Cap 2 Flashcards

Question 1

Q

Accounts receivable

Financial Reporting (ASPE)

Core – Level A

Answer

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
• As such, accounts receivable must be tested for
impairment at the end of the reporting period if
significant adverse changes during the period cast
doubt on collectability
• If impaired, then should be written down to the
amount expected to be collected through the use of
an allowance account
• The amount of the reduction shall be recognized as
a bad debt expense in net income.

Reference: ASPE 3856.05(h), .16, .17

Question 2

Q

Inventory valuation

Financial Reporting (ASPE)

Core – Level A

Answer

A

Inventory valuation (ASPE)

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

Reference: ASPE 3031.07, .10-12, .29

Question 3

Q

Inventory costs

Financial Reporting (ASPE)

Core – Level A

Answer

A

Inventory costs (ASPE)

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

Reference: ASPE 3031.11, .12, .17

Question 4

Q

Internally generated intangible assets – R&D

Financial Reporting (ASPE)

Core – Level A

Answer

A

Internally generated intangible assets – R&D (ASPE)

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

Reference: ASPE 3064.37, .40, .41

Question 5

Q

Goodwill and intangible assets – Amortization

Financial Reporting (ASPE)

Core – Level A

Answer

A

Goodwill and intangible assets – Amortization (ASPE)

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

Reference: ASPE 3064.56, .57, .61

Question 6

Q

Investments

Financial Reporting (ASPE)

Core – Level A

Answer

A

Investments (ASPE)

• Investments subject to significant influence can
be accounted for using the equity or cost method
• Investments without significant influence:
o Not quoted on an active market – accounted for
using cost method
o Quoted on active market – accounted for at fair
value

Reference: ASPE 3051 and 3856.11 - .15

Question 7

Q

Financial instruments – Impairment

Financial Reporting (ASPE)

Core – Level A

Answer

A

Financial instruments – Impairment (ASPE)

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

Reference: ASPE 3856.16 - .19

Question 8

Q

Deductibility of expenses

Taxation

Core – Level B

Answer

A

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

Reference: ITA 18(1)(a)

Question 9

Q

Common business expenses DISALLOWED

Taxation

Core – Level B

Answer

A

Common business expenses DISALLOWED (Tax)

• Amortization / Impairment / Accounting Gains &
Losses (deduct via CCA)
• Personal expenses and membership / club dues
• Charitable donations – deduction to determine
Taxable Income for a Corp.
• 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.
• Taxes, interest and penalties related to tax
• Meals & entertainment (50% for business
purposes, deductible for remote or temporary
work sites, or special events for employees)
• Expenses re: issue or sale of shares and
refinancing costs (deduct over 5 years)
• Life insurance premiums (except where the policy
has been assigned as collateral)
• Unpaid amounts & unpaid remuneration (accrued
salary which is unpaid 180 days after fiscal period
is deemed not to have been incurred until actually
paid)
• Carrying charges on vacant land (non-deductible
portion added to ACB)
• Soft costs on construction of building (include
interest, legal, accounting fees, insurance,
property taxes; must be capitalized)

Reference: ITA 20(1), 18(1)

Question 10

Q

Common business expenses ALLOWED

Taxation

Core – Level B

Answer

A

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

Reference: ITA 20(1)

Question 11

Q

Capital Cost Allowance (CCA)

Taxation

Core – Level B

Answer

A

Capital Cost Allowance (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 Accelerated Investment
Incentive of 1.5 × CCA on net additions (except 53,
43.1, and 43.2, which are subject to 100% CCA in
the year of purchase)
• 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.

Reference: ITA 20(1)(a)

Question 12

Q

Reporting alternatives – Specific items

Audit; Assurance

Core – Level B; Elective – Level A

Answer

A

Reporting alternatives – Specific items (Assurance)

• 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

Reference: CAS 805

Question 13

Q

Retiring allowance rollover to RRSP

Taxation

Core – Level B

Answer

A

Retiring allowance rollover to RRSP (Tax)

A retiring allowance (also called severance pay) is an amount paid to officers or employees when or after they retire from an office or employment, in recognition of long service or for the loss of office or employment.

A retiring allowance includes:
• payments for unused sick-leave credits on
termination; and
• amounts individuals receive when their office or
employment is terminated, even if the amount is
for damages (wrongful dismissal when the
employee does not return to work).
Individuals with years of service before 1996 may
be able to directly transfer all or part of a retiring
allowance to a registered pension plan (RPP) or a
registered retirement savings plan (RRSP). The
amount that is eligible for transfer is limited to:
• $2,000 for each year prior to 1996
• Additional $1,500 for each year prior to 1989 (if no
vested contributions to RPP or DPSP by employer)

Reference: ITA 60(j.1)

Question 14

Q

Shareholder loan

Taxation

Core – Level C

Answer

A

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.

Reference: ITA 15(2), ITA 80.4

Question 15

Q

Revenue recognition – Consignment sales

Financial Reporting (ASPE)

Core – Level A

Answer

A

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

Reference: ASPE 3400.13 - .15

Question 16

Q

Asset criteria

Financial Reporting (ASPE)

Core – Level A

Answer

A

Asset criteria (ASPE)

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

Reference: ASPE 1000.25

Question 17

Q

Residency

Taxation

Core – Level C

Answer

A

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

Question 18

Q

PPE – Betterments

Financial Reporting (ASPE)

Core – Level A

Answer

A

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

Reference: ASPE 3061.14

Question 19

Q

Non-monetary transactions

Financial Reporting (ASPE)

Core – Level B; Elective – Level A

Answer

A

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

Reference: ASPE 3831.06, .07, .11

Question 20

Q

Non-monetary transactions

Financial Reporting (IFRS)

Core – Level B; Elective – Level A

Answer

A

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

Reference: IAS 16.24-.26

Question 21

Q

Review engagements

Audit; Assurance

Core – Level B; Elective – Level A

Answer

A

Review engagements (Assurance)

• 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

Reference: CSRE 2400

Question 22

Q

Opening balances

Audit; Assurance

Core – Level B; Elective – Level A

Answer

A

Opening balances (Assurance)

• 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

Reference: CAS 510, paragraph 6(c)

Question 23

Q

Employee vs. Contractor

Taxation

Core – Level B

Answer

A

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
• 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

Question 24

Q

Employer provided automobile –
Standby charge

Taxation

Core – Level B

Answer

A

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%)

Reference: IT-63R5

Question 25

Q

Employer provided automobile –
Operating cost benefit

Taxation

Core – Level B

Answer

A

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

Reference: IT-63R5

Question 26

Q

Employer provided automobile –
Tax planning

Taxation

Core – Level B

Answer

A

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

Reference: IT-63R5

Question 27

Q

Employment – Taxable benefits

Taxation

Core – Level B

Answer

A

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

Reference: ITA 6(1)

Question 28

Q

Employment – Non taxable benefits

Taxation

Core – Level B

Answer

A

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

Reference: ITA 6(1)

Question 29

Q

Impairment of long-lived assets

Financial Reporting (ASPE)

Core – Level A

Answer

A

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

Reference: ASPE 3063.04-.09, .12, .18

Question 30

Q

Impairment of assets

Financial Reporting (IFRS)

Core – Level A

Answer

A

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.

Reference: IAS 36

Question 31

Q

Investments – Equity method

Financial Reporting (IFRS)

Core – Level A

Answer

A

Investments – Equity method (IFRS)

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

Reference: IAS 28

Question 32

Q

Accounting for subsidiaries

Financial Reporting (ASPE)

Core – Level A

Answer

A

Accounting for subsidiaries (ASPE)

An enterprise can make an accounting policy choice to account for its subsidiaries using one of the following methods:
• Cost method
• Equity method
• Consolidation method

** Once a method has been selected, it must be applied consistently (i.e. all subsidiaries must be accounted for using the same method)

Reference: ASPE 1591, ASPE 3051

Question 33

Q

PPE – Costs

Financial Reporting (ASPE)

Core – Level A

Answer

A

PPE – Costs (ASPE)

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

Reference: ASPE 3061.03, .06, .08

Question 34

Q

Capital lease criteria – Lessee

Financial Reporting (ASPE)

Core – Level A

Answer

A

Capital lease criteria – Lessee (ASPE)

• Must meet one of the criteria:
o Transfer of ownership or bargain purchase
option at the end of the lease term
o Lease term at least 75% of economic life of
asset
o PV of minimum lease payments at least 90%
of FV of leased asset
 Discount rate = lower of lessee’s
incremental borrowing rate and implicit
rate in the lease

Reference: ASPE 3065.06

Question 35

Q

Capital lease criteria – Lessor

Financial Reporting (ASPE)

Core – Level A

Answer

A

Capital lease criteria – Lessor (ASPE)

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

Reference: ASPE 3065.07

Question 36

Q

Types of capital leases – Lessor

Financial Reporting (ASPE)

Core – Level A

Answer

A

Types of capital leases – Lessor (ASPE)

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

Reference: ASPE 3065.29, .30, .37

Question 37

Q

Compound Financial Instruments

Financial Reporting (ASPE)

Core – Level A

Answer

A

Compound Financial Instruments (ASPE)

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

Reference: ASPE 3856.20 - .22

Question 38

Q

Capital Budgeting –
Buy vs. Lease

Finance

Core – Level B

Answer

A

Capital Budgeting – Buy vs. Lease (Finance)

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

Question 39

Q

Financing Options –
Debt vs. Equity

Finance

Core – Level B

Answer

A

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

Question 40

Q

Revenue recognition – Completed contract method

Financial Reporting (ASPE)

Core – Level A

Answer

A

Revenue recognition criteria – Completed contract method (ASPE)

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

Reference: ASPE 3400.18

Question 41

Q

Revenue recognition – Percentage of completion method

Financial Reporting (ASPE)

Core – Level A

Answer

A

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.

Reference: ASPE 3400.17

Question 42

Q

Revenue recognition – Effect of uncertainties (returns)

Financial Reporting (ASPE)

Core – Level A

Answer

A

Revenue recognition – Effect of uncertainties (returns) (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.

Reference: ASPE 3400.19-.21

Question 43

Q

Business use of home expenses

Taxation

Core – Level B

Answer

A

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.

Reference: ITA 18(12), IT-514

Question 44

Q

Inventory measurement – Cost formulas (specific identification)

Financial Reporting (ASPE)

Core – Level A

Answer

A

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

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

Reference: ASPE 3031.22

Question 45

Q

Inventory measurement – Allocation of overhead

Financial Reporting (ASPE)

Core – Level A

Answer

A

Inventory measurement – Allocation of overhead (ASPE)

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

Reference: ASPE 3031.14

Question 46

Q

Intangible assets

Financial Reporting (ASPE)

Core – Level A

Answer

A

Intangible assets (ASPE)

• 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.

Reference: ASPE 3064

Question 47

Q

Lease inducements

Financial Reporting (ASPE)

Core – Level A

Answer

A

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.

Reference: ASPE 3065.27

Question 48

Q

Business income vs. property income

Taxation

Core – Level B

Answer

A

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

Reference: ITA 9, ITA 248(1), IT-218R

Question 49

Q

Incremental Cash Flows

Finance

Core – Level B

Answer

A

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

Question 50

Q

Control Deficiencies

Audit; Assurance

Core – Level A

Answer

A

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.

Question 51

Q

Internally generated intangible assets

Financial Reporting (IFRS)

Core – Level A

Answer

A

Internally generated intangible assets (IFRS)

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

Reference: IAS 38.4, .8, .54, .57

Question 52

Q

Intangible assets – Definition and recognition

Financial Reporting (IFRS)

Core – Level A

Answer

A

Intangible assets – Definition and recognition (IFRS)

• 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 transferable or separable
• The entity controls the asset if it has the power to
obtain future economic benefits
• Recognition criteria:
o Probable that the expected future economic
benefits will flow to the entity
o Cost of the asset can be measured reliably

Reference: IAS 38.12, .13,.17 .21

Question 53

Q

Intangible assets – Amortization

Financial Reporting (IFRS)

Core – Level A

Answer

A

Intangible assets – Amortization (IFRS)

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

Reference: IAS 38.72, .88, .97, .104, .107, .109

Question 54

Q

Discontinued operations

Financial Reporting (IFRS)

Core – Level B; Elective – Level A

Answer

A

Discontinued operations (IFRS)

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

Reference: IFRS 5.03, .31 - .33

Question 55

Q

Assets held for sale

Financial Reporting (IFRS)

Core – Level B; Elective – Level A

Answer

A

Assets held for sale (IFRS)

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

Reference: IFRS 5.06 - .15, .25

Question 56

Q

Borrowing costs

Financial Reporting (IFRS)

Core – Level A

Answer

A

Borrowing costs (IFRS)

• Interest and financing costs that an entity incurs in
connection with the borrowing of funds
• Capitalize borrowing costs that are directly
attributable to the acquisition, construction or
production of a qualifying asset
• Possible qualifying assets:
o Inventories
o Manufacturing plants
o Intangible assets
o Investment properties

Reference: IAS 23.05, .07, .08

Question 57

Q

Share-based compensation

Financial Reporting (IFRS)

Core – Level B; Elective – Level A

Answer

A

Share-based compensation (IFRS)

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

Reference: IFRS 2.10, .11

Question 58

Q

Common audit risk factors

Audit; Assurance

Core – Level B; Elective – Level A

Answer

A

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

Reference: CAS 315, Appendix 2

Question 59

Q

Materiality

Audit; Assurance

Core – Level B; Elective – Level A

Answer

A

Materiality (Assurance)

• 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 75% 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

Reference: CAS 320

Question 60

Q

Audit approach

Audit; Assurance

Core – Level B; Elective – Level A

Answer

A

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

Question 61

Q

Financial statement assertions

Audit; Assurance

Core – Level B; Elective – Level A

Answer

A

Financial statement assertions (Assurance)

• 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
o Presentation – transactions and events are
appropriately aggregated or disaggregated and
clearly described, and related disclosures are
relevant and understandable
• 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 Accuracy, 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
o Classification – assets, liabilities, and equity
interests have been recorded in the proper
accounts
o Presentation – assets, liabilities, and equity are
appropriately aggregated or disaggregated and
clearly described, and related disclosures are
relevant and understandable

Reference: CAS 315.A129

Question 62

Q

Use of an expert

Audit; Assurance

Core – Level B; Elective – Level A

Answer

A

Use of an expert (Assurance)

• 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

Reference: CAS 500.A35 - .A58

Question 63

Q

Revenue recognition criteria

Financial Reporting (ASPE)

Core – Level A

Answer

A

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

Reference: ASPE 3400.04 - .06

Question 64

Q

Revenue recognition – performance criteria

Financial Reporting (ASPE)

Core – Level A

Answer

A

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.

Reference: ASPE 3400.07, .10

Answer 65

A

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

Reference: ASPE 3400.19

Answer 66

A

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

Reference: ASPE 3400.11

Answer 67

A

Government assistance (ASPE)

• 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

Reference: ASPE 3800

Answer 68

A

Discontinued operation (ASPE)

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

Reference: ASPE 3475.03, .30

Answer 69

A

Assets held for sale (ASPE)

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

Reference: ASPE 3475.04, .08, .13

Answer 70

A

Accounting changes – change in estimate (ASPE)

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

Reference: ASPE 1506.20 - .23

Answer 71

A

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)

Answer 72

A

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

Answer 73

A

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; and
o C is the total cash flow during the period after A.

Answer 74

A

Reporting alternatives – Compliance reporting (Assurance)

• CSAE 3530 Report: Attestation engagement — A
reasonable assurance or limited assurance
engagement to report on management’s
statement of an entity’s compliance with
agreements, specified authorities, or a provision
thereof
o A report concluding on whether management’s
stated compliance with the terms of the
agreement is fairly stated
• CSAE 3531 Report: Direct engagement — A
reasonable assurance or limited assurance
engagement to report on an entity’s compliance
with agreements, specified authorities, or a
provision thereof
o A report stating compliance with the terms of
the agreement
• 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

Reference: CSAE 3530, 3531, Section 9100

Answer 75

A

Methods of collecting audit evidence (Assurance)

• 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

Reference: CAS 500.A14-A25

Answer 76

A

Related Party Transactions (ASPE)

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

Reference: ASPE 3840.08-.09, .18, .22, .29

Answer 77

A

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.

Answer 78

A

Lease Accounting – Land & Building (ASPE)

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.

Answer 79

A

Subsequent Events (ASPE)

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

Reference: ASPE 3820

Answer 80

A

Contingencies (ASPE)

• 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

Reference: ASPE 3290

Answer 81

A

Revenue Recognition (IFRS)

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

Reference: IFRS 15

Answer 82

A

Accounting Policies, Changes, Errors (IFRS)

Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. Changes in accounting estimates result from new information or new developments and, accordingly, are not corrections of errors.

Only change a policy if:
• Standard/interpretation requires it, or
• Change will provide more relevant and reliable
information to users

Apply changes to policy retrospectively unless it is impractical.

Changes to accounting estimates should be applied prospectively.

Corrections to errors should be applied retrospectively unless it is impractical

Reference: IAS 8

Answer 83

A

Property, Plant and Equipment (IFRS)

Initial recognition if:
• The future economic benefits associated with the
asset will flow to the entity, and
• The cost of the asset can be reliably measured.

Initial measure- recorded at cost.

Subsequent measurement
• Carried at cost less accumulated depreciation,
and impairment losses, OR
• Carried at revalued amount, i.e. FV, less
subsequent depreciation if FV can be reliably
measured
o An increase in value is credited to OCI, unless it
is a reversal of a revaluation decrease previously
recognized as an expense

Significant components are required to be depreciated over their estimated useful life.

Reference: IAS 16

Answer 84

A

Agriculture (IFRS)

This standard is intended to apply to the following which relates to agricultural activity
• Biological assets
• Agricultural produce at the point of harvest
• Government grants related to biological assets

Initial recognition if:
• The entity controls the asset as a result of a past
event.
• The future economic benefits associated with the
asset will flow to the entity, and
• The cost of the asset can be reliably measured.
Initial measurement at:
• FV, less estimated point of sale costs
• Cost, if no reliable measurement of FV is available.
Subsequent measurement
• FV, less estimated point of sale costs
• Cost, less accumulated depreciation if no reliable
measurement of FV is available.

Reference: IAS 41

Answer 85

A

Revenue Recognition – Identification of the performance obligations (IFRS)

Performance obligations are identified as each promise to transfer to the customer either:
• a good or service (or bundle of goods or services)
that is distinct; or
• a series of distinct goods or services that are
substantially the same and have the same pattern
of transfer to the customer

A good or service that is promised to a customer is distinct if:
• the customer can benefit from the good or service
on its own or together with other resources
readily available to the customer; and
• the entity’s promise to transfer the good or
service to the customer is separately identifiable
from other promises in the contract
Two or more promises are not separately
identifiable if the nature of the promise, within the
context of the contract, is to transfer a combined
item in which the promised goods or services are
inputs.

If a promised good or service is not distinct, it is combined with other promised goods or services until the entity identifies a bundle of goods or services that is distinct.

Reference: IFRS 15.22-.30

Answer 86

A

Provisions, Contingent Liabilities, Contingent Assets (IFRS)

Provisions- a liability of uncertain timing or amount. May be recognized when:
• The entity has a present legal or constructive
obligation as a result of a past event,
• It is probable that an outflow of economic benefits
will be required to settle the obligation; and
• A reliable estimate can be made of the amount of
the obligation

Contingent losses
• A possible obligation that arises from past events,
whose existence will be confirmed only by the
occurrence or non-occurrence of one or more
uncertain future events not wholly in the control of
the entity;
• A present obligation that arises from past events
is not recognised when an outflow of future
economic benefits is not probable or the amount
of the obligation cannot be measured reliably.

Contingent gains
• possible asset that arises from past events and
whose existence will be confirmed only by the
occurrence or non-occurrence of one or more
uncertain future events not wholly within the
control of the entity.

Reference: IAS 37

Answer 87

A

Tax Implications of Going Public

• Company status will change from CCPC to Public
company.
• Deemed year end on date of change in status.
• Possible acquisition of control
• Tax balances that are no longer available  CDA,
RDTOH
• Small business deduction only available to CCPC  public company will be taxed at “high rate”,
creating General Rate income pool (“GRIP”) and
eligible dividends.
• Any undistributed Small Business earnings in the
Low Rate income pool must be paid out first as
other than eligible dividends.
• SRED – public company qualifies for lower rate of
ITC, and they are not refundable (only refundable
for CCPC)
• Public company shares do not qualify for Capital
Gains exemption

Answer 88

A

Employer paid automobile expenses – Taxable benefit (Tax)

• A taxable benefit arises when an employee is
given something that is personal in nature or if
something that is personal in nature is paid for by
the company
• A benefit may include an allowance or a
reimbursement of an employee’s personal
expense (e.g. personal fuel is reimbursed)
• The value of the benefit is generally its FMV
• If an employee is provided with a taxable benefit,
the amount must be included in their income

Answer 89

A

Owner- manager compensation – salary vs. dividends (Tax)

• Corporations are separate legal entities therefore,
to extract funds, an owner manager must either
receive a dividend or be paid a salary
• The Canadian tax system is meant to charge the
same level of tax on income regardless of
whether it is earned directly as an individual (i.e.
salary) or flowed through a corporation (i.e.
dividend); this is referred to as integration
• Salary payments are deductible to the corporation
whereas dividends are not
• Dividend payments will be paid out of after-tax
profits and be eligible for a dividend tax credit
which offsets the higher corporate rate of tax paid
• Salary is considered earned income for the
purpose of generating RRSP contribution room
and pensionable earnings for CPP
• Salary payment may result in reduced net cash
flow available to an owner-manager, as there are
CPP costs associated with this type of
compensation; these remittances are not required
for dividend payments
• Dividend payments will reduce an individual’s
cumulative net investment loss (CNIL)

Answer 90

A

Reserves for bad debts (Tax)

• A reserve may be deducted for bad debts to the
extent that it is reasonable and based on specific
uncollectible accounts
• A reserve claimed in one taxation year must be
included in income in the following tax year and a
new reserve based on the current specific
uncollectible accounts will be calculated and
deducted from income
o Effectively this means that the increase in the
reserve amount should be deducted each year

Reference: ITA 20(1)(l), ITA 12(1)(d)

Answer 91

A

Business investment loss (Tax)

• For tax purposes, 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
o Generally, this will yield a capital loss equal to
the ACB of the shares
• A capital loss of small business corporations is
given special treatment and is deemed to be a
business investment loss
o 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
o The ABIL can be carried back up to three years
or forward up to 10 years
o If the ABIL is not used by the end of the 10
years, it will become a capital loss

Reference: ITA 50(1), ITA 39(1)(c), ITA 111(1)(a), ITA 111(8)

Answer 92

A

Activity based costing (Management Accounting)

• Costs are allocated to activity cost pools and
activity rates are calculated
• Costs that are not driven by activities are not
allocated to cost pools

Answer 93

A

Moving expenses

In order for any moving costs to be deductible for tax purposes, the move must be an “eligible relocation” and the costs incurred must be deductible moving expenses.
• Eligible relocation is:
o Occurring as a result of a new work location
within Canada, and
o One in which the new residence is at least 40
kilometres closer to the new work location than
the old residence
• Deductible moving expenses include:
o Selling costs related to the old residence (i.e.
commissions)
o Costs to transport household goods (i.e. moving
company costs, etc.)
o Legal fees associated with the purchase of a
new residence
o Disconnecting and connecting utilities, revising
legal documents to reflect a new address,
replacing driver’s licenses
o Travelling costs
o Meals and lodging (not exceeding 15 days, not
including travel days)
o Costs of cancelling a lease on the old residence
o Up to $5,000 of interest, property taxes,
insurance, heating and utilities costs on the old
resident, subsequent to the time when the
taxpayer has moved out, during which
reasonable efforts are made to sell the property
• Examples of costs that are not deductible include:
o Home renovations for the old property in
advance of the sale (these are capital in nature
and would be added to the capital cost of the
old property)
o Travel expenses for a house-hunting trip

Reference: ITA 248(1); 62

Answer 94

A

Principal residence exemption (PRE)

The PRE enables the capital gains arising on the disposition of a principal residence to be received tax-free.
• The formula for determining the PRE is (A x (1 + B)
/C), where A = the capital gain on the disposition of
the property, B = number of years the property is
being designated as the principal residence, and C
= number of the years the property was owned by
the taxpayer.
• Only 1 property can be designated as a principal
residence for a taxpayer and his/her family in any
given year
• A principal residence is an accommodation that is
ordinarily inhabited by the taxpayer/taxpayer’s
family in the year
o To be ordinarily inhabited, the property needs to
have been lived in at some point during the year
by the taxpayer/taxpayer’s family
• If more a taxpayer/taxpayer’s family own more
than 1 principal residence in a year, they will have
to choose 1 to designate as the principal
residence
• To minimize taxes, it is most advantageous to
designate the residence with the highest average
capital gain per year as the principal residence

Reference: ITA 54; 40(2)(b)

Answer 95

A

Replacement property rules (Tax)

• In an arm’s length transaction, when one property
is exchanged for another property, it is deemed to
be disposed of for proceeds equal to the fair
market value, and any excess of proceeds over
adjusted cost base is a capital gain
• If replacement property criteria are met, then an
election is available to fully defer any
recapture/capital gain arising on the deemed
disposition, by reducing the UCC/cost base of the
acquired property by the amount of the
recapture/capital gain, respectively.
• To be eligible to defer the gain, the replacement
property rules must apply:
o It is reasonable to conclude that the property
was acquired by the taxpayer to replace the
former property (and put to the same or similar
use)
o Where the former property was used by the
taxpayer or a person related to the taxpayer for
the purpose of gaining or producing income
from a business, the particular capital property
was acquired for the purpose of gaining or
producing income from that or a similar business
or for use by a person related to the taxpayer for
such a purpose
o Where the former property was a taxable
Canadian property of the taxpayer, the particular
capital property is a taxable Canadian property
of the taxpayer

Reference: ITA 13(4), 44(1), 44(5)

Answer 96

A

Refundable dividend tax on hand (RDTOH)

For tax years beginning on or after January 1, 2019, there are two types of RDTOH balances:
• Non-eligible RDTOH: Includes refundable taxes on
investment income and Part IV tax on non-eligible
portfolio dividends.
o Only the payment of a non-eligible dividend can
trigger a refund from this account.
• Eligible RDTOH: This tracks refundable taxes paid
on eligible dividends received by the corporation.
o 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 non-eligible
RDTOH first.
At the date of transition, the eligible RDTOH
balance will be calculated as the lesser of:
• The existing RDTOH balance; and
• 38 1/3 % of the General Rate Income Pool (GRIP)
balance.

Reference: ITA 123.3, 129(3), 186, 187

Answer 97

A

Eligible versus non-eligible dividends

• Individuals must include the actual dividend plus a
gross-up in their net income for tax purposes. The
grossed-up dividend is referred to as the taxable
dividend. Dividends received by individuals will
have been designated as either eligible or non-
eligible by the corporation paying the dividend.
• Non-eligible dividends are paid by Canadian-
controlled private corporations (CCPCs) out of
after-tax active business income eligible for the
small business deduction or from after-tax
aggregate investment income subject to RDTOH.
o Since both of these types of income are taxed at
preferential rates inside the corporation, the
gross-up and dividend tax credit rates on non-
eligible dividends are lower than the gross-up
and dividend tax credit rates on eligible
dividends.
• Eligible dividends are paid by: Canadian public
companies out of after-tax income taxed at the
general corporate tax rate, or CCPCs out of the
general rate income pool (GRIP).
• A CCPC’s GRIP balance comprises eligible
dividends received and 72% of active business
income not eligible for the small business
deduction.

Reference: ITA 82(1)(b)

Answer 98

A

Filing and payment deadlines

• Income taxes
o Filing deadline is six months after year end.
o Tax balances owing are due two months after
year end (three months for CCPCs eligible for
small business deduction).
• GST/HST filing deadline
o Annual taxable supplies of:
 $1.5 million or less = annual reporting
 More than $1.5 million up to $6 million =
quarterly reporting
 More than $6 million = monthly reporting
o Annual or quarterly filers have the option to
report
more frequently.
o Quarterly and monthly filers must file and remit
the balance owing within one month after the
end of the reporting period.
o Annual filers must file and remit the balance
owing within three months after the fiscal year
end.
o Annual filers are required to pay quarterly
instalments if net GST owing in the previous
year was more than $3,000.

Answer 99

A

Contribution margin (Management Accounting)

• Contribution margin (CM) is the determination of
how much variable profit is available to cover
fixed costs and generate a profit.
• CM is highly dependent on the industry and type
of business.
• In general, the higher CM, the better.
• To determine CM, calculate the variable revenues
per unit (hour, day, year, quantity) offset by the
variable costs of the same.
• CM is A – B where:
o A is the total variable revenue per unit;
o B is the total variable expenses per unit.

Answer 100

A

Break-even analysis (Management Accounting)

• Break-even is the determination of sales volumes
necessary to generate a zero-profit.
• Break-even can be expressed in number of units,
total revenues, or a percentage of expected
revenues.
• To determine, calculate the fixed costs per period,
and divide them by the contribution margin (CM)
per unit, to determine the necessary sales
volumes to generate zero-profit.
• Break-even is A / B where:
 A is the total fixed costs;
 B is the CM per unit.

Answer 101

A

Warranties (IFRS)

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

Reference: IFRS 15.B28 – B31

Answer 102

A

Business combinations (IFRS)

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

Reference: IFRS 3

Answer 103

A

Earnings per share (EPS) (IFRS)

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

Reference: IAS 33

Answer 104

A

Using the work of internal auditors

• The external auditor shall determine whether the
work of the internal audit function can be used for
purposes of the audit by evaluating the following:
o The extent to which the internal audit function’s
organizational status and relevant policies and
procedures support the objectivity of the internal
auditors;
o The level of competence of the internal audit
function; and
o Whether the internal audit function applies a
systematic and disciplined approach, including
quality control.
• In determining the nature and extent of work that
may be assigned to internal auditors the external
auditor shall consider:
o The amount of judgment involved in
planning/performing audit procedures, and
evaluating the audit evidence
o The assessed risk of material misstatement
o The existence of significant threats to objectivity
and competence of the internal auditor

Reference: CAS 610.15, 610.29

Answer 105

A

Reporting alternatives – Specific Items (Assurance)

CAS 805 Report – Audit of a Single Financial Statement and Specific Elements, Accounts or Items of a Financial Statement
• A report providing audit level assurance on
individual financial statements or accounts, rather
than financial statements on the whole

The auditor must
• comply with all CAS’s 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)

CAS’s written in the context of an audit of financial statements are to be adapted as necessary when applied to audits of other historic financial information.
When forming an opinion and reporting on a single financial statement or on a specific element of a financial statement, the auditor shall apply the requirements in CAS 700, adapted as necessary in the circumstances of the engagement.

Reference: CAS 805

Answer 106

A

General assurance standards (Assurance)

Standards for assurance engagements OTHER THAN audits of financial statements and other historical financial information.
• Attestation engagements (CSAE 3000): a party
other than the practitioner measures or evaluates
the underlying subject matter against the criteria
• Direct engagements (CSAE 3001): the practitioner
measures or evaluates the underlying subject
matter against the criteria.

General standards:
• Before undertaking an assurance engagement,
the practitioner should have a reasonable basis f
the engagement can be completed in accordance
with the relevant standards.
• The practitioner should seek management’s
acknowledgment of responsibility for the subject
matter as it relates to the objective of the
engagement.
• The assurance engagement should be performed
with due care and with an objective state of mind.
• The practitioner and any other persons performing
the assurance engagement should have adequate
proficiency in such engagements and collectively
possess adequate knowledge of the subject
matter.

Reference: CSAE 3000/CSAE 3001

Answer 107

A

Responsibility of the Auditor for Assessment of Going Concern

• The external auditor should obtain sufficient
appropriate audit evidence about management’s
use of the going concern assumption in
preparation of the financial statements
• Conclude if a material uncertainty exists that the
entity cannot continue as a going concern
• Determine the implications on the auditor’s report
• Communicate with those charged with
governance if events or conditions cast doubt on
the going concern Additional Audit Procedures
When Conditions or Events Are Identified
• If no assessment has been made by management,
request one
• Evaluate management’s plan for future actions
• Where there is a cash flow forecast and the
forecast is a significant factor:
o Evaluate the reliability of underlying data
o Assess adequate support for assumptions
• Consider additional information
• Request written representations from
management regarding future plans and feasibility
Impact on the Auditor’s Report if Material
Uncertainty exists
• If adequate disclosures are made in the financial
statements, unmodified option but include an
emphasis of matter in the auditor’s report
• If adequate disclosures are not made, qualified or
adverse opinion

Reference: CAS 570

Answer 108

A

Capital lease criteria – Lessee

• A lease is a contract that conveys the right to
control the use of an identified asset for a period
of time in exchange for consideration
• Expensing lease payments is only available for
short-term leases or those with a low underlying
asset value
• Recognition:
o A right of use asset and a lease liability are
recorded at the commencement date of the
lease
• Initial measurement:
o Lease liability is equal to the present value of
future lease payments, discounted using the rate
implicit in the lease (if unknown, use lessee’s
incremental borrowing rate)
o Right of use asset initially includes initial direct
costs, dismantling costs, and value of the lease
liability, less any lease incentives
• Subsequent measurement:
o Lease liability increases to reflect interest and
decreases to reflect payments
o Right of use asset is amortized over its useful life
(if asset is transferred to lessee at end of lease
term or lessee is expected to exercise bargain
purchase option) or the lease term
• Effective for periods beginning on or after January
1, 2019

Reference: IFRS 16

Answer 109

A

Capital lease criteria – Lessor

• Each lease is classified as financing or operating:
o Financing — Substantially all of the risks and
rewards incidental to ownership of the asset are
transferred to the lessee
o Operating — No substantial transfer of the risks
and rewards incidental to ownership of the asset
to the lessee
• Finance lease:
o Initially measured as a receivable equal to the
net investment in the lease, which is future lease
payments discounted using the interest rate
implicit in the lease
o Finance income is recognized over the lease
term at a constant rate of return
• Operating lease:
o Lease payments received are recognized in
income either on the straight-line basis or
another systematic basis

Reference: IFRS 16

Answer 110

A

Contributions — revenue recognition (ASNPO) Reference: ASNPO 4410.16, .19-.20, .24

Contributions of materials and services can be recognized only when fair value can be reasonably estimated and when the materials and services are used in the normal course of operations and would otherwise have been purchased.
Fair value of assets is estimated using market or appraisal values. Fair value of contributed materials and services is determined by comparing to the purchase of similar materials and services.
Recognition of contributions is not required; however, the criteria for recognition must be met if an NPO wishes to record contributions. Once an accounting method has been determined, it must be applied consistently to all periods and for all types of contributions.
The nature and amount of the contributions must be disclosed in the financial statements.

Restricted contributions — deferral method Reference: ASNPO 4410.31, .33

Funds are not recognized as revenue until they are used.
If the funds are used for capital assets that are amortized, they are deferred and recognized over time.
Contributions are recognized as deferred contributions on the financial statements.

Restricted contributions — restricted fund method Reference: ASNPO 4410.57, .62

At least one restricted fund, and one general fund, must be used.
Contributions in the restricted fund can be recognized as revenue upon receipt.

Answer 111

A

Efficiency variance

Efficiency variance is the difference between the actual unit usage of something and the expected amount of usage. The expected amount is usually the standard quantity of direct materials, direct labour, machine usage time, and so forth that is assigned to a product.
Efficiency variance = standard price × (actual quantity − standard quantity)
Using the above formula, positive result is unfavourable; negative result is favourable.

Answer 112

A

Price variance

Price variance is the difference between the actual cost and standard cost of materials or labour.
Price variance = actual quantity × (actual price − standard price)
Using the above formula, positive result is unfavourable; negative result is favourable.

Answer 113

A

Flexible budget variance

A flexible budget variance is the difference between the actual costs and standard costs based on the actual production levels.
Flexible budget variance = actual costs − flexible budget costs (that is, standard quantity of an item for actual units produced × standard price)
Using the above formula, positive result is unfavourable; negative result is favourable.

Answer 114

A

Foreign currency transactions (IFRS)

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

Reference: IAS 21.21-23

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