CPA Flash Flashcards
What would you tell a client that wants to change accounting policies?
IAS 8.14 and ASPE 1506.06
Accounting policies can only be changed if the following are met:
- It is required by GAAP
- Will provide reliable and more relevant information
If the client’s change is reasonable. How should they apply the change in accounting policy?
Adjust the opening balances for each component impacted and provide comparative financcial statements for prior periods as if they’ve always had this change.
Note - changes impacting FS will be realized in retained earnings. Tax entries will also need to be revisted for the adjustment
The client asks, what is the difference between a change in accounting estimate and a change in accounting policy/
Accounting policies are changed retrospectively while estimates are change prospectively.
Estimates are used to measure something with uncertainty while policies are defined as specific rules, bases, principles, practices applied by an entity in preparing and presenting the financial statements.
Client has found out that they’ve been recognizing something incorrectly for the past 3 years. How should they apply this change? How should an auditor react to this finding if it was found between
They must adjust the financial statements retroactively (ASPE/IFRS), but IFRS allows you the option not to if it is unrealistic.
Events occuring between FS mail out and date of audit report (filling) - Need to investigate, perform testing to see if adjustment/disclosure is required.
Events between audit of audit report and but before FS are issued by the client - No obligation, gain an understanding, and investigate to see if it relates to audit period. Do you need an amendment of opinion? If so , do the steps above.
Events after FS issuance - gain an understanding, see if you need another audit report or if you can extend it.
A client purchased a new factory and said that the government is making them pay clean up fees after. What is the appropriate accounting for this? And how is it different under ASPE/IFRS for their understanding?
This is an asset retirement obligation - guidance can be found in IFRS 37 and ASPE 3110.
Recognition: Should be recognized when a reasonable estimate can be made. The value of the retirement obligation is added to the cost of the asset.
Subsequent measurement: Each year, recognized an accretion expense (ASPE) or interest expense (IFRS) and offset it with a retirement obligation liability.
The client also mentioned that they borrowed money to purchase the factory and their inventory. They’re confused as to when they can capitalize their borrowing costs and if it is different between ASPE and IFRS.
This is covered in IAS 23 or ASPE 3850 (disclosure) or ASPE 3061
Recognition: You can only capitalize borrowing costs if it is used for the acquisition, construction or production of a qualifying asset. A qualifying asset is defined as an asset that takes significant time to get ready for use or sale.
Measurement: It depends on whether specific borrowings or general borrowings were used. If a general notes payable was used to purchase, then it would need to be weighted and multiplied by the average caryring amount of the qualifying assets
A client uses their home office for this business. What are some factors they should consider if they want to deduct their home expenses?
If they’re self-employed, they are eligible to deduct their home office expenses if they primarily use this office business purposes only, and this was their principal place of business.
Expenses such as insurance, heat, electricity, mortgage/rent, repairs and maintenance and property taxes are pro-rated to the size of the office vesus the house.
Important thing to note is that you cannot claim CCA on a principal house. This may affect your eligibility to elect a principal household.
A client started investing in a research project and was curious on the criterias required before they are allowed to recognize their research project as an intangible asset.
There are three criterias that need to be demonstrated for intangible assets:
- Identifability, can the asset be separable from the business. Has it arose from contractual or legal right?
- Control, do you have control of the future economic benefits of the asset?
Future ecnomic benefits, can it be expected that the economic benefits will flow to the entity? And can you reasonable measure the costs.
How should you account for lease inducements?
They should be used to reduce lease expenses over the life of the lease agreement.
The client heard that there are multiple ways to amortize intangible assets. Can you provide a brief explanation on the two methods and when one is favoured over the other?
There are two methods to measure PPE
- Cost method (what you’ve paid for)
- Revaluation method (update to FV, can’t reverse in ASPE, you can in IFRS only up to original)
A client wants to sell their pizza oven and has heard about “held for sale” from a friend. Can you explain what it is, how to recognize an asset and the purpose?
An asset is held for sale when the following are met:
- Available for sale in current state
- sale is highly probable (management plan, looking for customer, asset is marked at reasonable price, will be sold within a year)
It is measured as the lower of - cost and fair value less selling costs.
The purpose is that once something is classified, you don’t need to depreciate it anymore.
How is held for sale different from discontinued operations?
Both are assets that are to be sold, but for discontinued operations, there is only presentation rules rather than accounting rules. Presentation can be found in IFRS 5
