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
