CFE Flashcards
Taxable benefits: What is the standby charge formula if personal km >50%?
Employer owned: 2% * Cost of vehicle * # of months available to employee
Employer leased: 2/3 * monthly lease * # of months avail to employee
Taxable benefits: What is the standby charge formula if personal km <50%?
OR personal under_____ km?
OR personal under 20,004km (or 1,667 monthly)
Employer owned: 2% * cost of vehicle * # of months avail to employee * (personal km / 1667 * # of months avail)
Employer leased: same but 2/3 lease cost
Taxable benefits: what is the standby charge and operating cost benefit?
For when an employee has access to an employer owned vehicle for business & personal use.
If no personal km - no benefit required
Standby charge for when they can use the vehicle
Operating benefit for when employer pays for operating expenses (fuel, maintenance costs, licenses and insurance)
Taxable benefits: What is the formula for operating cost benefit?
If vehicle used <50% for business purposes:
$0.33 * Km of personal use
If > 50% business purposes, lesser of:
- 50% standby charge
-$0.33 * Km of personal use
ASPE Stock option taxable benefit
- Grant date
- Exercise date
- Shares sold
- Deduction of 50% of benefit if?
Grant date - no benefit
Exercise date - no benefit
Shares sold - FMV - exercise price = benefit
Deduction of 50% of benefit if FMV of shares when option granted does not exceed the option exercise price or CCPC shares held for 2 years
IFRS Stock option taxable benefit
- Grant date
- Exercise date
- Shares sold
- Deduction of 50% of benefit if?
Grant date - no benefit
Exercise date - FMV - exercise price = benefit
Shares sold - no benefit
Deduction of 50% benefit if FMV of shares when option granted does not exceed the option exercise price
How does the taxable benefit work for low interest loans to employees?
- Loan principle is NOT taxable
- Interest benefit based on prescribed rate (reduced by any interest paid in the year)
- Benefit is deductible if loan for purchase of investments or automobile purchase used for employment
Home office expenses for employees are permitted if?
- Place where individual principally (>50% of time) performs employment duties; OR
- Used exclusively for purpose of earning employment income AND used on regular/ continuous basis for meeting customers
Home office for employees: salaried employees may only deduct rent, supplies and r&M, whereas commissioned employees may also deduct:
Property taxes, home insurance, rented equipment
True or false: You cannot create or increase a loss in employment income from home office rent.
True
Employee Vs Contractor Tests
- Control of work
- Ownership of tools and equipment
- Subcontracting work or hiring assistants
- Financial risk
- Responsibility for investment and management
- Opportunity for profit
SOFROC
CCA - Immediate expensing for CCPCs, individuals and partnerships are available for all classes except?
- how much available per year?
- Available until when?
1-6, 14.1, 17, 47, 49, 51
Use this rather than AII for applicable classes
1.5 M available per tax year
Available until Jan 1, 2024
What are these CCA classes?
- 12, 13, 14, 14.1,16, 17, 28, 43.1, 43.2, 47, 49, 53
12- Tools, medical or dental instruments
13 - Leasehold improvements
14 - patents, franchises
14.1 - goodwill
16 - Taxies
17 - Roads, parking lots, sidewalks, storage areas
38 - Most power operated, movable equipment - excavating, moving or compacting earth
43.1 - Electrical vehicle charging stations up to 10 kilowatts
43.2 - electrical vehicle charging stations up to 90 kilowats
47- Equipment and structures used for natural gas liquefaction
49 - Pipeline
53 - Manufacturing and processing equipment and machinery
Gross up and dividend tax credit for Eligible and non-eligible dividends
Eligible - 38% and 6/11
Non Eligible - 15% and 9/13
True or false: Dividends received from a taxable Canadian corp are deductible?
True
True or false: Dividends are taxable if payor a connected corp
False - Dividends are not taxable if from a connected corp
Business income or capital? 8 Factors
prtkfan
- # and frequency of transactions
- Period of ownership
- Knowledge of market
- Relationship to taxpayers business
- Time spent
- Financing
- Advertising
- Nature of assets (can it produce income? - capital)
What are the 2 rules of personal use property?
- Gains are taxable but losses are not deductible
- $1,000 minimum rule for both proceeds/ cost
What is different about listed personal property (than personal use property?)
- Value of items often increase (art, jewelry)
- PUP rules but losses can be used against gains (only on LPP)
What are 4 common events that cause a deemed disposition?
- Death
- Change in use
- Gift
- Cessation of Canadian residency
What is the formula for capital gains reserve (amounts not due in the year)?
Lesser of:
- 1/5th of gain * (4- # of preceding years)
- Reasonable reserve based on amount not due until after the end of the year
What is required to defer recapture and/or capital gains for replacement property?
An election required in the year of acquisition of replacement property to amend return for year in which voluntary/ involuntary disposition took place
Voluntary disposition rules (3)
- Property must be replaced within one year from the end of the tax year of sale
- Property must be a former business property
- Replacement property must be used to produce income same or similar business
Involuntary disposition rules (2)
- Property must be replaced within 2 years
- Property includes land, building and equipment used to produce income from business or property
Does replacement property need to be of the same class?
No
When replacement property rules are elected into, how are the following calculated?
- Capital gain
- Recapture
- ACB of replacement property
- UCC of replacement property
Capital gain - lesser of:
- Actual capital gain
- Proceeds/ deemed proceeds not reinvested
Recapture - lesser of:
- Actual
- recapture not reinvested
ACB
- Replacement cost less capital gain deferred
UCC
- Replacement cost less cap gain and recap deferred
Principal Residence Exemption - what is the exempt portion of a gain?
(1+ # of years designated / # of years owned) * gain
Principal residence exemption - planning for people with more than one property (2)
- Designate one with higher capital gain per year
- Can designate up to 4 years of rental residence - No CCA should be claimed while rented
Describe Allowable business investment losses and the business investment loss
ABIL is capital losses arising from disposition of shares/ debts of small business corporations (except when 2 corps not at arms length)
BIL is the gain * 50%
Similar to allowable capital loss except ABIL may be applied against all other income
Carry back and carry forward years of losses:
- Non capital
- Capital
- LPP
- ABIL
Carry back - 3 years for all
Carryforward:
- Non cap - 20 yrs
- Cap - Indefinite
- LPP - 7 yrs
- ABIL - 10 yrs
What are the rules for inadequate consideration for non arms lengths transactions?
Consideration Proceeds for transferor ACB for transferee
FMV FMV FMV
> FMV Actual FMV
< FMV FMV Actual
Gift FMV FMV
Spousal transfers of what are tax free?
- Non depreciable capital property at ACB
- Depreciable property at UCC
True or false: Can elect to transfer out of spousal tax free transfer?
True
If spouses elect out of spousal tax free transfer, what are the 3 rules with depreciable property?
If FMV > transferor’s cap cost; Transferee’s UCC only bumped up by 50%
If FMV < Transferor’s cap cost; Transferee’s cap cost deemed to be the same
If FMV < Transferor’s UCC; terminal loss denied
Attribution rules
- Spouses
Loan or transfer of property not at FMV:
- Property income, taxable gains and losses attributes to transferor
- Business income does not attribute
- Second gen income does not attribute (income on income)
- ACB and UCC flows through on automatic rollover
If spouses living apart due to marital breakdown:
- No attribution of income
- No attribution of Taxable capital gains/losses IF BOTH spouses elect jointly
Attribution rules
- Transfers to children
Loan or transfer of property to minor - under 18
- property income attributes to transferor
- Business income does not attribute
- Taxable capital gains/ losses do not attribute
Does not apply to income earned on Canada child benefits transferred to a child
When TOSI applies
The split income will be taxed in the hands of the recipient at the highest marginal personal tax rate and no claim permitted for basic personal tax credit
The exception from TOSI can apply to income received by a family member who is 25 years or older AND if ALL the following apply:
- The income is received on excluded shares (shares that rep at least 10% of votes and value of the company)
- Less than 90% of the income of the corp is from the provision of services
- The shares are not in a professional corp
- If amount is considered reasonable for the family members contribution to the business
Personal taxes: Child care expenses
Claimed by parent with lower net income and the deduction is the lesser of 3 amounts:
- Amount paid
- 2/3 of taxpayers earned income
- Limits:
- Child any age/ disability credit - $11K
- Child under 7 - $8K
- child aged 7-16 - $5K
Personal taxes: Moving expenses
Deductible if? Limitations?
- At least 40Km closer to new work/ study location
- Limited to income earned at new location
- Amounts can be carried forward and deducted to extent of income earned at new location
Moving expenses include:
- Travel costs
- Transport/ storage
- 15 days meals/ lodging
- Lease cancellation/ selling costs of old
- Legal and other costs of acquisition
- up to $5K interest, prop taxes, insur, util on old while vacant
- Costs of revising legal docs for new address
- Utility connection and disconnection fees
*Can use simplified method for meals/ per KM driven
RRSP contribution limit:
- Unused room carried forward
- plus, 18% of earned income subject to max (2023- 30,780)
- less, pension adjustment for prior year
At what age must an RRSP be terminated?
71
Can be transferred to RRIF or purchase annuity to continue deferral
RRSP planning
- Managed earned income - salary vs dividend
- Maximize contributions
- Use spousal RRSPs (watch 3 year attribution rule)
- Roll over eligible retiring allowances
- Dividend and capital gain generating investments should be held outside RRSP as they get more favorable tax treatment and interest bearing investments should be held within RRSP because otherwise fully taxable
Part year Canadian residents are taxed on what?
Worldwide income for part of the year in which resident allocated to period of residence
What is a deemed resident and how are they taxed?
Non resident physically present in Canada for 183 days or more. Taxed on worldwide income for full year
What are the primary ties in determining residency status?
- Dwelling
- Spouse or common law partner
- Dependents
What are secondary ties in determining residency status?
- Personal property in Canada
- Social ties with canada
- Economic ties with Canada
- Work visas in Canada
- Medical insurance coverage
- Drivers license
- Vehicle registration
- Seasonal dwelling in Canada
- Canadian passport
- Memberships in canada unions or professional orgs.
Leaving the country:
- deemed disposition at FMV - specific exclusions?
- Elections available to?
- Rental property, business property etc.
Elections available to: - Exclude property (requires security)
- To include property
Instalments must be made how often and in what situations for individuals and corporations?
Individuals
- Quartlerly
- If taxes payable and amounts withheld at source is greater than $3K in both current and either of 2 preceding years
Corporation
- If part 1 tax payable or preceding year $3K or more
- Monthly for corps
- Quarterly for CCPCs with taxable income at or below the SBD threshold in current or preceding year with perfect compliance records
GST reporting and remittances: Amounts and frequency of filing
1.5 M or less of annual taxable supplies - annually and due 3 months after year end
>1.5 - 6M - Quarterly, due 1 month after end of reporting period
>6M - Monthly, due 1 month after end of reporting period
To qualify as a small business corporation (SBC):
- a CCPC that uses 90% or more of the FV of it’s assets in active business
- Assets are < $50M
To qualify as a Canadian Controlled Private Corporation (CCPC):
- Private corp
- Canadian
- Not controlled by non residents or by public corps
How do you calculate recapture/ terminal loss?
Opening UCC - (lesser of cost and proceeds)
- positive is recapture
- negative is terminal loss
A personal service business (PSB) is an incorporated business where:
- An individual owns >10% of the shares of the corp performs services on behalf of the corp; AND
- The individual would be reasonably regarded as an employee of the person to whom the services are provided
UNLESS: - The corp employees >5 full time employees; OR
- Services are provided to an associated corporation
If determined to be a personal service business (PSB), what is applied?
- 33% tax rate (highest rate for personal)
- Not eligible for SBD, general rate reduction or expenses unless it is wages, expenses allowed as an employee
The lifetime capital gains exemption is applicable to who?
Every Canadian individual for the disposition of shares of a qualified small business corporation (QSBC)
What all conditions are required to be a qualified small business corporation?
- At time of sale, qualifies as a small business corporation
- Owned by you, spouse/common law, or partnership you were apart of
- 24 months immediately before share disposal, it was a share of a CCPC and more than 50% of the FMV of the assets of the corp were used mainly in an active business (90%)
- 24 months immediately before the share disposal, no one owned the share other than you/ partnership
Factors to consider on sale of asset versus shares
- Redundant assets
- Undisclosed liabilities
- Asset bump up (Assets acquired at FV. If > UCC, value for tax is bumped up)
- Goodwill deduction (If goodwill purchased - paying > value of assets; it is eligible for CCA claims under class 14.1)
- Loss carryovers - remain in corp (can only use under share purchase)
- Complexity
- lifetime capital gains exemption
Non Monetary Transactions: Steps
- Definition (nothing specific under IFRS - use ASPE)
- Measure at carrying value if all exceptions are met
- If any exception met, measure at FV
Non Monetary Transactions: What is commercial substance?
Commercial substance exists when cash flows expected to change significantly in relation to:
- Configuration (risk, timing and amount) of cash flows differ from asset received vs given up
- Entity specific value value of the portion of the entity’s operations affected by the transaction changes as the result of the exchange
Non Monetary Transactions: What are the exceptions when determining if should be valued at carrying value?
Measure at CV when any met:
- Lacks commercial substance
- Exchange of a product or property held for sale in the ordinary course of business for a product or property to be sold in the same line of business
- Neither FV of the asset received nor asset given up is reliably measurable
- Non monetary non reciprocal transfer to owners
Non Monetary Transactions: When recording at FV, is it the FV of the asset given up or received?
Whichever is more reliably measured. If both, then:
- IFRS - FV of asset received
- ASPE - FV of asset given up
Related Party Transactions: How are these recorded under IFRS?
At exchange amount unless another standard provides guidance. Significant disclosures are required (nature of relationship, transactions and key management compensation)
Related Party Transactions: How are these recorded under ASPE?
Flow chart - likely won’t be required but see prep notes for the flow chart for review.
Inventory - Definition
Inventories are assets:
- Held for sale in the ordinary course of business
- in the process of production for such sale
- in the form of materials of supplies to be consumed in the production process or in the rendering of services
Inventory - What is NRV?
Net realizable value = selling price - estimated costs of completion - estimated selling costs
Inventory is measured at the lower of cost and net realizable value
Inventory - Differences between IFRS and ASPE on borrowing costs
IFRS - requires capitalization of borrowing costs
ASPE - allows a choice to either capitalize or expense
Revenue Recognition - ASPE - List criteria to use to determine when to recognize revenue
- Collection is reasonably assured
- Performance has been achieved
- Reasonable assurance regarding measurement of revenue
Apply to each separately identifiable component
Revenue recognition - ASPE - Upfront and non-refundable fees or payments: how are they recognized?
Even if non refundable, typically are earned as the products and/or services are delivered - deferred and recognized systematically
Rev Rec - ASPE - Revenue can be recognized under which two methods?
Completed contract or percentage of completion
Rev Rec - ASPE - Percentage of completion: List the technical relevant
- Recognize proportionately to performance of each act
- If underterminate number of acts over term, straight line basis used
- Measures of performance include output measures (units produced) or input measures (hours of labour/ machine)
- amounts billed NOT an appropriate basis of measurement
Revenue Recognition- IFRS - List steps
- Identify the contract
- Identify the separate performance obligations
- Determine the transaction price
- Allocate transaction price to separate performance obligations
- Determine when performance obligations have been satisfied
Rev Rec- IFRS - Identify the contract assessment:
- Can identify each party’s rights
- Can identify payments terms
- Commercial substance
- Both parties approve contract
- Collection probable
Rev Rec - IFRS - Determine the transaction price - factors to consider
- Variable consideration (Using expected value or most likely amount) - see also, Right of return
- Constraining estimates (shall only include up to the extent that is highly probable that a significant reversal will not occur)
- Existence of significant financing component (adjust for effects of time value of money)
- Non cash consideration (value at FV)
- Consideration payable to customer (accounted for as a reduction of transaction price once transfer occurs or entity pays or promises to pay)
Rev Rec - IFRS - Right of Return
Form of variable consideration listed under step 3 (determining the transaction price)
Limited to amounts that is highly probable
If unable to estimate amount of revenue highly probable - not recognized
If based on a history of returns - set up refund liability (contra rev acct) and right to recover (contra COGS account)
Rev Rec - IFRS - Warranty
If purchased separately - consider it a separate performance obligation
If not an option to purchase separately, account in accordance with ‘contingent liabilities’
Rev rec - IFRs - Consignment
- 3 indicators of consignment arrangement
- When is rev recognized?
3 indicators:
- Product controlled by entity until specified event occurs (sale/ expiration)
- Entity able to require return of product or transfer to third party
- Dealer does not have unconditional obligation to pay for the product (may require deposit)
Recognize revenue when end sale is made
Rev Rec - ASPE - Uncertainties relating to measurement of revenue may result from one or both issues:
Consideration
- When not determinable within reasonable limits, rev not recognized
Returns
- Rev not recognized when subject to significant and unpredictable amounts of goods being returned
Rev rec- ASPE/ IFRS - Non refundable fee
An advance for future goods or services and therefore recognized as revenue when those goods/ services are provided
Rev rec - ASPE/ IFRS - Gross or net
Determine if principal or agent (gross/ net respectively)
Factors for principal:
- Primary responsibility for providing goods/ services
- Bears inventory risk
- Latitude in establishing prices
- ASPE - bears credit risk
Factors for agent:
- ASPE - Amount earned is predetermined
- IFRS - Does not control the specified good or service before it is transferred to the customer
Intangible Assets - definition
Must be:
- Identifiable (either a- separable or b- arise from contractual or other legal rights)
- Controlled by entity
- Existence of future economic benefits
Intangible Assets - Recognition criteria
- Probable future economic benefits
- Cost reliably measurable
Intangible Assets - What assessment comes after recognition criteria?
Is it internally generated?
If so, need to assess development criteria (Development vs research)
Look up list in knotia
- Technical feasibility
- Intention to complete
- Ability to sell/ use
- Future economic benefits
- Adequate financial, technical and other resources avail
- Cost reliably measurable
If met - capitalize under IFRS. ASPE - can choose to capitalize or expense.
Intangible Assets - What CANNOT be recognized as an intangible asset?
- Internally generated goodwill
- Research costs
- Expenditure initially expensed (after FS finalized)
- Internally generated brands, publishing titles, customer lists
Intangible Assets - How is the asset initially recognized? What costs are excluded?
- At cost
- Excluded costs: Marketing, admin, general overhead, initial operating losses, staff training to operate asset
Intangible Assets - Subsequent measurement
- ASPE
- IFRS
ASPE - must be cost model (amortize unless indefinite life)
IFRS - Choice between cost or revaluation model
To use revaluation model:
- Only if FV can be measured reliably
- Revaluations must occur regularly
- Revaluation increases - revaluation surplus in OCI
- Revaluation decreases - revaluation surplus decrease, then net income
*No amortization
Government Assistance: IFRS/ ASPE: Recognition criteria:
- the entity will comply with the conditions
- the grant will be received
Government assistance: IFRS/ ASPE: If the grant does not meet the recognition criteria, how is it recorded?
Deferred government grant (deferred liability)
Government assistance: IFRS/ ASPE: How to record government grant if it meets the recognition criteria?
Revenue grant:
- Separately as other income
- Deducted from the related expense
Asset grant:
- Deferred liability and brought into income as asset amortized
- Deducted from assets carrying amount
Government assistance: IFRS/ASPE:
- If grant received prior to conditions being met?
- If conditions met but grant not received?
- For government loan that has favourable interest terms?
- Recognize as deferred government grant
- Recognize as government grant receivable
- Recognize a benefit equal to the proceeds of the loan, less the discounted value and account for as a government grant
Not-For-Profit Accounting: What accounting framework must be followed?
- Can choose from ASPE, IFRS or ASNPO
- follow ASPE standards where a topic is not addressed under ASNPO
An NPO can report on _______ basis or use __________ accounting
An NPO can report on aggregate basis or use fund accounting
*Must use fund accounting if using restricted fund method for contributions
NPO: Contributions/ rev rec: steps?
- Identify method of accounting for contributions - restricted fund method or deferral method
- Determine type of contribution being made (Restricted, endowment, unrestricted)
- Determine amount to measure the contribution (use FV)
- Discuss how and when to record the contribution
NPO: Contributions/ rev rec: Difference between restricted fund method and deferral method?
Restricted Fund Method
- Details of FS elements are reported by fund (general, restricted, endowment etc)
Deferral Method:
- Any restricted contributions related to future period expenses re deferred and recognized into revenue in period in which related expenditures are incurred
NPO: Contributions/ rev rec: How to record the contribution under the restricted fund method:
- Restricted r/t restricted fund
- Restricted with no related restricted fund
- Endowments
- All other
Restricted r/t restricted fund
- recorded to related restricted fund
Restricted with no related restricted fund
- recorded to general fund in accordance with the deferral method
Endownments
- Endownment fund
All other
- reported as revenue in the current period
NPO: Contributions/ rev rec: How to record the contribution under the deferral method:
- Restricted r/t current period expenses
- Restricted r/t future expenses
- Restricted r/t capital assets that will be amortized
- Restricted r/t capital assets that won’t be amortized
- Endowments
- All other
Restricted r/t current period expenses
- rec as rev in current period
Restricted r/t future expenses
- deferred and recognized as rev when expenses are incurred
Restricted r/t capital assets that will be amortized
- deferred and recognized on same basis as amortization
Restricted r/t capital assets that won’t be amortized
- direct increase in net asset
Endowments
- direct increase in net assets
All other
- reported as revenue in current period
NPO: contributions receivable: Define:
- Pledge
- Bequests
Pledge
- Promise to contribute cash or other assets
Bequests
- Subject to considerable uncertainty surrounding the timing of the receipt and the amount that will actually be received
What happens if you over contribute to RRSP?
- You have a lifetime limit of $2,000 for excess without penalty
- 1% per month on the excess contribution
*recommend to withdraw it
Can an NPO record the donation of materials and services (time)?
Yes - if it meets the criteria:
- The FV can be reasonably estimated
- Used in the normal course of operations
- Otherwise would have been purchased
How are capital assets recorded under ASNPO?
Choice to capitalize or expense if average revenue (prior and current year) is under $500,000
- Choice to capitalize and amortize, 100% expense or capitalize and not amortize
Must meet the identifiable tangible assets for an NPO (look up)
-held for use in the provision of services, for admin purposes, etc.
- Acquired, constructed or developed with the intention of being used on a continuing basis
- Not intended for sale in ordinary course of operations
- Not held as part of a collection (see “collections held by not for profit org” definitions
Identifiable tangible assets for NPO
- How to measure initially
- How to amortize
- Cost + all cost directly attributable
- Amortize cost less residual value and recorded over assets useful life
NPO and Intangible assets- what are the steps?
Same as capital assets in the first bit
- NPO with less than $500K in annual average rev can choose to cap & amort, cap & not amort, 100% expense
-Identify intangible assets - “Identifiable non monetary asset without physical substance”
- Measure initially by following ASPE intangible assets guidance (separately acquired and internally generated intangibles)
- Assess whether write down required -does net carrying amount exceed FV? *Write-downs cannot be reversed
NPO: Collections: Steps
- Identify existence of potential collection
- Determine if definition met
- Record at cost or nominal value (must be the same method for all collections)
- No amortization on collections
- Consider whether write-down required
NPO:Collections - Definition
- Held for public exhibition, education or research
- Protected, cared for and preserved
- Subject to an organizational policy that requires proceeds from their sale to be used to acquire other items to be added to the collection or for the direct care of the existing collection
NPO: Collections: When recording at cost, what all is included?
- Acquired - purchase cost
- Items contributed - FV plus all costs directly attributable to the acquisition
- Costs incurred in protecting and preserving collection items are considered repair and maintenance (expense as incurred)
NPO: Collections: How to consider if write down required?
- Events/ changes in circumstances
- Does CV need to be written down to FV or replacement cost?
PP&E: Steps?
- Assess definition and or recognition criteria (different for both IFRS and ASPE)
- Initially measured at cost (determine relevant costs to be included)
- Assess measurement (different for IFRS & ASPE)
PP&E: IFRS
- Definition criteria
- Held for use in production or supply of goods or services, for rental to others, or for admin purposes
- Are expected to be used during more than one period
PP&E: IFRS
- Recognition criteria
- Probable future economic benefits
- Cost can be measured reliably
PP&E: IFRS
- Measurement after recognition
Choice between revaluation model and cost model
PP&E: ASPE
- Definition criteria
- Held for use in the production or supply of goods and services, for rental to others, for admin purposes or for the development, construction, maintenance or repair of other PPE
- Acquired, constructed or developed with the intention of being used on a continuing basis
- Not intended for sale in the ordinary course of business
PP&E: ASPE
- Recognition criteria
Although IFRS has separate recognition criteria, ASPE does not. Just definition criteria -> Measurement at recognition
PP&E: ASPE
- Measurement after recognition
Must use cost model (cost less AD less impairment losses)
ASPE Lessee
- Steps?
- identify issue
- Determine if capital or operating
- Measure according to capital/ operating
ASPE Lessee
- What are the criteria to determine if capital lease?
If one or more met - capital lease:
- Transfers ownership of asset by end of lease term (including BPO)
- Lease term is for substantially all of useful life (>75%)
- PV of minimum lease payments is substantially all of the FV using implicit rate in lease (>90%)
ASPE Lessee
- how to measure if capital?
- Recognize ROU asset/ lease liability at PV of minimum lease payments
- Amortize over lease term (if BPO, over useful life)
- effective interest table for pmts
ASPE Lessor
- steps?
- Identify issue
- Determine capital or operating
- If capital, determine if sales type or direct financing
- Measurement
ASPE Lessor
- What are the criteria to determine if capital lease?
One or more of:
- Transfers ownership of asset by end of lease term (including BPO)
- Lease term is for substantially all of useful life (>75)
- PV of minimum lease pmts substantially all of the FV using implicit rate in lease (>90%)
AND
- Credit risk associated with the lease is normal compared to similar receivable
- Amounts of any un-reimbursable costs can be reasonably estimated
ASPE Lessor
- If capital, what kinds are there?
- How do you determine which kind it is?
Sales type:
- FV of the leased property greater/ lesser than CV
Direct financing
- FV of leased property = CV
ASPE Lessor
How do you measure an operating lease?
- Lease payments income
- Assets on BS, depreciate as normal
- Add direct costs to carrying amount
ASPE Lessor
How do you measure a sales type lease?
- Sales revenue/ lease receivable = pv of minimum lease payment
- Cogs/ Inventory = carrying value
- Effective interest table - record payments against interest rev and lease rec
- Initial direct costs expensed as incurred
- Residual value (if any) recorded back into inventory against lease receivable at the end (when leased asset returneD)
ASPE Lessor
How do you measure a direct financing lease?
- Recognize as lease receivable/ inventory at amount equal to net investment in lease , less initial direct costs
- Minimum lease payments broken down using discount rate into lease receivable and interest income
- Initial direct costs expensed as incurred
ASPE Sale leasebacks
- Everything the same but what do you do with the profit on sale?
- Amortize profit on sale in proportion to amortization of leased asset or rental payments over lease term if operating
- If land, amortize over lease term
- If FV of property at time of transaction is less than CV, recognize loss immediately
IFRS Lessee
- Steps?
IFRS Lessee - all capitalized from this perspective
1. Assess criteria to determine whether contract contains a lease (control and exchange of consideration)
-> recognition exemptions - short term lease or low value asset
2. Identify separate lease components
3. Determine commencement date
4. Determine lease term
5. Determine discount rate
6. Record right of use asset/ lease liability at PV
7. Subsequent measurement
-> ROU asset: Cost model unless revaluation model used on other assets in that class
-> Lease liability: Interest increases lease liability, reduce CV to reflect lease pmt
IFRS - Lessor
- Steps?
- Assess criteria to determine classification between finance of operating
- Recognition and measurement
IFRS - Lessor
- How to classify as finance?
One or more to be met:
- Transfers ownership of underlying asset by end of lease term
- BPO lower than FMV
- Lease term is for major part of economic life (>75%)
- PV of MLP substantially all fo the FV using interest rate implicit (>90%)
- Assets are so specialized that only lessee can use them without major modifications
*There are other factors listed below in handbook that could also indicate finance (secondary factors)
IFRS - Lessor
- Recognition & measurement of finance lease
Initially recognize receivable as net investment including initial direct costs
- Use discount rate to break lease pmts into lease receivable and interest income
Manufactures or dealers that offer a choice to buy or lease different:
- Revenue (lower of FV of asset or PV of lease pmts)
- COGS (CV of asset less PV of unguaranteed residual value)
- Profit or loss for difference (gain/ loss)
IFRS - Lessor
- Recognition & measurement of operating lease
- lease pmts recognized in income
- initial direct costs added to CV
- Asset on BS as usual
Sale & Leaseback for IFRS
- steps?
- Assess whether transaction meets requirements to be accounted for as as sale under IFRS 15 (determine when a performance obligation is satisfied)
- Determine on how to account for if sale or not a sale under handbook
Assets held for sale (or disposal group) - IFRS/ ASPE
- Steps?
- Assess criteria to see if asset held for sale
- Initial measurement - lower of CV and FV, less costs to sell. Not amortized. Interest and other expenses continue to be accrued under ASPE
- Subsequent measurement - initial and subsequent loss’s and gains up to the amount of loss previously recognized
- Disclose separately on the financials as a single item (major classes of assets/ liabilities disclosed in the notes)
Assets held for sale (or disposal group) - IFRS/ ASPE
- Criteria for asset held for sale?
- CV principally recovered through sale transaction (IFRS)
- Avail for immediate sale in present condition with usual and customary terms for sales of such assets (IFRS)
- Sale highly probable (list of things that indicate this such as management committed etc)
Discontinued operations - IFRS/ ASPE
- Steps?
- Assess criteria to evaluate presentation as a discontinued operation
-> component of an entity (distinguishable)
-> has been disposed of or is classified as held for sale
-> One of:
—>represents a separate major line or geographical area
—> Part of plan to dispose of a separate major line of business
—> Subsidiary acquired exclusively with a view to resale - Financial statement presentation - reported as separate element of income for both current and prior periods
-> single amount in IS post tax profit/ loss
Business Combination (ASPE/ IFRS)
- Steps?
- Determine if business combination - use definition of business combination AND business
- Apply the acquisition method
- Identify acquirer
- Determine acquisition date
- Recognize and measure the identifiable assets acquired, liabilities assume and any non controlling interest in the acquiree
-> Use definition of assets/ liabilities
-> Measured at FV
- Recognize and measure goodwill (capitalize) or a gain from bargain purchase
Foreign Exchange/Translation of foreign operations - ASPE
- Steps?
- Assess type of foreign operation (integrated/ self sustaining using definitions)
- If integration operation, use temporal method (use definition)
- If self-sustaining operation, use current rate method (use definition)
Impairment of Financial Assets
What type of asset is this for?
Cash, contractual right to receive cash, contractual right to exchange financial instruments, equity instrument (cash, stocks, bonds, mutual funds)
Impairment of Financial Assets - IFRS
-What section of handbook?
-Steps?
-How to determine when to recognize?
- Can loss be reversed?
- Determine whether financial asset impaired - IFRS 9 Financial instruments - section 5 “impairment”
Recognize an impairment loss upon recognition of expected credit losses. To assess whether credit risk has increased significantly - use IFRS 9 5.5.9 “Determining significant increases in credit risk” - Determine impairment loss
-> If not significantly increased - record equal to 12 month expected credit losses
-> If significant - record lifetime expected credit losses
Impairment of financial assets - ASPE
- What section of handbook?
- Steps?
- Can loss be reversed
3856 ‘Financial Instruments’. Subsection16-.17 ‘impairment’
1. Each each reporting date - assess whether any indicators exist that show asset may be impaired.
2. If impaired, reduce the CV to the higher of the following: (look up)
-> PV of cash flows expected to be generated by holding the asset
-> Amount that could be realized by selling the asset
-> Amount expected to be realized by exercising right to any collateral, net of costs
Losses can be reversed up to initial amount
Impairment of investments - ASPE
- what section of handbook?
- Steps?
3051 ‘Investments’. subsection .23-.25 ‘Impairment’
- Everything pretty much the same as impairment of financial instruments except only 2 amounts to reduce the CV to the higher of
Impairment of Goodwill - IFRS
*can look up initial bit, but memorize definitions
- Section of handbook?
- Steps?
- can loss of goodwill be reversed?
IAS 36 - Impairment of assets
1. Why testing? Needs to be tested annually
2. Determine recoverable amount - using recoverable amount definition. Equal to the higher of:
-> Value in use (Discounted future expected cash flows from use and eventual disposal of asset; exclude taxes, financing)
-> FV less costs of disposal (the price that would be received in an orderly transaction. costs of disposal includes legal costs, non recoverable transaction taxes, costs of removing asset and direct incremental costs to ready the asset for sale)
3. If recoverable amount < CV, impaired. Does it apply to a single asset or to a cash generating unit with goodwill?
4. Apply to goodwill first, then to other assets (if applicable) recognize loss in IS
Goodwill losses CANNOT be reversed
Impairment of long lived assets - IFRS
- Section of handbook? *Memorize subsection & step 2/ definitions of step 2
- Steps?
- can loss be reversed?
IAS 36 Impairment of Assets
1.State - need to assess at the end of each reporting period whether any indication that an asset may be impaired
2. Indicators of impairment - section 36.12
3.Determine recoverable amount of the asset, higher of:
-> Value in use (Discounted future expected cash flows from use and eventual disposal of asset; exclude taxes, financing)
-> FV less costs of disposal (the price that would be received in an orderly transaction. costs of disposal includes legal costs, non recoverable transaction taxes, costs of removing asset and direct incremental costs to ready the asset for sale)
Consider whether impairment applies to a single asset or cash generating unit
3. Impairment loss recorded in income.
May be reversed up the amount of loss previously recorded
Impairment of long lived assets - ASPE
- What handbook section?
* Memorize step 2 & 3 & initial subsection of handbook
- Steps?
- Can losses be reversed?
3063 impairment of long lived assets
1. State - test for impairment whenever events or changes in circumstances indicates that its CV may not be recoverable. Potential changes in events - 3063.10
2. Impairment exists when CV exceeds the sum of undiscounted cash flows from use and eventual disposition. Undiscounted cash flows:
-> Use remaining useful life of asset as term for cash flows
-> Include principal amount of related liabilities
-> Exclude interest costs
Consider if applies to single asset of asset group
3. Calculate and record impairment loss which is the amount by which CV exceeds FV
Losses CANNOT be reversed
Impairment of long lived assets
- What types of assets are these?
PP&E, intangible assets with finite useful lives and long term prepaid assets
Under Impairment of financial assets, goodwill and long term assets - which of these losses can be reversed?
Goodwill can not be reversed
Financial assets under ASPE can be reversed
Losses under long lived assets CAN be reversed under IFRS but NOT for ASPE
Investments - IFRS
-How do you determine what type of investment?
Consider control, significant influence, joint control or investment property
If none of these - it’s a financial instrument
Investments - IFRS Handbook sections for:
- Control
- Significant influence
- Joint control
- Investment property
- Financial Instruments
-Control- IFRS 10 ‘consolidated financial statements’
-Significant influence - IAS 28 ‘Investments in associates and joint ventures’
- Joint control - IFRS 11 ‘Joint arrangements’
- Investment property - IAS 40 ‘Investment property’
- Financial Instruments - IFRS 9 ‘ Financial instruments’
Investments - IFRS
- How to determine if have control and how is the investment accounted for?
- Handbook section?
- What is the exception?
investor controls an invetment if has ALL the following: (easy to find under IFRS 10):
- Power over investee
- Exposure or rights to variable returns from its involvement with investee
- Ability to use its power over investee to affect amount of investors returns
Consolidate financial statements
Exception is if Investment Entity (still uneer IFRS 10) - exception to consolidation - look up definition of investment entity and if met, shall measure investment in subsidiary at FVTPL
Investments - IFRS
- How to determine if significant influence?
- How to account for?
- Handbook section?
IAS 28 - Investments in associates and joint ventures
*Look up significant influence, then equity method
- Greater than 20% and less than 50% ownership
- consider other factors, board of directors rep etc.
Investments - IFRS - Joint Control
- What section of handbook?
- Steps?
- How accounted for?
- IFRS 11 ‘Joint arrangements’
- Determine if joint venture or joint operation using definitions
- Joint venture - equity method
- Joint operation - share of assets/ liabilities/ rev/ expenses
Investments - IFRS - Investment property
- Handbook section?
- Steps?
IAS 40 ‘Investment property’
- Meet definition of investment property
- Record at cost when cost can be reliably measured and when future economic benefits probable
- Subsequent - policy choice between cost and FV
If none of the other investment criteria is met (IFRS), it is recorded as a financial instrument under IFRS 9.
- How are these recognized?
- Handbook section for classification?
Recognized through amortized cost, FVTPL, or FVOCI
See classification of financial assets under IFRS 9.4.1
Investments - ASPE - Handbook sections for:
- Control
- Significant influence investments
- Joint control
If none of above:
- Financial instrument
- Control 1591 ‘subsidiaries’
- Significant influence 3051 ‘Investments’
- Joint control 3056 ‘Interests in joint arrangements’
- Financial instruments 3856 ‘Financial instruments’
Investments- ASPE- How to account for:
- Control investments (subsidiaries)
- Exception?
1591 ‘Subsidiaries’
- Greater than 50% ownership
- Policy choice between consolidation, equity or cost
If investment company - see AcG-18 ‘Investment companies’ - do not consolidate, use FVTPL
Investments- ASPE- How to account for:
- Significant influence investments
3051 ‘Investments’
Greater than 20% and less than 50% ownership
Consider other factors - board of directors etc.
Policy choice between equity or cost method (unless quoted in active method use equity method)
Investments- ASPE- How to account for:
- Joint control investments
3056 ‘Joint arrangements’
Determine if jointed controlled operation, Jointly controlled assets or jointly controlled enterprise
- Controlled operation - assets it controls, liabilities it incurs, share of rev/ expenses
- Controlled assets - share of jointly incurred assets/ liabilities/ IS
- Controlled enterprise - policy choice between equity method or cost of share of assets/ liabilities/ rev/ exp
Investments- ASPE- How to account for:
- Financial instrument
3586 ‘Financial instruments’
Initially measured at FV
Subsequently at cost if not quoted in active market (then use FV) OR use amortized cost if none of above or is a financial liability
If initially measured at cost - subsequently measure at cost, less reduction for impairment
Provisions - IFRS
(lawsuit/ ARO)
- Steps?
- Recognize when:
- Present obligation as a result of a past event
- Probable that must settle obligation
- Reliable estimate can be made of amount - Initial measurement at:
- best estimate
- When range all equally likely, midpoint range
- when large population use expected value method (weigh all by associated probabilities) - Subsequently - recognize changes resulting from passage of time as changes in provision and borrowing costs
What is an onerous contract?
How is it recognized?
Where unavoidable costs of meeting the obligation under the contract exceed the economic benefits expected to be received
Recognize and measure as provision
Provision (ARO under IFRS)
Restructuring constructive obligation to restructure arises when?
Look up under provisions
- Detailed formal plan…
- Raised valid expectation…
Recognize and measure as a provision
Under Provision (IFRS), if some expenditure will be reimbursed by another party, when and how is this recognized?
Only when virtually certain it will be received
- Reimbursement cannot exceed amount of provision
- Recognized as separate asset
- Provision expense may be presented net of reimbursement
Contingent liabilities - IFRS
- How recognized?
Not recognized because it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation of the amount of the obligation cannot be measured with sufficient reliability
Disclosed unless possibility is remote
Contingent Assets - IFRS/ ASPE
- How recognized?
Not recognized
Disclosure only permitted when probable - nature of contingencies and estimate of amount
Contingent Liabilities - ASPE
- Steps
- Assess whether to recognize contingent loss
Accrue when:
- likely to occur
- Amount reasonably estimated
Disclose when the occurrence is:
- Likely but the amount cannot be reasonably estimated
- Likely and an accrual has ben made but an exposure to loss in excess of amount accrued exists
- not determinable
- Record at:
- Best estimate of amount required to settle
- When a range avail (all equal) accrue at minimum or range
Asset Retirement Obligations - ASPE
- Steps?
- Apply definition
- Assess recognition, criteria to recognize
- Initial measurement (typically use PV)
-> Record at best estimate
-> Record ARO liability and related long lived asset - Subsequent measurement
-> Depreciate asset and use accretion expense to increase ARO
What are the 3 business strategies?
- Cost leadership (low cost and focuses on broad market)
- Differentiation (higher price, unique product)
- Differentiation focus (targets small segment of customers)
