or
2) a series of distinct goods or services that are substantially the same and have
the same pattern of transfer to the customer
Revenue Recognition - IFRS 15 - Identification of the performance obligations - good/service distinct if
A good or service that is promised to a customer is distinct if:
1) the customer can benefit from the good or service on its own or together with
other resources readily available to the customer; and
2) 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
Provisions, Contingent Liabilities, Contingent Assets (IFRS) - IAS 37
Provisions - Defn and when can be recognized
Provision = a liability of uncertain timing or amount. May be recognized when:
1) entity has a present legal or constructive obligation as a result of a past event
2) it is probably that an outflow of economic benefits will be required to settle the obligation, and
3) a reliable estimate can be made of the obligation
When there is a range of possible outcomes, accrue weighted average (rather than min as in ASPE)
Provisions, Contingent Liabilities, Contingent Assets (IFRS) - IAS 37
Contingent Losses
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 control of the entity
- a present obligation that arises from past events is NOT recognized when an outflow of future economic benefits is NOT PROBABLE OR the amount of the obligation CANNOT BE MEASURED
IFRS makes a distinction: “contingent liability” is used for liabilities that do not meet the recognition criteria, while “provision” is used for liabilities that do meet the recognition criteria but are of an uncertain timing or amount.
Tax Implications of Going Public - Tax - Level C (8 pts)
1) Company status change from CCPC to Public
2) Deemed year end on date of change in status
3) Possible acquisition of control
4) Tax balances that are no longer available (CDA, RDTOH)
5) SBD is only available to CCPC -> public company will be taxed at “high rate”, creating General Rate Income Pool (GRIP) and eligible dividends
6) Any undistributed Small Business earnings in the Low Rate income pool must be paid out first as OTHER THAN ELIGIBLE DIVIDENDS
7) SRED - public company qualifies for lower rate of ITC and they are not refundable (only refundable for CCPC)
8) Public company shares do not qualify for Capital Gains exemption
Employer paid automobile expenses - Taxable Benefit
Taxable benefit when employee is given something that is personal in nature or if something that is personal in nature is paid for by the company
Benefit may include an allowane or a reimbursement of employee’s personal expense (e.g. personal fuel is reimbursed)
Value of benefit is generally FMV
If employee is provided with taxable benefit, amount must be INCLUDED IN THEIR INCOME
Tax - Child Care Cost - deductible - limit
Not deductible if parent stays home; must be deducted from LOWER INCOME SPOUSE
Deduction limited to the lower of:
a) 2/3rds income
b) Sum of yearly maximum:
- 11K disabled
- 8K under 7
- 5K btwn 7 and 16
c) weekly limits for overnight camps plus actual cost for childcare
Vehicles purchased for own business - tax - what can you deduct?
Can deduct the lesser of:
1) loan interest paid
2) $10 per day vehicle is owned during the year
Employer owned vehicle - taxable benefits - standby charge
Taxable benefit = added to income
Standby charge:
If owned: stdby charge = (2%)(cost of vehicle)(months available)
If leased: stdby charge = (2/3)(lease pmts less insurance for the year)(months available)
Employer owned vehicle - taxable benefits - standby charge - reduction - when and what
Taxable benefit = added to income
- The employee is required to use the automobile for employment duties.
- The automobile is used primarily (50% or more) for employment purposes.
- Personal-use kilometres for the year are less than 20,004.
If the reduction applies, the benefit determined above is multiplied by the following fraction:
(Personal-use kilometres) / (1,667 × months avaiable)
Employer owned vehicle - taxable benefits - operating cost benefit
Operating cost benefit is the lesser of:
A) operating cost benefit = ($0.28 x personal km)
B) operating cost benefit = reduced standby charge / 2 (if reduced stdby charge applies)
Stock options - taxation - employment income inclusion
Include in income when options are exercised (overall, 50% is taxed):
income = FMV at exercise date - option price
(entirety of this amount is included in NIFT)
THEN deduct 50% in the calculation of TI
Capital gain = (POD - FMV at exercise date)x50%
Deductibility of work space in home costs - tax - if employee without commissions
Rent? Yes Utilities? Yes R&M? Yes Telephone? Yes Supplies? Yes Property tax? No Home insurance? No Mortgage interest? No CCA on home? No
Deductibility of work space in home costs - tax - if employee WITH commissions
Rent? Yes Utilities? Yes R&M? Yes Telephone? Yes Supplies? Yes Property tax? Yes Home insurance? Yes Mortgage interest? No CCA on home? No
Deductibility of work space in home costs - tax - if self employed
Rent? Yes Utilities? Yes R&M? Yes Telephone? Yes Supplies? Yes Property tax? Yes Home insurance? Yes Mortgage interest? Yes CCA on home? Yes
CCA and losses - Tax
CCA can’t create a loss
Capital losses and depreciable property
Can’t have capital loss on depreciable property; only terminal losses allowed
Owner-Manager Compensation - Salary vs Dividends - Taxation Level C
Corp = separate legal entity, so to extract funds, owner manager must either receive a dividend or be paid a salary
1) salary pmts deductible to corporation while dividends are not (are after tax)
2) Dividend pmts paid out of after tax profits and be eligible for a dividend tax credit which offsets the higher corp tax rate paid
3) Salary considered earned income for the purpose of generating RRSP contribution room and pensionable earnings for CPP
4) Salary pmt may result in reduced net cash flow available to owner manager as there are CPP costs associated with this type of compensation
5) dividend payments will reduce an individual’s cumulative net investment loss (CNIL)
Reserves for bad debts - tax level B
1) reserve may be deducted for bad debts tot he extent that it is reasonable and based on SPECIFIC uncollectible accounts
2) Reserve claimed in one tax year must be included in income in the following tax year and a new reserve based on CURRENT specific uncollectible accounts will be calculated and deducted from income
Therefore, increase in the reserve amount should be deducted each year
Subsequent Events - FR - ASPE 3820
2 types of subsequent events:
1) Those providing further evidence of conditions that existed at the financial statement date, and
2) Those that are indicative of conditions that arose SUBSEQUENT tot he financial statement date
Type 1 is adjusting event (ie event occurring between the date of the FS and the date of their completion provides addl evidence relating to conditions that existed at the date of the FS)
Type 2 requires disclosure if the event:
a) causes significant changes to assets or liabilities in the subsequent period, or
b) will, or may, have a significant effect on the future operations
Contingencies - FR - ASPE 3290
Existing condition involving uncertainty as to possible gain or loss
A contingency is an existing condition or situation involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur.
Uncertainty results in range of probabilities:
1) likely
2) unlikely
3) not determinable
Contingent losses
- must be accrued if the future event is LIKELY and a reasonable estimate of the loss can be made
- disclosed if the future event is LIKELY but a reasonable estimate of the loss CANNOT be made
- disclosed if the future event is not determinable
- if no amount within the range is better, accrue minimum
Contingent gains
- must NOT be accrued
- disclosed if the future event is likely
Accounting Policies, Changes, Errors - IFRS - IAS 8
Only change a policy if:
1) Standard/interpretation requires it, or
2) 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
PPE (IFRS) - IAS 16
Initial recognition if:
1) future economic benefits associated with the asset will flow to the entity, and
2) cost of the asset can be reliably measured
Initially recorded at cost
Subsequent measurement
A) carried at cost less acc depn and impairment losses, OR
B) carried at revalued amount (ie. FV less subsequent depn if FV can be reliably measured) - an increase in value is credited to OCI unless it is a reversal of a valuation decrease previously recognized as an expense
Significant components are required to be depreciated over their estimated useful lives
Agriculture - IFRS - IAS 41
Standard applies to:
1) biological assets
2) agricultural produce at the point of harvest
3) govt grants related to biological assets
Initial recognition if:
A) entity controls the asset as a result of a past event
B) future economic benefits associated with the asset will flow to the entity, and
C) 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 acc depn if no reliable measurement of FV is available
Home Office Expenses - Tax - when is a deduction allowed?
Home office deductions are allowed if:
a) a workspace is an individual’s principal place of business, or
b) it is used on a regular and continuous basis for meeting customers, clients, or patients of the individual in earning business income
Financial Instruments - Impairment - FR - ASPE Level A
Financial instruments tested for impairment at the end of each reporting period.
Where impairment exists, reduce CV to highest of:
1) PV of CFs expected from holding asset
2) NRV if asset sold
3) Amt entity expects to realize from exercising its right to collateral
Impairment can be reversed if asset subsequently recovers in value
Deductibility of expenses (Tax) - general limitation
To be deductible, expense or outlay must be made or incurred by the taxpayer for the purpose of gaining, producing, or maintaining income, and be expected to generate income related to the taxpayer’s business or property
Common business expenses DISALLOWED - Tax
1) Amortization/impairment/accounting gains and losses (deduct via CCA)
2) Personal expenses and membership/club dues
3) Charitable donations - deductions to determine Taxable Income for a Corporation
4) Political contributions - limited tax credit available for an individual; federal accountability act deems corporate political contributions to be illegal, resulting in no deduction or credit
5) Taxes, interest, and penalties related to tax
6) Meals and entertainment (50% for business purposes; deductible for remote or temporary work sites or special events for employees)
7) Expenses for issue or sale of shares and refinancing costs (deduct over 5 years)
8) Life insurance premiums (except where policy has been assigned as collateral)
9) Unpaid amounts and unpaid remuneration (accrued salary which is unpaid 180 days after fiscal period is deemed not to have been incurred until actually paid
10) Carrying charges (i.e. interest exp) and property taxes on vacant land (non-deductible portion added to ACB)
11) Soft costs on construction of building (including interest, legal, accounting fees, insurance, prop taxes - all must be capitalized)
Common business expenses ALLOWED (Tax)
- Automobile expenses
- Home office expenses
- Convention expenses (limited to 2 per year)
- Foreign taxes (deductions in excess of 15% on foreign-source property income, since foreign tax credits limited to 15%; if no foreign tax credit can be claimed, entire amount of foreign non-business income tax is deductible)
- Inventory valuation (lower of cost or market, method must be consistent, LIFO not permitted)
- Reserves – no deduction for a reserve, contingent liability or sinking fund in general, but reserve is permitted for doubtful debts, amounts not due under an installment sales contract; any reserve deducted in one year must be taken into income the next year
CCA (Tax)
- CCA may be claimed on all tangible capital property other than land, must be available for use
- Inducements (such as leasehold improvements) may be included in income or used to reduce capital cost
- Most classes subject to ½ year rule (except class 12 [some cases], 14, and 52)
- Dispositions are credited to UCC at lesser of cost and proceeds (excess of proceeds over original cost result in a capital gain)
- Terminal loss – when there is a balance of UCC in the class but there are no assets remaining, the UCC can be claimed as a terminal loss (capital loss cannot arise on the disposition of depreciable property)
- Recapture – arises when the balance in the class is negative (i.e. when the adjustment re: disposal is in excess of the UCC) and is taken into income
- Recapture / Terminal loss calculated as: Lesser of a) proceeds and b) cost; less UCC. If positive, then recapture. If negative, then terminal loss.
Reporting alternatives – Specific items (Assurance) - CAS 805
• CAS 805 Report – Audit of a Single Financial Statement and Specific Elements, Accounts or Items of a Financial Statement
o A report providing audit level assurance on individual financial statements or accounts, rather than financial statements on the whole
o May not be a practical alternative if the financial statements on the whole are not being audited
Reporting alternatives – CAS 800 Special Considerations — Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks
For both: Special Purpose Financial Statements and Financial Statements Prepared in Accordance with Special Purpose Frameworks
Special purpose financial statements are essentially a specialized set of financial statements created for a limited set of users.
Financial statements may be prepared using a special purpose framework that is not Generally Accepted Accounting Principles (GAAP). A special purpose framework is a financial reporting framework designed to meet the financial information needs of specific users.
Level of assurance
High (CAS 800) or moderate (CSRE 2400)
Other considerations
A CAS 800 report is generally more costly than a CSRE 2400 report because of the higher level of assurance provided.
Examples:
- statement of profit distribution for a joint venture (special purpose)
- financial statements prepared using a cash basis of accounting (special purpose framework)
- FS prepared with a tax basis of accounting
If special purpose framework - EMPHASIS OF MATTER PARA is included
Reporting alternatives – CAS 810 Special Considerations — Engagements to Report on Summary Financial Statements
The practitioner should only accept an engagement to report on summary financial statements when the practitioner has been engaged to conduct an audit of the complete financial statements from which the summary financial statements have been derived.
Audit level assurance
Reporting alternatives – CSAE 3416 - Reporting on Controls at a Service Organization
There are two types of reports that can be provided:
- A Type 1 report attests to the design and implementation of the service organization’s system of controls at a specific point in time. This is often for one day (a point in time), when the auditors actually review the design and implementation of the system.
- A Type 2 report attests to the design, implementation and ongoing operating effectiveness of the organization’s system of controls. This assurance would be provided over a period of time, such as six months or a year.
High level of assurance
Reporting alternatives – Audits and Reviews of Compliance with Agreements, Statutes and Regulations (now in CSAE 3530)
Section 5815 Special Reports — Audit Reports on Compliance with Agreements, Statutes and Regulations
Section 8600 Reviews of Compliance with Agreements and Regulations
Level of assurance
High (audit) or moderate (review)
Reporting alternatives – Compilation Engagements
The practitioner ensures that the statements are arithmetically correct. Although no assurance is provided on the compiled financial statements, the practitioner remains associated with the information provided.
Reporting alternatives - Section 7600 - Reports on the Application of Accounting Principles
Management of an entity may consult with a practitioner, other than the incumbent accountant, on the application of accounting principles on which the incumbent accountant has already provided guidance. The incumbent accountant is the public accountant engaged to report on the financial statements of the entity.
No assurance
Reporting alternatives - Section 9100 - Reports on the Results of Applying Specified Auditing Procedures to Financial Information Other than Financial Statements
The practitioner will only perform procedures that have been requested by the client. The procedures should be specific and should not give the practitioner any flexibility in determining how to perform the procedure.
No assurance
Reporting Alternatives - Auditor’s Involvement with Offering Documents - AuG-6
Canadian securities regulators may require a practitioner to examine and provide an opinion on a forecast or a projection that is included in an offering document.
No assurance
Reporting Alternatives - Compilation of a Financial Forecast or Projection - AuG-16
A client may request that a practitioner compile a forecast (prepared for one year) or a projection (prepared for more than one year). While a practitioner can prepare these compilations, the practitioner cannot provide assurance as to the achievability of the financial forecast or projection because actual results may vary from those forecasted or projected.
No assurance
5 Key Principles of Rules of Professional Conduct
- Objectivity: CPA Canada members must maintain an independent and objective state of mind when providing assurance services.
- Integrity and due care: CPA Canada members must act with integrity and due care in the performance of their professional activities.
- Professional competence: CPA Canada members must maintain their knowledge and skill at a level required by the professional bodies and must not undertake work for which they lack the necessary competence.
- Confidentiality: CPA Canada members must maintain confidentiality with respect to the affairs and the business of the client.
- Professional behaviour: CPA Canada members must behave in a professional way that maintains the good reputation of the profession and serves the public interest. Members are expected to avoid actions that would discredit the profession.
5 Independence Threats
Advocacy Self Interest Self Review Familiarity Intimidation
Advocacy Threat - Independence
Advocacy threats occur where the practitioner (or his or her firm) is perceived to promote, or actually promotes, the position of the client, as in the following examples:
o The practitioner (or his or her firm) promotes the sale of shares or other securities for the client. In this situation, the practitioner may or may not receive a commission for such sales.
o The practitioner (or his or her firm) represents the client in a legal dispute.
o The practitioner (or his or her firm) represents the client in negotiations with a third party, such as a major creditor of the client.
Self-Interest Threat - Independence
Self-interest threats occur where the practitioner (or his or her firm) has a financial interest in the client, as in the following examples:
o Assurance team members involved in the assurance engagement and/or their immediate family members own shares of, or have made a loan to, the client.
o The client’s fees are significant in relation to the total fee base of the practitioner (or his or her firm).
o A loan is made by a client to an assurance team member that is outside of normal lending terms.
Self-Review Threat - Independence
Self-review threats occur where the practitioner is in the position of having to form an opinion on his or her own work, as in the following examples:
o The practitioner, or an assurance team member, has recently been an employee or a director of the client and has had an opportunity to prepare original data or records for the client.
o The practitioner, or an assurance team member, has provided internal audit services, human resource services, valuations, information technology services, or corporate finance services to the client. The practitioner then provides assurance over these services.
Familiarity Threat - Independence
Familiarity threats occur where a close relationship exists between the practitioner and the client, creating an environment where it is difficult for the practitioner to behave with professional skepticism, as in the following examples:
o The practitioner (or his or her firm), or an assurance team member, has a long-standing association with the client.
o A former partner of the public accounting firm now holds a senior position (such as chief financial officer or chief operating officer) at the client.
o The practitioner, or an assurance team member, has accepted other than very minor gifts from the client.
o The practitioner, or an assurance team member, has accepted other than very minor gestures of hospitality from the client, such as tickets to a sporting event or meals.
Intimidation Threat - Independence
Intimidation threats occur where the client intimidates the practitioner (or his or her firm), as in the following examples:
o The client threatens to replace the practitioner next year.
o There is pressure from the client to reduce the number of audit hours in an effort to reduce assurance engagement fees.
Independence Safeguards
Safeguards are created by the profession, by the client, or by the practitioner (or his or her firm). They can include, but are not limited to, the following:
- profession safeguards, such as education and training provided by CPA Canada regarding the threats to independence
- client safeguards, such as the introduction of an audit committee and/or the implementation of policies and procedures to ensure that financial statements are fairly presented
- practitioner safeguards, such as the implementation of firm policies and procedures (such as a partner rotation policy) that ensure the quality of the firm’s service and compliance with independence
Professional Conduct - Specific Rules Around Fees
Prior to providing a fee quotation to perform any professional service, CPA Canada members must obtain adequate information regarding the work to be performed. Billings for professional services must be rendered on a just and reasonable basis and provide explanations (as necessary) for the amounts billed. Billings should not be significantly lower than the fees charged by the predecessor auditor or quoted by others, and contingent fees are specifically prohibited where the CPA Canada member’s professional judgment or objectivity may be compromised.
Professional Conduct - Specific Rules Around Advertising
CPA Canada members should not engage in false or misleading advertising or make unsubstantiated claims, nor should they solicit any professional engagement in a manner that is persistent, coercive, or harassing.
Professional Conduct - Specific Rules Around Predecessors
A CPA Canada member must contact the predecessor practitioner before accepting an engagement with respect to public accounting. The member must ask the predecessor if there is any reason that he or she should not accept the engagement. The predecessor is required to respond promptly to inquiries of this nature. Unless the client has given the predecessor permission to provide additional information, the predecessor will be limited to a yes-or-no answer.
Shareholder loan (Tax)
- Principal amount must be added to shareholder’s income ITA 15(2)
- No imputed interest under ITA 80.4(3)
- Can be deducted under ITA 20(1)(j) when it is repaid
- Exception: If loan repaid prior to second balance sheet date of corporation, then principal amount need not be added to shareholder’s income, but imputed interest under ITA 80.4(2) would apply. However, it cannot be a series of loans and payments (as per ITA 15(2.6))
- Exception: Loan advanced as an employee, rather than shareholder, to acquire residence, auto for work or shares of the company, under ITA 15(2.4), as long as at the time the loan was made, bona-fide arrangements were made for repayment of the loan within a reasonable amount of time
Revenue recognition – Consignment sales (ASPE)
- 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
Asset criteria (ASPE)
Definition of an asset:
• Future benefit
• Entity can control the benefit
• Event that caused benefit already occurred
Residency (Taxation)
• CRA considers both significant and secondary residential ties in assessing whether a taxpayer is a resident of Canada
• Significant residential ties – factors that make a strong case, in and of themselves, that residential ties exist:
o a home in Canada
o a spouse or common-law partner in Canada
o dependents in Canada
• Secondary residential ties – factors that may contribute to whether residential ties exist (including, but not limited to):
o personal property in Canada (car, furniture, etc.)
o social ties in Canada (memberships in Canadian recreational groups, etc.)
o economic ties in Canada (Canadian bank account or credit cards, etc.)
o Canadian driver’s licence, Canadian passport, or Canadian health insurance
• If a taxpayer is determined to be a resident of Canada, they are taxed on all of their worldwide income; non-residents of Canada are taxed only on income tied to Canadian sources (25%)
PPE – Betterments (ASPE)
- 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
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
Non-monetary transactions (IFRS)
• 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
Review engagements (Assurance) - CSRE 2400
• The objective of a review engagement is to obtain limited assurance about whether the financial statements as a whole are free from material misstatement
• A conclusion is formed on whether anything has come to the practitioner’s attention to cause them to believe the financial statements are not prepared, in all material respects, in accordance with an applicable financial reporting framework, i.e. ASPE, IFRS
• Limited assurance about the results of the examination is provided, with an explicit statement that an audit opinion is not expressed
• Report expresses negative assurance – “nothing has come to our attention…”
• Similar to an audit, independence is required as it is an assurance engagement
• Materiality must be determined
• Typical procedures include:
o Obtaining knowledge of the client’s business
o Making inquiries of management and client personnel
o Performing analytical procedures
Opening balances (Assurance) - CAS 510 reference
- Sufficient and appropriate evidence regarding opening balances being free of material misstatement must be obtained in order to issue an opinion
- Evidence may be obtained by reviewing the previous auditor’s working papers, if the client has been audited before, or by performing specified audit procedures on the opening balances, if the client is being audited for the first time
- If the opening balances cannot be verified, it may be necessary to issue a qualified opinion or denial / disclaimer of opinion due to the scope limitation
- Generally, the opening balance scope limitation would not apply to a review engagement as there’s no requirement to send out A/R confirmations or attend inventory counts, which are time-sensitive and generally only required for audit level assurance
Employee vs. Contractor (Tax)
• No single test is decisive. Must consider:
o Intention of the parties
o Control of work (hours, location, how job is completed)
o Ownership of tools (who supplies)
o Chance of profit and risk of loss
o Ability to subcontract work or hire assistants
o Integration (interaction with other employees)
o Specific Results
• Issues:
o Contractors can deduct all reasonable expenses whereas employment deductions are limited
o Employees can receive EI benefits, contractors can opt in with restrictions
o Employers are required to withhold source deductions for employees
o Employer may be responsible for both employee and employer contributions of EI and CPP if an individual is incorrectly classified as a contractor
Employer provided automobile – Standby charge (Tax)
• Standby charge is a taxable employment benefit that only applies if an employer-provided automobile is available to the employee for personal use
• Calculated as:
o 2% of the original cost per month available; or
o 2/3 of the monthly lease payment per month available
• reduced by payments made by the individual to the employer
• reduced standby charge applicable where personal use less than 1,667 km per month and automobile primarily used for business purposes (consider greater than 50%)
Employer provided automobile – Operating cost benefit (Tax)
• Taxable employment benefit, calculated as:
o $0.26 (for 2018) or $0.28 (for 2019) per km of personal use; or
o 50% of the standby charge (only when vehicle used at least 50% for business)
• Operating costs include gas, insurance and maintenance, but not parking
Employer provided automobile – Tax planning (Tax)
- Consider employee purchasing the car and charging a reasonable per-km allowance (may be more tax effective since the standby charge is based on original cost)
- Consider employee including allowance in income and claiming business portion of actual car expenses if they exceed the allowance
- Consider sale and leaseback for employer-provided cars (leasing may lower tax benefits because otherwise the standby charge is based on original cost)
- Maintain log to justify business vs. personal km
- Lower standby charge by reducing number of days vehicle available for personal use
- Increase business use by visiting clients on the way to and from work
Employment – Taxable benefits (Tax)
- Board and lodging (unless at remote location)
- Most rent-free and low-rent housing
- Trips of a non-business nature
- Gifts greater than $500 (that are not cash or near-cash)
- Cash and near-cash gifts
- Cost of tools where employee is not required to have tools to work
- Forgiveness of debt
- Employer-paid education costs when primarily for the benefit of employee
Employment – Non-taxable benefits (Tax)
- Uniforms and special clothing required to be worn
- Transportation to job site
- Moving expenses reimbursed, excluding housing loss reimbursement
- Recreational facilities at place of work
- Premiums paid under private health services plans
- Professional membership fees when primarily for benefit of the employer
ASPE Rev Rec Criteria (ASPE 3400)
1) Collectibility reasonably assured
2) Consideration reliably measurable
3) Performance achieved
a) PERSUASIVE EVIDENCE of an arrangement exists
b) determine using either percentage of completion or completed contract method (multiple acts vs single act, service over time vs single point in time)
Agency relationship - evidence of this?
Exists if there is no profit margin and the company is simply recovering net costs
Agency relationship - how to account for this
Record income on a net basis (i.e. no revenue or expenses) if company is an agent in this transaction and simply recovering net costs
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
Impairment of assets (IFRS)
• 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
Investments – Equity method (IFRS) - IAS 28
• 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
Accounting for subsidiaries (ASPE) - ASPE 1591 and ASPE 3051
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)
PPE – Costs (ASPE) - ASPE 3061
- 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
Capital lease criteria – Lessee (ASPE) - ASPE 3065
• 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
Capital lease criteria – LESSOR (ASPE) - ASPE 3065
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**
Types of capital leases – Lessor (ASPE) - 3065
• 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
Compound Financial Instruments (ASPE) - ASPE 3856
• 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
Calculate portion attributable to debt first, then remainder is attributed to equity portion (if using this method)
Capital Budgeting – Buy vs. Lease (Finance) - How to and other factors to consider
• 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)
Financing Options – Debt vs. Equity (Finance)
• Debt financing options:
o Loan- consider loan term, and security/collateral required
o Lease
o Government assistance
• Equity financing options:
o Angel investors- can be friends or family looking for a return on investment; generally passive investors
o Venture capitalists- professional investment funds, looking for superior returns (>30%); active participants in management, with a clear exit strategy
o Private equity- tends to participate later in business lifecycle, hence lower risk
o Public markets
Revenue recognition criteria – Completed contract method (ASPE)
- The completed contract method would ONLYbe 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.
Revenue recognition criteria – Percentage-of-completion method (ASPE)
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.
Revenue recognition – Effect of uncertainties (ASPE)
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.
Business use of home expenses (Tax)
A taxpayer can deduct expenses for the business use of a workspace in the home, as long as they meet one of the following conditions:
• The home is the principal place of business.
• They use the space only to earn business income, and the taxpayer uses it on a regular and ongoing basis to meet clients, customers, or patients.
Eligible costs include: heat, home insurance, electricity, property taxes, repairs and maintenance, mortgage interest or rent (if tenant).
• Expenses are pro-rated using a reasonable basis such as the area of the work space divided by the total area of the home.
• Home office expenses are also pro-rated for a SHORT BUSINESS YEAR.
• Losses CANNOT be created by home office expenses. Unused expenses are CARRIED FORWARD for use in a later year.
• Do not claim CCA on a principal residence, as it may negatively impact the ability to use the principle residence exemption.
Inventory measurement – Cost formulas (specific identification) (ASPE 3031)
• 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
Inventory measurement – Allocation of overhead (ASPE 3031)
- 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.
Intangible assets (ASPE 3064) - Steps
• 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.
Impairment of Assets - Steps
1) Asset grouping (asset group if ASPE, CGU if IFRS)
2) Indicators for impairment - list one internal and one external
2.1) In IFRS no indicators needed and must test for impairment annually if asset is CGU with goodwill, intangible not yet ready for use, or intangible with indefinite useful life
3) Measure recoverable amount
If IFRS, = higher of:
A) FV if sold less cost of disposal
B) Value in use - sum of PV of future CFs and PV of future CF from ultimate disposal of asset
If ASPE = sum of undiscounted cash flows
4) If CV>recoverable amount, record impairment loss
If IFRS, write down to recoverable amount
If ASPE, write down to FV
5) Adjust depreciation/amortization amount for future periods
6) If impairment loss relates to CGU/asset with goodwill, record loss against goodwill first (write down to nil) and then apply to remaining assets in CGU on pro rata basis
Impairment reversal - IFRS
Not allowed for goodwill
Max amount you can write asset up to is the lesser of:
1) Recoverable amount
2) Carrying value that asset would have had net of depn if it had never been written down.
Consider the depn at both sides (if it wouldnt have been written down vs what the current CV is making sure to account for adjusted amt of depn taken in the current year).
Lease inducements (ASPE)
• 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.
Business income vs. property income (Tax)
• It is a question of fact whether income is from business or property.
• Capital property is property that provides a long term or enduring benefit
• Disposition of capital property gives rise to capital gains or losses
• Business income will arise from an “adventure or concern in the nature of trade”, determined as follows:
o Conduct
How long was the asset held? Have there been similar transactions?
o Nature of the asset
Is the asset capable of producing income? Is the asset related to the taxpayer’s ordinary business?
o Intent
Did the taxpayer originally acquire the asset with the intention to sell?
• For an individual, business income is generally taxed at a higher rate than capital gain, as only 50% of capital gains are taxable.
• For a CCPC earning less than the SB Limit, capital gain is generally taxed at a higher rate than business income, as the SBD doesn’t apply to capital gains
Incremental Cash Flows (Finance)
• Incremental cash flows comprise the additional cash flows from taking on a new project, incorporating the tax-affected initial outlay, annual revenues & expenses and terminal value (or cost) associated with the project, in accordance with the scale and timing of the project
• When determining incremental cash flows from a new project, consider:
o Sunk Costs – These are the initial outlays that cannot be recovered even if a project is accepted. As such, these costs will not affect the future cash flows of the project and are not considered incremental
o Opportunity Costs – These represent any potential loss of current cash flows due to accepting a new project and are considered incremental
o Cannibalization – This is the opportunity cost where a new project takes sales away from an existing product
o Working Capital Changes – These represent changes in receivables, payables and inventory due to accepting a new project and are therefore considered incremental
Control Deficiencies (Assurance)
• The most effective format to address controls weaknesses consists of a short statement of the problem (deficiency), its potential effect(s) on the financial statements or operations (implication) and suggestions to address the matter (recommendation) o Deficiency (D) – this is generally a case fact outlining something that might be deficient with the current controls o Implication (I) – here, we go beyond case facts to explain the effects of the noted deficiency either on the financial statements or on operations. To the extent possible, effects on the financial statements must be tied to assertions or at least the affected accounts must be outlined along with a discussion of how they might be affected by the deficiency o Recommendation (R) – this involves suggesting a solution to rectify the noted deficiency that is specific and practical given the case facts and circumstances.
Internally generated intangible assets (IFRS) - IAS 38
• 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
Intangible assets – Definition and recognition (IFRS) - IAS 38
• 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
Intangible assets – Amortization (IFRS) - IAS 38
- 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
Discontinued operations (IFRS) - IFRS 5
• 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.
Assets held for sale (IFRS) - IFRS 5
• 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
Borrowing costs (IFRS) - IAS 23
• 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
Share-based compensation (IFRS) - IFRS 2
- 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
Common audit risk factors (Assurance)
- New or additional users
- Management bias
- Going concern
- Debt covenants
- Cash flow issues
- Control issues
- New problems or issues
- Significant growth in revenues or assets
- Legal claims
- High risk industry
- Complex systems
- Changes in operating environment
- New personnel
- Changes to information systems
- New technologies
- Changes in products or activities
- Corporate restructuring
- Expanded foreign operations
- New accounting pronouncements
Materiality (Assurance) - Common Bases
3-7% of Normalized Net Income Before Tax (if business has profit motive)
1-3% of assets (if FV of assets a concern - property values)
1-3% of revenues or expenses (e.g. if non profit)
3-5% of equity
Materiality (Assurance) - CAS 320
- A misstatement in financial statements is considered to be material if, in the light of surrounding circumstances, it is probable that the decision of a person who is relying on the financial statements, and who has a reasonable knowledge of business and economic activities (the user), would be changed or influenced
- Common base = 5% of Normalized Net Income before Taxes (NIBT) for profit-oriented entities
- Materiality is not purely quantitative; qualitative factors must be considered
- Factors that may indicate the existence of one or more particular classes of transactions, account balances or disclosures for which misstatements of lesser amounts than materiality for the financial statements as a whole could reasonably be expected to influence the economic decisions of users- i.e. “specific” materiality
- Performance materiality (generally 60% to 80% of materiality) means the amount less than materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality
Audit approach (Assurance)
- If Control Risk assessed at Maximum, then no reliance may be placed on controls, resulting in no Tests of Controls, and a Substantive approach must be followed
- If Control Risk assessed at less than Maximum, then some reliance may be placed on controls, based on results of Tests of Controls, which could lower the amount of substantive work to be done at year-end. Such an approach is generally referred to as a Combined approach
Financial statement assertions (Assurance) - Income statement assertions- CAS 315
• Assertions about classes of transactions and events for the period under audit:
o Occurrence – transactions and events that have been recorded have occurred and pertain to the entity
o Completeness – all transactions and events that should have been recorded have been recorded
o Accuracy – amounts and other data relating to recorded transactions and events have been recorded appropriately
o Cut-off – transactions and events have been recorded in the correct accounting period
o Classification – transactions and events have been recorded in the proper accounts
Financial statement assertions (Assurance) - Balance Sheet assertions- CAS 315
• Assertions about account balances at the period end:
o Existence – assets, liabilities, and equity interests exist
o Rights and obligations – the entity holds or controls the rights to assets, and liabilities are the obligations of the entity
o Completeness – all assets, liabilities and equity interests that should have been recorded have been recorded
o Valuation and allocation – assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded
Financial statement assertions (Assurance) - Presentation and Disclosure assertions - CAS 315
• Assertions about presentation and disclosure:
o Occurrence and rights and obligations – disclosed events, transactions, and other matters have occurred and pertain to the entity
o Completeness – all disclosures that should have been included in the financial statements have been
o Classification and understandability – financial information is appropriately presented and described, and disclosures are clearly expressed
o Accuracy and valuation – financial and other information are disclosed fairly and at appropriate amounts
Use of an expert (Assurance) - CAS 500 (Audit Evidence)
- Evaluate the competence, capabilities and objectivity of the expert
- Obtain an understanding of the expert’s work
- Evaluate the appropriateness of the expert’s work as audit evidence for the relevant assertion
Revenue recognition criteria (ASPE)
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
Revenue recognition – performance criteria (ASPE)
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.
Revenue recognition – collectability criteria (ASPE)
- Recognition of revenue requires that the revenue is measurable and that ultimate collection is reasonably assured
- When there is reasonable assurance of ultimate collection, revenue is recognized even though cash receipts are deferred
- When there is uncertainty as to ultimate collection, recognize revenue only as cash is received
Revenue recognition – multiple deliverables (ASPE)
- 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
Government assistance (ASPE) - ASPE 3800
• 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
Discontinued operation (ASPE) - ASPE 3475
- 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
Assets held for sale (ASPE) - ASPE 3475
• 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
Accounting changes – change in estimate (ASPE) - ASPE 1506
• 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
Net Present Value (NPV) vs. Internal Rate of Return (IRR) (Finance)
- The NPV rule states that you invest in any project which has a positive NPV when its cash flows are discounted at the opportunity cost of capital, also known as the discount rate (usually the cost of raising the capital to fund the project)
- The IRR rule states that you invest in any project offering a rate of return which exceeds the opportunity cost of capital
- A project’s rate of return is calculated as the discount rate at which the NPV of the project would be zero
- Therefore, the NPV and IRR rules should give the same accept/reject answer about a project, in most circumstances
- A project’s cash flows should include incremental elements only (i.e. additional sales, associated expenses, lost margin on cannibalization, investment & associated tax-shield, etc., but no financing elements, as discounting of the cash flows already addresses financing)
Discounted vs. Undiscounted Cash Flows (Finance)
- Incremental cash flows (excluding financing elements) should be discounted to recognize the time value of money for the purposes of making a decision regarding accepting or rejecting a project
- Incremental cash flows (including financing elements) should be analyzed year over year, without discounting, to determine if a certain cash position would be met by a certain time
Payback Period (Finance)
• Payback period is the time in which the initial cash outflow of an investment is expected to be recovered from the cash inflows generated by the investment
• In general, investments with lower payback period are preferred
• To determine, calculate the cumulative net cash flow for each period and then use the following formula for payback period:
Payback Period = A + B / C, where:
o A is the last period with a negative cumulative cash flow;
o B is the absolute value of CUMULATIVE cash flow at the end of the period A (including year 0); and
o C is the total cash flow during the period after A.
Reporting alternatives – Compliance with agreement (Assurance)
• Section 5815 Special Report – Audit reports on compliance with agreements, statutes and regulations
o A report stating compliance with the terms of the agreement, through procedures such as inspection, observation, inquiry, confirmation, recalculation, reperformance and analytical procedures
o High level of assurance and therefore more costly alternative
• Section 8600 Report – Reviews of compliance with agreements, statutes and regulations
o A report stating compliance with the terms of the agreement, through procedures such as inquiry, discussion and analysis
o Moderate level of assurance and therefore less costly alternative
• Section 9100 Report – Results of Applying Specified Auditing Procedures
o A report providing the factual results of the specific procedures that can be chosen to be performed
o No assurance provided but is the most flexible of all alternatives
Methods of collecting audit evidence (Assurance) - CAS 500 - there are 7
- Inspection – thorough examination of an item by the auditor
- Observation – use of the senses to assess certain activities
- Inquiry – obtain written or oral information from the client in response to questions
- Confirmation – receipt of a written or oral response from an independent third party verifying the accuracy of information
- Recalculation – recheck the computations and mathematical work completed by the client
- Reperformance – redo other non-mathematical procedures such as internal controls
- Analytical procedures – use comparisons and relationships between financial and non-financial information to determine whether account balances appear reasonable
Related Party Transactions (ASPE) - ASPE 3840
• 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.
Financial Ratio Analysis
Financial ratios are categorized according to the financial aspect that the ratio measures:
• Liquidity ratios measure the availability of cash to pay short-term debts.
E.g., Current ratio, Quick ratio, Working capital ratio
• Asset turnover ratios measure efficiency in utilizing assets. E.g., accounts receivable turnover, inventory turnover
• Profitability ratios measure how well assets are used and expenses are controlled to generate a return. E.g., gross profit margin, net profit
• Debt service ratios measure the ability to repay long-term debt. E.g., debt to equity, times interest earned
Ratios generally are not useful unless they are benchmarked against something else such as past performance or another organization. Therefore, the ratios of organizations in different industries, which face different risks, capital requirements, and competition, are usually hard to compare.
AR Turnover
Net credit sales / Avg AR balance
Inventory Turnover
COGS / Avg Inventory Balance
Days in receivables
365 / AR turnover ratio
Lease Accounting – Land & Building (ASPE) - ASPE 3065
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.
Subsequent Events (ASPE) - ASPE 3820
• 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
Contingencies (ASPE) - ASPE 3290
• 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
Revenue Recognition (IFRS) - IFRS 15
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
Accounting Policies, Changes, Errors (IFRS) - IAS 8
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
Break Even Point with Multiple Products (Product Mix)
Find BEP for a BUNDLE based on product mix. Eg product mix is 70% of A and 30% B. Find BEP for selling 7 A + 3 B.
CMx - FC = 0
FC / CM of bundle
CM of bundle = CM of A x 7 plus CM of B x 3
After finding BEP for number of bundles, multiply the number of bundles by the number of each item in the product mix to find the number of A, and B etc must be sold
Sum of number of A and B etc = total number of units that must be sold to BEP (vs number of bundles)
Auditor’s Involvement with Offering Documents
When issuing securities to the public to raise capital, entities will provide potential shareholders with their financial information by way of an offering document. Canadian securities regulators may require a practitioner to examine and provide an opinion on a forecast or a projection that is included in an offering document.
11.1 Handbook reference
AuG-6 Examination of a Financial Forecast or Projection Included in a Prospectus or Other Public Offering Document
The practitioner must give consent in writing prior to the use of the report in an offering document. Section 7150 Auditor’s Consent to the Use of a Report of the Auditor Included in an Offering Document provides guidance for this consent letter. The consent letter wording clarifies that the consent does not provide an audit or a review of the offering document. The consent letter informs the securities regulator that the practitioner has read the prospectus and has no reason to believe that there are any misrepresentations.
If unaudited financial statements are included in the offering document, the practitioner will need to perform review procedures on the financial statements using the guidance provided in Section 7060 Auditor Review of Interim Financial Statements.
If pro forma financial statements are included in the offering document, the practitioner will need to verify that the historical financial information has been properly taken from the historical financial statements that were previously reported on. The practitioner will inquire as to how management determined the necessary adjustments to the pro forma statements and whether the statements comply with regulatory requirements. The practitioner will also recalculate the pro forma amounts based on the historical financial statements.
11.3 Reporting considerations
In addition to providing consent, a practitioner may be asked to provide some assistance to underwriters. Practitioners may either issue a comfort letter or participate in a due diligence meeting. The comfort letter assists the underwriter with the underwriter’s due diligence in connection with the offering document. Section 7200 Auditor Assistance to Underwriters and Others provides guidance in this area.
Emphasis of Matter Paragraphs Used to Highlight
1) Lack of going concern assumption and that statements are prepared on liquidation basis, or
2) Going concern assumption is used and appropriate but a material uncertainty exists - draws attention to note disclosure around this uncertainty
3) an uncertainty relating to the future outcome of exceptional litigation or regulatory action, or
4) early application of a new accounting standard that has a pervasive effect on the financial statements in advance of its effective date, or
5) a major catastrophe that has had, or continues to have, a significant effect on the entity’s financial position
Audit Risk formula
Inherent risk: IR. Risk before considering controls
IR x CR x DR = AR
IR x CR = ROMM
DR is substantive vs combined approach w control reliance
Materiality - How To (Mat, PM, SPM)
Materiality
users (list them and their needs) Conclude on base and percentage Normalization of errors and one time items to base to calc materiality
PM is based on auditor/audit needs. Consider risk only with PM and SPM
Specific materiality (SM) - determine as with ofsl materiality but at the account level (if set SM, set SPM too)
Acronyms for case writing
IGAR
RAMP
WIR
for Procedures: AR and WHY its a risk, P (ARP
Examples of inherent risk factors that increase the RMM at the OFSL include:
(ALWAYS EXPLAIN WHY THEY INCREASE THE RISK)
ALWAYS PROVIDE FACTORS THAT INCREASE AND DECREASE RISK
- A company in poor financial health: The company may not be a going concern, thus impacting the presentation of the financial statements as a whole.
- Significant market competition that is driving down prices and pressuring cost structures: Significant market competition may create aggressive revenue recognition. Management may be biased to overstate earnings in order to maintain the ability to raise financing.
- The company has never been audited before: The opening and comparative balances may not be reliable.
- An upcoming purchase or sale of the company: The sellers of the company will have an inherent bias to make the financial statements appear more favourable. The purchasers of the company will be relying on the audit report to make a decision.
- Imposition of more stringent regulation on the industry and the company: Given that regulatory agencies may be reviewing and scrutinizing the client’s financial statements, there will be new users of the financial statements.
- An initial public offering, issuance of new debt, or bank covenants: Additional users relying on the audit report increases risk, as the preparers of the statements have an inherent bias to make the financial statements appear more favourable to their new users.
- Employees with reliance on net income for compensation (bonuses)
Examples of control risk factors that increase the RMM at the OFSL include: (ALWAYS EXPLAIN WHY THEY INCREASE THE RISK)
Use of an outdated general ledger system that is no longer supported by the software system: An outdated general ledger system used for financial reporting may not reliably compile financial statement information.
- Lack of segregation of duties: Staff may have access to the complete accounting cycle of transactions, which increases the risk of fraud and error occurring and going undetected.
- Lack of an internal audit function: Management and the board of directors may not be aware of the company’s control deficiencies.
- Lack of general computer controls, such as passwords, firewalls, encryption, virus protection, backup system, and so forth: These risks make the system susceptible to a loss of data or intrusion by unwanted parties.
- Management has a poor attitude toward control or places little importance on control systems: Appropriate controls may not be in place or employees may put little effort into following and/or executing controls.
- Management override of controls: This sets a tone at the top for a disregard of controls.
- Lack of policies: Employees may act inappropriately and inconsistently, and there may be a lack of accountability.
- Lack of system documentation
Procedures to address the RMM at the OFSL
Once the practitioner has identified and assessed the RMM at the OFSL, the practitioner will need to respond accordingly. Examples of responses include:
- emphasizing professional skepticism to the audit team
- assigning more experienced staff to the audit team
- increasing supervision of the audit
- adding elements of unpredictability in audit procedures
- making changes to the nature, timing, and extent of the audit procedures
- if the company has multiple locations/branches, increasing the number of locations/branches to be tested
Examples of factors that may have an impact on inherent risk at the assertion level include:
Industry
o technology change in industry — for example, inventory that is easily made obsolete due to changing trends, such as cellphone inventory
• Nature of business
o concentration of customers in one industry with economic downturn — for example, receivables from these customers may not be collectable
o type of inventory held — for example, there is a greater risk that the inventory of an electronics retailer will become obsolete more quickly than the inventory of a steel manufacturer
• Characteristics of an account balance or class of transaction
o inventory or fixed assets susceptible to theft — for example, high-value inventory that is easily misappropriated (such as jewelry) or high-value capital assets that are small and can be easily stolen (such as small tools)
o significant estimate uncertainty — for example, revenue related to large-scale projects for which it is difficult to determine the percentage of completion
o complex transactions or calculations — for example, derivatives or other financial instruments that are difficult to account for and are, therefore, susceptible to error
o unusual or non-routine transactions — for example, one-time events that an entity is not familiar with or does not have experience accounting for
Fraud Risk Factors
CAS 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements states that a practitioner assesses the RMM due to fraud (from fraudulent financial reporting and/or misappropriation of assets) at both the OFSL and at the assertion level.
Some conditions that create an environment for fraud include:
- inadequate corporate governance
- lack of “tone at the top”
- inadequate internal control
- large financial incentives
- complex business operations
- high expectations by investors
Three Pillars of Fraud - Two are sufficient for fraud but presence of ONE is considered fraud risk for auditor
Rationalization and attitude
Incentive
Opportunity
Per CAS 240.11, with regard to fraud, the objectives of the auditor are as follows: (3 steps)
- to identify and assess the risks of material misstatement of the financial statements due to fraud
- to obtain sufficient appropriate audit evidence regarding the assessment of risks of material misstatement due to fraud through designing and implementing appropriate responses
- to respond appropriately to fraud or suspected fraud identified during the audit
Dealing with Fraud - during the engagement (4)
professional skepticism
Discussion with audit team re fraud
Fraud detection
Fulfill auditors responsibility regarding fraud
The practitioner should perform the following related to fraud detection: (5)
- Make inquiries of management regarding their identification, communication, and response to fraud risks.
- Make inquiries of both management and those charged with governance regarding actual, suspected, or alleged fraud in the company.
- Make inquiries of those charged with governance as to how they exercise oversight of management to identify and assess fraud risk.
- Look for unusual or unexpected relationships obtained from analytical procedures.
- Consider the risk of management bias and override
If Going Concern Assumption is Appropriate But a Material Uncertainty Exists
the auditor must determine whether the financial statements adequately disclose the events or conditions that have led to the material uncertainty and that a material uncertainty exists.
If the disclosure is adequate, the auditor will issue an unqualified opinion and include an Emphasis of Matter paragraph in the audit report to:
- highlight the existence of a material uncertainty relating to the going-concern assumption
- draw attention to the note in the financial statements that sets out the going-concern disclosure
If the disclosure is inadequate, the auditor will issue a qualified or adverse opinion.
Going-concern assumption is not appropriate
If the auditor determines that the use of the going-concern assumption is not appropriate, the auditor must determine whether the financial statements are presented on a liquidation basis and whether there is adequate disclosure for the users of the financial statements.
If the statements are presented appropriately, the auditor will issue an unqualified opinion and include an Emphasis of Matter paragraph in the audit report to:
- highlight the lack of the going-concern assumption
- highlight that the financial statements are prepared on a liquidation basis
If the disclosure is inadequate, the auditor will issue an adverse opinion.
Client Acceptance and Continuance - New Client
1) Does the practitioner have the necessary resources available to perform the engagement, such as expertise, experience, and availability of staff?
2) Are there any independence prohibitions, threats, or conflicts of interest between the practitioner and the client?
3) Is the practitioner able to mitigate or accept engagement risk factors? Does the practitioner have a clear understanding of the user’s requirements for this engagement?
4) Is there industry legislation or regulations impacting the financial reporting requirements of the client?
5) Has the client’s management agreed to its responsibilities in writing?
Management should:
o prepare the financial statements in accordance with the appropriate financial reporting framework
o have operating internal controls
o provide unrestricted access to information and people.
6) Are there any known scope limitations that may restrict the practitioner’s ability to provide an opinion?
Client Acceptance and Continuance - Existing Client
1) Does the practitioner (or his or her firm) have the necessary resources available to perform the engagement, such as expertise, experience, and availability of staff?
2) Are there any independence prohibitions, threats, or conflicts of interest between the practitioner and the client?
3) Are there any new or emerging risks that could impact engagement risk?
4) Has the client’s management agreed to its responsibilities in writing?
Two Instances where Must Decline an Engagement Unless Required by Law to accept
1) where management does not acknowledge its responsibilities in writing - set out in engagement letter
2) where the chosen financial reporting framework is not acceptable
Taxable Income Calc
NIFT Less: Charitable donations Less: Net capital losses from prior years (limited to net capital gains in this year) Less Dividends (taxed separately) = TI
ABI Calc
NIFT - AII = ABI
Rate Building
Federal Rate 38%
Less federal abatement (10%)
General Rate Reduction (13%) - applies to full rate ABI (not AII)
Small Business Dedution (18%)
SBD applies to
The lesser of:
1) ABI
2) TI
3) SBD limit of $500K
ART rate applies to all AII
Additional 10.67% on top of basic rate less abatement
RDTOH balance
Opening plus Part 1: Lesser of 30.667% of AII 30.667% of TI - SBD eligible Actual Part 1 tax payable Part 4: Part 4 tax payable Less RDTOH refund from prior year
Refundable Part 4 tax
Taxable Canadian Dividends from NON CONNECTED corps x 38.333%
Or
Dividends received from a connected corporation:
Dividend refund received by payor x recipient’s holding %
Leases for tax
Always “operating” for tax purposes
Joint Arrangements - options in IFRS 11
Joint operations - include entity’s percentage ownership of assets and liabilities
Joint Ventures - record investment account and use equity method (remove unrealized after tax intercompany (btwn JV and entity) profit from JV’s income before allocating percentage to entity) - use IAS 28 to account for it
Joint Arrangements - ASPE 3056
1) Jointly controlled assets - treat like joint operations under IFRS
2) Jointly controlled operations - treat like joint operations under IFRS
3) Jointly controlled enterprises - treat like joint ventyres under IFRS (use either equity method or cost method bc this is ASPE)
Equity Method - Steps with Joint Venture
1) Record initial investment If contribute assets: Dr. Investment FV amt Cr. Asset contributed NBV amt Cr. Gain on disposal Cr. Unrealized gain on disposal (entity's JV interest x total gain)
2) Year end, amortize into income portion of unrealized gain associated with asset contributed for JV investment based on useful life of asset remaining when contributed
Dr. Unrealized gain on disposal
Cr. Realized gain on disposal (gain x 1 / useful life)
3) Year end, record investment income associated with JV
Calc: Total Net Income for JV: xxx Subtract Unrealized after tax intercompany profit in EITHER direction (entity to JV or JV to entity) calculated as: Inventory remaining unsold (in either entity or JV) at YE x Profit margin = Unrealized profit x (1- tax rate) = Unrealized after tax profit
Adjusted JV NI
x Entity’s interest % in JV
= amount to record
Dr. Investment in JV
Cr. Investment income from JV
4) Record receipt of divs
If JV paid 100K divs and interest was 30%:
Dr. Cash 30K
Cr. Investment in JV 30K
How to determine if a Joint Operation vs Joint Venture (AKA which type of joint arrangement)
Joint Operation indicated by:
No separate legal entity (aka separate vehicle)
Also, if parties have rights to the assets and obligations for the liabilities of the joint arrangement, this results in the classification of the arrangement as a joint operation.
Consider: Structure (separate vehicle) Legal form Contractual Terms Other factors
Considerations - Lease vs Buy
1) Impact on balance sheet - operating vs capital lease (ASPE)
2) Cost of financing - interest rate implicit in the lease vs the interest rate for incremental borrowing
3) Whether sufficient operating cash resources exist to purchase the item outright WITHOUT use of debt to finance purchase. If so, and no impacts to cash position, definitely better to avoid cost associated with interest on lease
4) Lease term - if short term, could be a trial of equipt without needing to own it
5) BPO or transfer of ownership - if no transfer of ownership, would not have to take on responsibility of dealing with equipment at end of lease (e.g. disposing of it or selling it)
6) Typically easier to be approved for a lease than it is for the loan to purchase the related equipment (due to collateral associated with the lease)
Tax issues - format to address them
Assess
Analyze
Conclude
Advise
Shareholder loan rules:
1) Shareholder loans must be included in income of borrower for the year in which the loan was made, unless fully repaid within one year of the end of the company’s taxation year in which the loan was made
2) If loan is repaid within that time frame, it would be considered interest free - shareholder borrowing amount would have to include an imputed interest benefit in income equal to amount based on prescribed rate!
Dividends vs salary - Tax (5) with 1 having A/B/C and 5 having A/B
1) Salary considered earned income for building RRSP room, dividends not
1A) RRSP contributions deductible for tax purposes
1B) Income earned in RRSP not taxed until it is withdrawn
2) Salary considered earned income for pensionable earnings for CPP - should try to max out pensionable earnings to take advantage of max Canada pension plan contributions
3) Salary payments could result in reduced net cash flow available to owner manager due to CPP costs
4) Integration of tax system meant to ensure salary and dividends ultimately taxed the same overall despite double taxation of dividends
5A) Salary payments deductible to corporation
5B) Dividend payments not deductible to corporation and paid out after tax; dividend payments eligible for dividend tax credit to offset gross up and higher corporate tax rate
When is reserve for bad debts allowed to be deducted for tax?
A reserve may be deducted for doubtful debts to the extent that it is reasonable and
based on specific uncollectable accounts.
A reserve claimed in one taxation year must be included in income in the following tax year
Allowable Business Investment Losses (ABIL)
in the year a corporation declares bankruptcy, or is insolvent (subject to certain conditions), its shareholder(s) may file an election to deem the shares to have been disposed of for proceeds equal to nil (ITA 50(1)).
Result: capital loss equal to the whole amount of the ($0 proceeds less adjusted cost base).
If company that investment was in was a small business corporation, this capital loss is given special treatment
(ITA 39(1)(c)) and is deemed to be a business investment loss.
Half of the business investment loss is determined to be an “allowable business investment loss” (ABIL) and
can be applied immediately against income from any source.
The ABIL can be carried back up to three years or forward up to 10 years.
If the ABIL is not used by the end of the 10 years, it will become an allowable capital loss deductible only against taxable capital gains in any future year (ITA 38(c)).
Risk Management Plan format for Case writing
For each phase:
Phase - Risk - Mitigation of risk
What does a low multiplier (EBITDA) represent
Higher business risk (bc multiple = 1/capitalization rate)
Management accounting -BEP Things to Remember
- Calculate all using TOTAL AMOUNT FOR THE YEAR. Eg total for all revenue, total for all VC, total FC
- Calc the BEP number of units in year and then number per day or what have you
Management accounting - how to approach variance analysis
- Is there a budgeted amount and actual amount of dollars/hours/inputs? Only proceed with static and flex if there is ALSO a budgeted and actual amount of units
- Otherwise, calc whatever variances you can (total actual hours now vs prior, dollars per hour vs prior, units per hour vs prior)
- For a whatif to compare with and without employees, take actual (without emps), adjust using productivity from with emps to find what amount of overtime would have been required vs what was
Look at PPI vs Chinook
IAS 41 (agriculture) govt grants vs IAS 20
IAS 20 - “shall not be recognised until there is reasonable assurance that the entity will comply with the conditions attaching to them;”
IAS 41 - If related to biological/agricultural assets - an entity shall recognise the government grant in profit or loss when, and ONLY WHEN, the conditions attaching to the government grant are met.
Canada - US Tax Treaty
Prevents double taxation on same income in both countries
Consequences of Acquisition of Control - Tax
1) Deemed year end - short year = SBD (normally 19% deduction on first 500K of active income) prorated, CCA prorated
2) Capital losses can’t be carried forward (can file election to trigger capital gains on property with accrued gains - allows use of losses)
3) Property with accrued losses must be written down to FMV - creates more capital losses
4) Non-capital losses CAN be carried forward as long as owner carrying on same or similar business
5) Deemed year end reduces the number of years non-capital losses can be carried forward for by 1
Consequences of Change in Status - CCPC to Public Company for Tax
1) SBD no longer available - increase to tax payable
2) SRED claims on investments available but only at lower rate (15% rather than 35% for CCPC). Also no longer able to get refund if SRED credits > taxes payable amount (would be carried forward instead)
3) Taxes payable balance owing is due 2 months after year end (small business corps due 3 months after year end)
4) RDTOH and CDA accounts no longer available - no longer able to pay tax free dividends or receive dividend refunds, so should use these up prior to change in status
5) Dividend payments - CCPCs can pay eligible dividends out of GRIP. WHen change in status occurs, LRIP is calculated and must pay ineligible dividends out of that until pool is exhausted. THen back to eligible again
6) Lifetime Capital Gains Exemption (LCGE) not allowed to be used if sell shares of company that is no longer a CCPC - could crystallize LCGE with Section 85 rollover (transfer shares of op co to hold co in exchange for consideration, jointly elect value for the transferred shares that triggeres the capital gains for exemption to be used)
Section 85 rollover used for 2 main reasons
1) Transfer assets of proprietorship to corporation, or
2) Transfer shares of operating company to holding company
Non monetary exchanges - if exchanging:
Goods A plus 2K (cost 1K, FV 9K) for Services (Cost 2K, FV 8K), JE for company with goods A initially? This is in the case of ASPE
Dr. Services expense 11K Cr. Revenue 9K Cr. Cash 2K Dr. COGS 1K Cr. Inventory 1K
Non monetary exchanges - if exchanging:
Goods A plus 2K (cost 1K, FV 9K) for Services (Cost 2K, FV 8K), JE for company with goods A initially? This is in the case of IFRS
Dr. Services expense 6K Cr. Revenue 4K Cr. Cash 2K Dr. COGS 1K Cr. Inventory 1K
Non Mon Transaction - If Exchanging two Items of PPE Building A (Cost of 800 less 100 acc depn = 700, FV 900) and Building B (CV 650, FV 1100), JE for company initially with Building A?
Dr. Building B 900
Dr. Accum depn Building A 100
Cr. Building A 800
Cr. Gain on disposal of build A 200
Non Monetary Transaction - non reciprocal:
Amy donates cakes worth $500 for a tax receipt. JE
Dr. Donation expense 500
Cr. Sales revenue 500
Stale dated cheques - how long OS?
6+mo
EPS Calculation - how to calculate net earnings/loss available to common shareholders
Net earnings/loss less dividends on preferred shares
Note: cumulative preferred shares - dividends included for the year regardless of whether they were declared (only include CY div amount). Non-cumulative pref shares only have dividends included if they were declared that year
EPS Calculation - how to set up to calculate Weighted Average Common Shares Outstanding (WACSO)
Date Activity Shares Adjustment Part of Year WACSO
Note: adjustment factor is for stock divs or stock splits and is used to adjust all common shares from BEFORE the stock div/split (split/div treated as if it happened at the beginning of the year
Note: part of the year = months outstanding / 12
Diluted EPS Calc - Convertible bonds/debt
Income effect = bond carrying value x effective interest rate x (1-tax rate)
Share effect = number of common shares bonds convert to
Diluted EPS Calc - Convertible preferred shares
Income effect = dividends to preferred shareholders (note that cumulative pref shares, dividend is the amount for the year regardless whether or not was declared this year, but for non-cumulative the dividend is only what is declared in the year)
Share effect = number of common shares pref shares convert to
Diluted EPS Calc - Stock Options
Income effect = assumed to be 0 due to treasury stock method being used. Assumed that any cash generated from stock options being exercised is used to repurchase shares.
Share effect =
number of options x exercise price = initial number of shares + cash
Cash / average share price for year = shares bought back
Net share effect = initial number - shares bought back
Most diultive
Diluted EPS Steps
1) Calculate Basic EPS
2) Calculate the EPIS for each dilutive element
3) Rank dilutive elements from most to least dilutive
4) Recalculate EPS with each dilutive element starting with most dilutive until provisional EPS is lower than next dilutive EPIS
Use of Auditor’s Expert - CAS 620
1) Determine need for expert - complexity, auditor’s expertise with subject matter, ROMM with this acct, implications on other FS areas
2) Determine the competence, capabilities, and objectivity of expert - assessment required for each engagement
3) Additional work/procedures to perform on expert’s report:
a) Confirm competence and capabilities of expert
b) Obtain an understanding of expert’s field of expertise
c) review expert’s assumptions, calculations, and supporting documentation
d) perform analytical procedures, reperform calculations
e) assess consistency with other values, results, etc
CAS 705 - Modifications to Opinion of Audit Report
1) Explain diff between adverse and qualified opinion
2) Assess whether misstatements are material
3) Assess whether misstatements are PERVASIVE per CAS 705 definition
Interim Review of FS Section 7060
1) Objective: to assist audit committee in discharging its duties with respect to interim FS that are to be issued under provisions of securities legislation
2) Differences between interim review and annual audit:
a) type of procedures (7 vs 2),
b) cost
c) time/work required
d) objective (see above)
e) Use of audit report (interim review report is for audit committee only - not for wider use)
IFRS 15 - ID performance obligations - if DISTINCT - distinct?
1) Customer can benefit from good/service on its own or with other resources readily available, or
2) promise to transfer the performance obligation is separable
IFRS 15 - indication promise to transfer performance obligation is not separable?
1) Highly integrated
2) promises modify each other
3) interdependent/interrelated
IFRS 15 - step 5 - recognize revenue as performance obligations are satisfied by transferring a promised good to a customer. Control is transferred over time if:
1) Customer simultaneously receives and consumes benefits as the entity performs, or
2) entity’s performance creates an asset (WIP - e.g. contract asset) that the customer controls as the asset is created or enhanced, or
3) entity’s performance does not create an asset with an alternate use for the entity and the entity has an enforceable right to payment for performance completed to date.
IFRS 3 - Business combinations - Steps
1) Definition of business combination - there must be both of these for business combo to occur:
A) Acquirer who has gained control
B) Business that has been purchased
Conclude - is it a business combo?
2) Allocate consideration paid
A) Identifiable net assets (INA) acquired are recorded at FV directly in acquirer’s FS
B) Any difference betweeen consideration paid and the FV of the INA is recorded as GOODWILL
***Must ensure you get all INA even previously unrecorded:
C) Question of whether assets are separately identifiable (e.g. internally generated intangible assets not previously recorded, customer lists, non-compete arrangements)
Separately identifiable if:
i) Separable (legal contract = separable), or
ii) asset arises from contractual rights
3) Conclude on INA and goodwill
4) AJE
Treatment of Warranty under ASPE
Record a liability/provision
VS
IFRS where there are two types of warranties as per IFRS 15 (rev vs provision)
IAS 37 - Provision - steps
1) Does it meet the definition of a provision - a liability or amount of uncertain timing
2) Does it meet the definition of a liability?:
a) Present obligation
b) arising from a past event
c) requiring outflow of economic benefits in order to settle it
3) recognition criteria of provision:
a) Entity has a present obligation as a result of past event
b) It is probable that an outflow of economic resources/benefits will be required to settle it
c) reliable estimate can be made
Tax Setup - rates
Basic 38% Abatement (10%) GRR (13%) SBD (19%) on the lesser of: $500K of ABI ABI TI
ART = 10.6667%
AII taxed with ART in part 1
Non eligible RDTOH balance:
Opening balance \+ Part 1 tax portion: lesser of: i) actual part 1 tax payabl ii) 30.6667% x (TI-SBD) iii) 30.6667% x AII
+ Part 4 tax portion relating to NON ELIGIBLE divs
i) 38.333% x portfolio non eligible divs
ii) ownership percentage x amount of div refund received by related company
- div refund received in prior year
= Closing balance
Dividend refund =
38.3333% x RDTOH balance (only non elig divs can trigger refund from NE RDTOH, but either div type can trigger refund from elig RDTOH type)
Set up for tax implication involving windup/buyout to close down business - list
1) Proceeds amount
2) Less Corporate taxes payable
3) Add dividend refund (RDTOH x 38.333%)
4) Gives cash available for dispersal
5) Less PUC
6) Gives deemed dividend amount
7) Less capital dividend account (CDA) balance
8) Gives taxable dividends
Set up for tax implication involving windup/buyout to close down business - things to calculate
1) ABI related payouts and tax impact (ABI x ABI rate)
2) Capital gains and AII impact (AII x 50% CG)
3) Capital gains and impact on RDTOH account (30.667% x AII (is at 50%))
4) Capital gains and CDA impact (is the non taxable portion of CG)
Deductible “Capital Like” Costs for Tax purposes
- Landscaping costs
- Building moving costs
- Costs to drill well
Taxable Benefits - from Employer
1) employers are allowed to receive up to $500 per year in gifts from employer without having to include this amount as a taxable benefit on their income tax return (note that this amount is usually based on the FV of the gift receive) - this is ONLY allowed for gifts given for special occasions (e.g. awards for performance)
2) Items are not taxable benefit if the primary beneficiary of them is the employer (not the employee)
3) Social events (free parties) for employees are not taxable benefits as long as the cumulative amount is less than $150 per employee
4) Gift cards are considered NEAR CASH BENEFITS and are considered remuneration and ALWAYS taxable regardless of the amount
When are there deferred income tax implications to a business combination?
ONLY when shares are acquired (when net assets are acquired, the FV of the assets is the cost for tax purposes so there are no temporary differences)
Subsequent Event in ASPE (3820) vs IFRS (IAS 10)
ASPE: Event between date of FS and COMPLETION DATE
IFRS: Event between date of FS and AUTHORIZATION DATE
When do you have to disclose a non-adjusting subsequent event?
When it is for an event that is MATERIAL to the FS
Per IAS 10 what must be disclosed regarding the FS (context - related to subsequent events)
The date FS were authorized for issue and who gave the authorization
Defined benefit plans - across the top (5)
Pension exp OCI remeasure PA DBO Cash
Defined benefit plans - Down the bottom (10)
1) Opening
2) Current service cost
3) Past service cost
4) Interest - DBO
5) Interest - PA (using DBO discount rate)
6) Benefits paid
7) Contributions made
8) Remeasure - PA
9) Remeasure - DBO
10) Closing balance
Weighted average Plan Assets
FV at opening
+ Contributions (weighted for period of year after made)
- Benefits paid (if evenly in year, weight of 50%)
Weighted average DBO
Opening
+ 100% past service cost (whole amount incl as it would be at beginning of year)
- benefits paid (if evenly in year, weight of 50%)
Tax consequences - stock options
Only include in income once exercised
Include in TI at 50% of FV less exercise price (kind of like a gain, only included at 100% in NIFT and then get 50% reduction in TI)
Future income tax A/L or DITA/L is
Tax rate x sum of temp differences
Temp difference calculated as
Tax basis - accounting basis
Share based payment - compensation exp based on FV at which date for stock options
Based on grant date
Share based payment - compensation exp earned when
Over vesting period between vesting date and grant date
no entry made at grant date
Entry at vesting date (or YE if comes first) for stock option
Dr. Compensation expense
Cr. Contributed surplus - stock options
Entry to redeem stock options/expiry
Redeem
Dr. Cash
Dr. Contributed surplus - stock options
Cr. Common shares
Expire
Dr. Contributed surplus - stock options
Cr. Contributed surplus - expired stock options
Steps of considering discontinued operations
1) Does it meet definition of discontinued op?
2) Does it meet HFS criteria or was it already sold?
What kind of loss when writing down Discontinued Ops or Asset HFS to amount of NRV (if lower than cost)?
Impairment loss
How to present Discontinued ops profit/gain/loss?
Income from continuing operations before taxes
Less: Income tax expense
Net income from continuing operations
Income from discontinued operations (after tax)
Gain on sale of assets (after tax)
Net income
When to take depreciation on assets held for sale?
Take depn for the year ONLY up until the point it was classified as HFS
Complex Financial Instruments - IFRS 9 and IAS 32 and ASPE 3856 - types
1) Convertible debt (bonds) (portion is liability and portion is equity - allocate transaction costs according to the split (transaction costs will reduce both liab and equity components))
2) Mandatorily redeemable or retractable preferred shares (these are 100% liability)
3) Convertible preferred shares (treat just like common shares - NBD)
4) Perpetual debt (treat just like regular debt - amortized cost) - calc using PV of annuity formula
Due diligence - purpose (per handyside case)
To perform procedures to ascertain a business’:
1) FMV of assets
2) Profitability of the company
3) Completeness of liabilities
4) Verify sellers’ represntations
Due diligence - steps (3)
1) Financial review and risks
a) Ratios and variance analysis to ID risk areas
b) Identify the risks surrounding individual accounts (e.g. assets existence, valuation; liabilities completeness and unrecorded liabilities and lawsuits; revenues and expenses occurrence and completeness)
2) Tax - risk of unrecorded tax liabilities
a) CRA correspondance
b) Prior years’ returns
c) Prior years’ Notice of Assessments (NOAs)
3) Operational review
a) Synergies?
b) Staffing issues? - safety, retention, morale
c) Management team - retention? agreement in sale to ensure they are retained
Steps in accounting issue analysis:
IGARU Issue Guidance Analysis Recommendation USER IMPACT - Calculate if possible
Use of work of internal auditors - section?
CAS 610
1) Their objectivity
2) Their competence
3) Their systematic and disciplined approach
Return on Equity - calc?
Net income / average equity
Responsibility Centres
1) Cost centre - responsible for costs
2) Revenue centre - responsibility for sales
3) Profit centre - responsibility for costs and sales
4) Investment centre - responsible for management of return on invested capital (see FC on method)
Two key factors related to responsibility centres
1) Controllability (can management control what they are being evaluated for)
2) Goal congruence (will the setup lead management to make the best decision for the company (best decision for the division leads to best decision for the company))
Way to deal with inefficiencies created in dept B due to decisions made/work done/materials used in Dept A
Charge back policy where costs due to inefficiencies related to quality issues are reassigned back to Dept A
Transfer pricing methods
1) Cost based
2) Market Based
3) Negotiated
4) Standard transfer price - dictated by company overall
Cost based transfer price method - pros and cons
Pros:
1) Simple
2) Easily calculated
Cons:
1) May encourage decisions that don’t benefit company as a whole (e.g. if buyer can buy product externally for cost lower than transfer price)
2) Distribution of profit may be unfair to the seller or buyer
3) May encourage production inefficiencies because costs are passed along to the buyer
Market based transfer price method - pros and cons
Pros:
1) Simple if market prices readily available
2) If the selling division is operating at full capacity, it will encourage transfers only if they are beneficial to the company as a whole.
Cons:
1) External market prices may not be readily available.
2) Suboptimal decisions may be made by the seller and/or the buyer if the seller has excess capacity. - e.g. if price drops, only makes sense for Div A to keep producing and selling to Div B if the prices exceed incremental costs
Three conditions that lead to optimal decision making with market based transfer price method:
- The immediate market must be perfectly competitive and information readily available.
- Interdependencies between the departments must be minimal.
- There must be no additional costs or benefits to the organization as a whole in using the external market instead of transacting internally.
Negotiated transfer price method - pros and cons
Pros:
• Divisions are given independence and control.
- Divisions build relationships with each other.
- The price usually benefits the overall organization.
Cons:
• The price is determined by each division’s negotiating ability.
• It’s time-consuming.
Min transfer price when operating below capacity - for seller
Variable costs
Min transfer price for seller when operating at capacity
VC+
Opportunity cost
= market price
Operating segments - IFRS 8 - who is this standard for?
Only for public companies, not for private companies and also there is no comparable standard under ASPE
Operating Segments - Definition
Component of entity:
1) engages in business activities - earning revs and incurring expenses
2) operating results are regularly reviewed to make decisions about resources to be allocated
3) For which discrete financial info is available
Operating Segments - Reportable if
1) Sales (incl internal and external) are at least 10% of total overall sales of all operating segments
2) Profit or loss is at least 10% of overall profit or loss - note that the denominator here is EITHER total profit (does not include any losses in the calculation) OR total loss (does not include any profit in the calculation) of all operating segments
3) Assets are at least 10% of overall combined total assets of all operating segments
AND
Combined external revenue of reportable segments must be at least 75% of entity’s total external revenue
Disclosure required from reportable operating segment
Profit or loss
Assets or liabilities if regularly provided to CODM
Other key items when regularly provided to CODM
Geographical info per IFRS 8
Disclosure about major customers from which 10% or more revenue comes
Two types of foreign operation and what defines them
1) Self sustaining foreign operation - functional currency is not CAD (is a foreign currency) - use current method (treated like an investment, therefore gain/loss goes to OCI)
2) Integrated foreign operation - functional currency IS CAD - use temporal (ASPE term) AKA Integrated method (treated as the entire company is exposed to all gain and loss and therefore gain and loss goes to net income)
IS under temporal method (used for integrated foreign operation)
IS
- sales and most expenses at average rate
- COGS - set up table for BI (relevant rate) + purchases (avg rate) - EI (relevant rate)
- Depreciation - at rate from when asset was purchased
- Interest and financing charges - at average rate in period
- Foreign exchange gain or loss (TO NET INCOME) calculated with table - net monetary assets
Net Monetary Assets:
1) Opening net monetary assets x PY closing rate
2) Changes in year
+ sales x average rate
- purchases x average rate
- cash expenses x average rate
- dividends x declaration date rate
+/-other cash items (e.g. PPE purchase) x applicable rate
3) Closing net monetary assets - sum is translated calculated position
4) Closing net monetary assets - foreign currency x current rate = actual translated net monetary assets
5) Calculated less actual = fx gain (loss)
BS under temporal method (used for integrated foreign operation)
1) Monetary asset/liability - translate at current closing rate
2) Non-monetary assets/liabilities - translated at historical rates based on when bought/acquired
3) Retained earnings calculated:
Opening translated RE per PY statements
+ Translated NI per Translated IS
- Dividends x rate on declaration date
= Closing translated RE
Common shares translated at rate at issuance date
IS under current method (used for self sustaining foreign operation)
Revs and expenses ALL translated using the average rate
FX gain/loss is in OCI and calculated by:
Opening NET ASSETS x prior year closing rate
+ Net income x average rate for the year
- Dividends x rate at declaration date
Closing NET ASSETS calculated position
Closing net assets x current year closing rate
Difference between calculated and actual = fx gain/loss in OCI
BS under current method (used for self sustaining foreign operation)
Assets/liabilities translated at current closing rate (all)
Retained earnings calculated: Opening translated RE per PY statements \+ Translated NI per Translated IS - Dividends x rate on declaration date = Closing translated RE
Common shares translated at rate at issuance date
AOCI:
Opening AOCI
+ OCI gain/loss for FX
= Closing AOCI
Foreign Exchange - Initial measurement
Record transaction translated at spot rate on day of transaction
Foreign Exchange - Subsequent measurement
Non-monetary items (e.g. inventory, PPE, prepaids, etc) are NOT updated at year end
Monetary items (e.g. AP, AR, Loans) are updated at year end to the closing YE rate. Difference goes to gain or loss (FX gain on IS under NI)
Foreign Exchange - Derecognition
Update to spot rate before derecognizing any monetary items
Sales leasebacks - where to look to assess whether a sale has happened and how to record a sales leaseback that is not deemed to be a sale under that standard
IFRS 15 will tell you.
If not a sale - Lessee:
Dr. Cash
Cr. Loan payable
If not a sale - Lessor:
Dr. Loan receivable
Cr. Cash
Sales leasebacks if sale has occurred
Lessee:
Dr. Accum demp
Cr. PPE
Dr. Cash
Dr. ROU asset (adjusted by any impact of the G/L being recognized on proportionate basis - below)
Cr. Lease obligation
Dr./Cr. Gain/loss (only portion of gain attributable to lessee = gain/loss x (PV lease MLP/FMV of asset))
Lessor:
Dr. Asset
Cr. Cash
Dr. Lease receivable
Dr. COGS
Cr. Equipment - inventory
Cr. Sales
Sales type lease from lessor perspective:
Dr. Lease receivable
Dr. COGS
Cr. Sales revenue
Cr. Equipment - inventory
- Still must recognize interest revenue on lease receivable each year
Fair value hedge vs Cash flow hedge
1) Fair value hedge to hedge against changes in FX rate; cannot enter into forward contract/hedging instrument before the hedged item is recorded; FX gains/losses go to net income
2) Cash flow hedge to hedge against variability of cash flows (e.g. sale or purchase of inventory where it is to be delivered in the future); often enter into forward contract/hedging instrument before being able to record hedged item; until the hedged item is recorded (e.g. the sale), the FX gains and losses on the hedging instrument go to OCI; once hedged item is recorded/sale is recorded, the OCI is reclassified into NI by adjusting the hedged item
Which rate to translate at:
Interest expense
Interest payable
Forward contract - due to broker in FCU
Interest expense - average rate for period
Interest payable - spot rate at period end
Forward contract - due to broker - forward rate (until right before settlement, then use spot rate)
What happens with breached debt covenants under IFRS?
Per IAS 1, if in breach terms of loan agreement at year end and no waiver/grace period of 12 is in place at YE, entire balance must be reclassified as current even if the lender subsequently agrees not to demand repayment after reporting date
Investment in Associates, also Joint Ventures - Equity Method
1) Allocate acquisition differentials
2) DITL - only at 50% if there is an accrued capital gain/loss (not used with inventory, and not used if it’s a depreciable asset with an accrued loss)
3) Ensure acq diff’ls are then taken at the OWNERSHIP %
4) No goodwill line - all recorded in single line in equity method
5) Eliminate intercompany AP/AR, intercompany transactions (reduce income by inventory remaining in associate x gross margin x (1-tax rate) x ownership percentage; add income from inventory sold during the year that was on hand last year… etc)
6) Note - goodwill on the books of another company has FV of 0 to entity who has influence or control
What happens with breached debt covenants under IFRS?
Per IAS 1, if in breach terms of loan agreement at year end and no waiver/grace period of 12 is in place at YE, entire balance must be reclassified as current even if the lender subsequently agrees not to demand repayment after reporting date
Business combination - Purchase of Shares
1) ID the acquirer
2) Determine date of acqusition
3) Determine purchase price - transaction costs are expensed when incurred and not included in purchase price
4) Analyze the acquisition differential
a) recognize and measure INA (and DITL) - note that any existing goodwill on sub’s BS has FV of 0 to parent (goodwill is not identifiable by definition)
b) recognize and measure goodwill at acquisition or gain on bargain purchase
5) Allocate NCI if any
Initial entry on acquisition:
Dr. Investment in subsidiary (recorded at cost)
Cr. Consideration paid
6) Elimination entry on consolidation:
Dr. Inventory
Dr. Land
Cr. Equipt (FV
DITL in Equity and Acquisition/Consolidation Methods
DITL only at 50% if there is an accrued capital gain/loss
- will always be 50% with non-depreciable property
- will not be used with inventory, AR, etc
- will not be used with depreciable property where FV is less than the COST (note - not NBV)
- used with depreciable property where FV is GREATER than ACB (the cost, not the NBV)
IFRS 3 Allows a choice in the Measurement of NCI: INA Approach (all goodwill attributable to parent) or
Fair Value Enterprise (FVE) Method
INA:
NCI = (FV of sub’s identifiable assets - FV of sub’s identifiable liabilities) x NCI ownership %
FVE:
NCI = FV of shares x number of shares owned
ASPE Choices if have Control
1) Cost
2) Equity method
3) Consolidation
NB: if traded on active market, must use FV instead of cost
Variable vs Fixed costs
Double check on assumed variable costs - if the amount will be paid (eg. hourly salary) regardless of whether or not a sale is made, it is not truly variable.
ASPE Choices if have Control
1) Cost
2) Equity method
3) Consolidation
NB: if traded on active market, must use FV instead of cost
Variable vs Fixed costs
Double check on assumed variable costs - if the amount will be paid (eg. hourly salary) regardless of whether or not a sale is made, it is not truly variable.
ROE
Net income / AVERAGE total equity
Quick ratio
Same as current ratio but inventory is EXCLUDED
BEP with target profit
(FC + TP)/CM = x
Porter’s Five Forces
1) Competition
2) Supplier Power
3) Buyer power
4) Threat of subtsitution
5) Threat of new entrants
Vision
future oriented, internal audience, inspires
Mission
declaration of org’s purpose and direction, external audience, guidance to orgs
Generic strategies for businesses
1) Low cost -> operational excellence (to get low cost)
2) Differentiation:
a) Customer intimacy - customer service
b) Product leadership - quality
Interim Financial reporting - BS, IS, SCE, SCF (required for public cos - IAS 34)
BS
End of CP
End of immediately preceding year
IS
End of CP
Cumulative for year
Comparative for prior year period
SCE
Cumulative YTD to period
Comparatives for PY YTD cumulative
SCF
Cumulative YTD to period
Comparatives for PY YTD cumulative
NPO - ASNPO - TCAs - options if revenues are under $500K
1) Expense all TCA costs
2) Capitalize TCAs but not amortize
3) Capitalize and amortize TCAs
Maximum lease cost per month deductible to the business
$800 per month - any excess is not deductible
Warranties for tax purposes
Pensions for tax purposes
Value of 0
Add back the warranty liability at the end of the year, and deduct the warranty liability at the beginning of the year.
Add back the pension liability at the end of the year, and deduct the pension liability at the beginning of the year.
Convention expenses deductibility for tax
Not deductible unless all of the following criteria apply:
- It is held by a business or professional organization.
- It is attended in connection with the taxpayer’s business or professional practice.
- It is held at a location that may reasonably be regarded as consistent with the territorial scope of the organization.
Limited to two conventions per year.
Tax - Reserve for bad debts
Deduct amount of bad debts anticipated based on current year, then next year, add this amount to income and deduct the amount anticipated for that year
Unpaid remuneration for tax
Not deductible if unpaid for 180 days or more after year end
CCA - half year rule
UCC opening balance \+ (Additions - Disposals)x50% = UCC for CCA rate Less CY CCA \+ Half year rule add back UCC Closing balance
Recapture/Terminal loss calc
Lesser of Cost and POD
Less UCC
Division C deductions - corporations
1) Charitable donations
2) Loss carryforwards
3) Dividends (taxed separately under part iv)
IFRS 9 - FVTOCI calc - there is an unrealized gain - what do you do?
Dr. Investment in ___ by gross gain amount
Cr. DITL by gain x 50% x tax rate
Cr. Unrealized gain - OCI by remainder
IFRS 9 - FVTOCI - derecgonition - when does gain get recycled into NI?
Gets recycled if it is a debt instrument
No recycling if it is an equity instrument (but can be transferred to RE)
What does recycling look like? Derecognition example
Dr. Cash Cr. Investment Dr. UNrealized gain - OCI (prev amount) Dr. DITL on prev unrealized gains Cr. RE (sum of realized and prev unrealized gains)
ASPE - what passive investments are recorded at FV? what at amortized cost?
1) FV if derivatives or quoted in active market
2) Amortized cost for all else
IFRS 9 - passive investment classification
1) FVTPL - if held for trading or not eligible to be either of the other two. Includes derivatives. Designation
2) Amortized cost - held to collect contractual cash flows
3) FVTOCI - if held to collect contractual cash flows and to sell. Can’t be HFT in here. Can be either debt or equity. Irrevocable designation.
NPV calc in excel
NPV discounts EVERY value - don’t include the first year (year 0) or it will be discounted as well. Sum year 0 with NPV from formula to get actual NPV.
Assets held for sale recorded at
The LOWER of cost and NRV
When is weighted average and/or FIFO costing inappropriate?
When items ARE NOT ORDINARILY INTERCHANGEABLE and goods or services produced and segregated for specific projects. These shall be assigned by using specific identification of their individual costs.
Practices which could help support the contractor
classification include: (CONTRACTOR VS EMPLOYEE)
Practices which could help support the contractor
classification include:
a) Independent contractor agreements in place
b) If they can work for other businesses
c) If they advertise their services
d) If they cover their own overhead expenses
e) If they submit irregular invoices
f) If they are registered for GST
g) If they are incorporated
Points earned on expenses paid for by business - tax
If points are redeemed for benefit, taxable benefit must be included in income
Meals while away on work - deductible? -tax
Still deductible at 50%
Hotel expenses - limit to deductibility - tax
Must be reasonable and incurred for business
Events put on for all employees - tax
100% deductible but limited to 6 per year
UCC end of year calculation
Opening Balance, UCC \+ Additions - Disposals (lesser of cost and POD) = 1/2 year rule (subtract) - only if additions are greater than disposals = Base amount for CCA - CCA claimed in year \+ 1/2 year rule add back = Closing Balance, UCC
Finance Type lease (direct financing lease) - Lessor - ASPE
transfers substantially all the benefits and risks incident to ownership of property to the lessee and, at the inception of the lease, the fair value of leased property is the SAME as its carrying amount to the lessor (usually not a manufacturer or dealer).
Sales Type Lease - Lessor - ASPE
transfers substantially all the benefits and risks incident to ownership of property to the lessee and, at the inception of the lease, the fair value of the leased property is greater or less than its carrying amount, thus giving rise to a profit or loss to the lessor (usually a manufacturer or dealer)
IPOs/Going public - what is required?
1) 3 years of audited IFRS compliant statements
2) cannot have modified audit opinion
3) would result in deemed year end - increase tax filing-related costs
4) significant regulatory and compliance costs required as a public company
The “Other Side” of Taxable Benefits - deductible or no to corp?
- Gym memberships for employees
- Gifts to employees
- Tuition paid for employees to take courses
1) memberships NEVER EVER deductible
2) gifts are deductible
3) tuition paid is deductible
Assurance - consideration if there are CONSULTING services and ASSURANCE SERVICES
Could be an INDEPENDENCE ISSUE
Division C deductions to go from NIFT to TI (Corporate tax)
1) Charitable donations
2) Carryforward capital and non-capital losses
3) Dividends received
Interest on vacant land (Carrying costs) and property taxes (for tax purposes)
Only deductible to the amount of income earned on the vacant land
Excess of amount deductible is added to ACB of land
PUP
Min ACB of $1000
Cant have losses
Half of gains are taxed
LPP
Min ACB of 1000, min POD of 1000
Can have losses but can only use against LPP gains
Can carry unused losses back 3 years, forward 7
Replacement Rules:
Involuntary disposition vs Voluntary dispostion
Involuntary disposition - property does not have to be have been used in a business to generate income (vs voluntary where it does have to have been used that way); property must be used in same way as replaced property; replacement must be within 24 months (rather than 12 as with voluntary disposition)
Voluntary disposition - must be replacing property that was used in a business to generate income, must be used in the same way as replaced property, replacement must be within 12 months of disposal
Note: in order for full gain to be deferred, must use up ALL of proceeds to purchase new asset
Pension income splitting - tax
- joint election required
- can allocate up to 50% of eligible pension to spouse
Eligible pension income
- pension income if above 65 years of age from an RPP, DPSP, RRSP or RRIF
- pension income if below 65 years of age from an RPP
- can reduce tax
- can make pension tax credit available to both spouses if only one has pension income
Limits for childcare deductions (from lower income earner)
Under 7 - 8K
Disabled - 11K
7 to 16 - 5K
RRSPs
- can contribute up to age 71 - after 71, funds transferred into a RRIF
- contributions deductible
- earned income contributes to deduction limit
- investment grows tax free while in plan
- proceeds taxed on withdrawal
- can make contribution to spouse’s plan - will be deductible to contributor (must have room to contribute FOR THEMSELVES - contribution to spouse’s plan won’t affect spouse’s room)
RRSPs vs TFSAs vs RESPs
RRSPs:
- contributions deductible
- earnings not taxed in plan, but taxed when withdrawn
- withdrawals are taxed unless under homebuyers plan or lifetime learning program
TFSAs:
- contributions not deductible
- earnings not taxed in plan or ever
- withdrawals not taxed
RESPs:
- contributions not deductible
- earnings not taxed in plan but taxed when withdrawn
- withdrawals are taxed (excluding “capital” portion) - taxable to beneficiary
- eligible for canada education savings grant (20% of 2500 contributed a year, max of 7200 over life)
- max of 50K contributions over life
LCGE - must be shares of a QSBC
QSBC requirements
Must be SBC:
90%+ of FMV used primarily (at least 50%) in an active business in Canada (less than 10% redundant assets)
Shares must be owned for at least 24 months before sale
At least 50% of FMV of assets must have been used in active business operations over the past 24 months
Tax - Purchase of Assets vs Purchase of Shares:
Purchaser’s perspective (5)
1) Redundant assets - don’t have to purchase all assets with purchase of assets (all come with company with purchase of shares)
2) Undisclosed liabilities - can avoid these with purchase of assets; cannot avoid these with purchase of shares
3) Asset bump up - increase in ACB with purchase of assets increases the amount of CCA that can be claimed and decreases future cap gain (not so with purchase of shares)
4) Goodwill deduction - goodwill in purchase of assets is considered “purchased goodwill” and CCA can be claimed under class 14.1. Goodwill as a result of purchase of shares is not eligible for class 14.1
5) Loss carryovers - No loss carryovers are available for future use if you purchase assets. Non capital loss carry overs can be used against future income if you purchase shares and carry on same or similar business
Tax - Sale of Assets vs Sale of Shares:
Vendor’s perspective (5)
1) Redundant assets - could get stuck with redundant assets that are difficult to sell in a sale of assets. Not so with purchase of shares.
2) Undisclosed liabilities - vendor remains liable for these in a sale of assets, but passes these on with the corporation when there is a sale of shares
3) Complexity - sale of assets would require a windup to access the cash - results in corporate and personal tax and is more complex; sale of shares has much less complicated tax implications
4) LCGE - cannot be used in sale of assets, can be used in sale of shares.
Company loan to employee (tax) - when is income inclusion for balance of the loan exempted?
When loan is for one of:
1) Purchase of a home
2) Purchase of a car for use in employment duties
3) Purchase of previously unissued company shares
AND
1) At the time the loan was made, arrangements were made for repayment of the loan within a reasonable period of time.
2) Loan is because of employee’s employment and is not because of their shareholdings
As with shareholder loans, if no interest is charged and the loan is exempted from being included in income, imputed interest must be calculated and included in income
Common temporary differences - deferred/future income tax
1) warranty liability
2) leased asset/ROU asset
3) Lease obligation (SOME WILL BE CURRENT)
4) Decommissioning asset/ARO - asset
5) Decommissioning liability/ARO - liablity
6) Lawsuit accrual
7) PPE
8) Deferred devt costs
9) sevrence cost accrued
10) investment at FVTOCI or FVTPL (tax basis is ACB +/- 50% of CG or CL) while accounting basis is FV on balance sheet
11) capital loss cfwd
Common Corporate Governance Weaknesses
- independence of BOD members
- reporting structure (to shareholders vs management)
- experience of BOD
- appropriate BOD committees (e.g. A&F, compensation)
- BOD selection process
- Meetings - frequency and attendance
Strategy Issue ID
Weakness: Inconsistencies with Mission, vision, values (strategy) and operations (proposed expansion, recent business changes, introduction o new product/servvice)
Implication: explain
Recommendation to fix
Balanced Scorecard - 4 areas
1) financial
2) Customer
3) Internal processes
4) Learning and growth
Cash Flows and Liquidity - Suggestions to Improve Cash Flows/Liquidity
1) Liquidity - conclude as to whether the is a risk will not be able to pay for obligations as they come due (tie into cash deficit or no)
2) Delay ongoing/new capital expenditures
3) Do not finance capital expenditures out of operating cash flows - consider LTD
4) Cost containment - reduce costs
5) Increase revenue if increasing prices will help
6) Increase AR turnover with collections policies
7) Manage inventory to reduce idle inventory/storage costs/minimize cash stuck in inventory
Day 3 - Strategy and Governance
1) Ensure you do ISSUE, ANALYSIS, and Recommendation
2) Do an OVERALL conclusion for each “line” or issue
3) Try to only address one “point” at a time as each is likely it’s own section in FG (e.g, courier services increasing AND mail delivery decreasing - this is actually TWO points)
Outsourcing - Common Qual
Pros:
1) Additional capacity/time
2) Potentially quality of outsourcer
3) Potential savings $
Cons:
1) May not be a contract in place
2) Prices may FLUCTUATE (may not be locked in)
3) Outsourcer may have many other big contracts
4) Layoffs
5) Process may be key to business (reputation/mission/vision)
6) Lack of control over quality, delivery, etc
Principal residence exemption - Discussion and Steps
1) Can only designate one residence as PR per year per family
2) Must be ordinarily inhabited (lived in at some point in the year)
3) Must designate which property is the principal residence in years in which multiple owned
4) PRE helps offset CG that may arise on the sale of principal residence
5) Minimize taxes by claiming PRE on property with highest average capital gain per year - would reduce the gain on that property to 0
6) PRE +1 factor = means ONE LESS year can be designated than the total number of years owned while still exempting 100% of the gain
e.g. own both homes for 10 years
Designating A for full amount would be to designate 9 years. PRE = CG x (1+9)/10
Can then designate B for 1 year
PRE = CG x (1+1)/10
NOTE: COSTS TO RENOVATE HOME ARE ADDED TO ACB OF HOME as they are not deductible as moving expenses
SHORT YEAR
1) Prorate CCA
2) Prorate home office expenses
3) Prorate depreciate expense
4) Prorate SBD eligible amount of $500K
Day 3 - Pros and Cons
List at least 6 PROS and 6 CONS
Day 3 procedures
LIST AT LEAST 6 PROCEDURES
Employee vs Contractor
1) Control of work location and hours
2) Ownership of Tools
3) Integration (whether work elsewhere/financially dependant)
4) Intent
5) Risk of loss/chance of profit
6) Ability to subcontract
7) Specific results
