Financial Reporting Flashcards
ASPE & IFRS Inventory Criteria & Measurement
ASPE 3031 IFRS 2 Criteria one of • Held for sale in the ordinary course of business • In process of production for sale • In form of materials to be consumed in production or services Measurement • Lower of cost or NRV
ASPE PP&E Criteria & Measurement
Criteria ASPE 3061 Tangible items that
• Are held for use in production or supply of goods or rental to others
• Have been acquired with intention of being used on a continuing basis
• Not intended for sale in ordinary course of business
Measurement
• Cost method – less depreciation and impairment
• Can choose to expense or capitalize borrowing costs
IFRS PP&E Criteria & Measurement
IFRS 16- Tangible items that
Definition
• Are held for use in production or supply of goods or rental to others
• Are expected to be used during more than one period
Criteria
• Probable future economic benefits associated
• Cost can be reliably measured
Measurement
• Capitalize borrowing cost
• Initial – Cost
• Subsequent –
• Cost method – less depreciation and impair
• Revaluation model: FV at date or revaluation less deprec and impair. Gains to OCI, losses to P&L
Accrual Accounting - ASPE
ASPE 1000 states that items recognized in financial statement are accounted for in accordance with accrual basis of accounting
For revenue this means that they are recognized when the three criteria have been achieved.
ASPE Liability criteria
Criteria ASPE 1000
• A responsibility to others that entails settlement by future transfer or use of assets, provision of services or other yielding of economic benefits
• The entity’s obligation leaves little or no discretion to avoid it
• The transaction or event that caused the obligation has already occurred
IFRS Liability criteria
Criteria
• The entity has an obligation
• The obligation is to transfer an economic resource
• The obligation is a present obligation that exists because of past events
ASPE Betterments
ASPE 3061 Criteria must display one of • Capacity has increased • Operating costs are lowered • Useful life is extended • Quality of output is improved Measurement • Cost of betterment
IFRS Betterments
IAS 16 - PP&E recognition criteria
- there are probable future economic benefits from the betterment
- The cost of the betterment can be reliably measured.
Since this is a major replacement and the PP&E criteria is met then can recognize.
ASPE Revenue Recognition Criteria & Measurement
Criteria ASPE 3400 • Performance has been achieved • Consideration is reasonably measured • Collection is reasonably assured Measurement • % Complete method • Completed contract method
IFRS Revenue Recognition Criteria & Measurement
Criteria IFRS 15
Step 1: identify the contract
• Parties have approved and are committed to performing obligations
• Can identify each party’s rights
• Can identify payment terms
• Commercial substance
• Collection is probable
Step 2: Identify the performance obligations
• An obligation is distinct when criteria is met:
• Customer can benefit from the promise on its own or together with other resources
• The promise is separately identifiable from other promises in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations
Step 5: Recognize revenue
• % Complete method
• Point in time
• Must be matched to performance obligations
ASPE Revenue – right of return
ASPE 3400
• Performance: NOT MET
• Measurement of consideration: may not be met if there is uncertainty on how much goods will be returned each period
• Collection: Usually met
• Revenue will not be recognized when there is significant unpredictable amounts of goods being returned – Need a history on returns
IFRS Revenue – right of return
IFRS 15 states for right of return an entity shall recognize:
o revenue for the transferred products in the amount of consideration to which the entity expects to be entitled
o a refund liability in the amount that the entity expects it will have to refund to the customer (right of return)
o an asset for its right to recover products from customers on settling the refund liability
• Discuss factors that could increase the likelihood or magnitude of a reversal (consideration may fluctuate, inexperience with arrangement, uncertainties)
• Should only recognize revenue they are entitled to
• Right of return is a constraining variable that is out of control of the seller
ASPE Revenue - Non-refundable upfront fees
- Revenue is deferred when the upfront fee relates to the performance obligations promised in the contract
- Are there separately any identifiable components where the upfront fee relates to a promise that could be sold on it’s own?
- If so, then must assess performance, measurement, collectability separately from other items
IFRS Non-refundable upfront fees
• When non-refundable upfront fee is not related to a performance obligation but to set up actives or other administrative tasks, the non-refundable fee is accounted for as an advance payment for future goods of services and therefore only recognized when services are provided
ASPE & IFRS Gross or net revenue
Criteria not limited to:
• Entity has primary responsibility for goods and service
• Entity has inventory risk
• Entity has ability to set prices
• Entity bears credit risk on receivables
Measurement
• Net amount retained after paying other party
ASPE Percentage complete method or completed contract method
- Revenue on long term contracts are usually recognized as the activity is performed using either method
- The percentage of completion method is used when there is more than one act
- Completed contract method would be appropriate when there is a single act or the entity cannot reasonability estimate the progress towards completion
- Long term contract requirements:
- Persuasive evidence of an arrangement exists
- Delivery has occurred or services rendered
- The price is fixed or determinable
- Collection is reasonably assured
ASPE Consignment
ASPE 3031 to asset inventory
• Inventories encompass goods purchased and held for resale – were these goods purchased?
ASPE 3400 for revenue: -
An entity is acting as principle when it has the significant risks and rewards associated with the sale of goods, such as:
• Entity has primary responsibility for providing the G&S to client.
• Entity has inventory risk before or after customer order
• Entity has latitude in establishing prices
• Entity bears customer credit risk
Agent indicator: when the amount the entity earns is predetermined with an amount or %
IFRS Consignment
Indicators that an arrangement is a consignment arrangement include, but are not limited to, the following:
(a) the product is controlled by the entity until a specified event occurs, such as the sale of the product to a customer of the dealer or until a specified period expires;
(b) the entity is able to require the return of the product or transfer the product to a third party (such as another dealer); and
(c) the dealer does not have an unconditional obligation to pay for the product (although it might be required to pay a deposit).
IFRS 15 Principle vs Agent Considerations
• Entity has primary responsibility for providing the G&S to customer
• Entity has inventory risk before or after customer order
• Entity has latitude in establishing prices
ASPE Impairment of Assets
Criteria ASPE 3063
• Tested when events indicate carrying amount may not be recoverable – discuss events
• Group assets where cash flows are not independent
• Impairment when carrying amount >undiscounted cash flows from use and disposal
• ASPE 3031 states that inventories must be measured at lower of cost or NRV
Measurement
• FV - Carrying amount
• impairment losses are not reversed when the asset makes a recovery in value
IFRS Impairment of Assets
IAS 36 steps to determine impairment:
• Discuss impairment indicators
• Determine asset grouping – Individual asset or cash-generating unit (CGU)
• Assess for Impairment – end of each period (or lack of economic cash flow) what are the case indicators
• Compare CV to Recoverable amount and determine whether impairment exists
• Recoverable amount = higher of FV less disposal vs value in use
Value in use = PV of future cashflows less disposal
Measurement
• Carrying amount less recoverable amount
ASPE Financial Instruments - Passive
Criteria ASPE 3856 if met: • Recognize when entity becomes party to the contractual provisions of the financial instrument that allows them the right to receive consideration Measurement • Initial – Arm's length - FV • Related party - Cost
Transaction costs
• Arm’s length - Expense
• Related party - Add to CV
Subsequent-
If initially recorded at FV and active market then measure at FVTPL
If initially recorded at FV and no active market then measure at cost
All others will be measured at cost.
• Other such as note receivable : amortized cost (effective interest rate method or straight-line)
IFRS Financial Instruments - Passive
Debt & Equity- FVTOCI
If entity business model is managing and selling financial assets and contractual terms give rise to cash flows
• Initial- FV + transaction costs
• Subsequent-
Debt: amortized cost using effective interest rate method,
Equity: FV
Financial assets held for sale – Amortized cost FVTPL
If entity business model is to hold assets in order to collect cashflows and contractual terms give rise to cashflow on specified dates
• Initial- FV + transaction costs
• Amortized cost using effective interest rate method
Assets that do not meet two above classes – FVTPL
• Initial- FV
• Subsequent-FV
ASPE Related Party Transactions
Criteria ASPE 3840
• Any party which entity exerts control, mgmt., immediate family
Measurement
• If not one of: normal business, not substantive (20% of equity), amount not supported by independent evidence, no commercial substance then carrying amount
• All others, exchange amount
IFRS Related Party Transactions
- Recorded at the exchange amount agreed by two parties
- Significant disclosures required including amount, nature or relationship and transactions, key management compensation
ASPE & IFRS Government Assistance
ASPE 3800 IAS 20 Recognize when • Entity can and will comply with conditions • Grant will be received
Grants related to income:
• Other Income (separated) or
• Deduct from expenses
Grants related to assets
• Deferred revenue and brought into income as depreciation occurs or
• Deducted from asset carrying amount
Non-monetary grants recorded at FV
ASPE Leases
Criteria 3065 – meets risks and rewards (capital lease) when one or more:
• Title transfer or BPO
• Lease term is major part of useful life 75%
• PV of min lease pmts is 90% of FV
Measurement
• Initial – Lower of FV or PV of min pmts
• Subsequent- Depreciation on item
• Non-lease component costs excluded
• Discount rate is lower of lease rate and entity borrowing rate
IFRS Leases
IFRS 16 -All leases are capitalized (Unless less than one year)
• ROU asset less costs and liability = PV of all future pmts
• Non-lease component costs – election is allowed to include in lease payments
• Discount rate is the lease rate, if not avail then borrowing rate
• Tested for impairment each period
• Lease liability – Initial – include any lease payments and any variables, purchase options, guaranteed residuals
• Subsequent - measure at amortized cost, interest expense is recognized using the rate used to PV the pmts
• ROU – Initially measure at the lease liability + any costs or future costs to be incurred in relation to the lease
• Subsequent - Amortize over the life of the lease
ASPE & IFRS Warranty
Revenue
ASPE 3400
Does not give specific guidance.
IFRS 15
If a customer has option to purchase warranty separately from a product, the warranty is a distinct service because the entity promises to provide a service in addition to the product. Consider whether the warranty is required by law, the length of the warranty and the nature of the promise.
- The customer does not have the option to purchase a warranty separately
- The warranty does not provide the customer with an additional service
If these are not met then the warranty then it is accounted for under IAS37
Contingency/Provision
Is it a liability:
• The entity has an obligation
• The obligation is to transfer an economic resource
• The obligation is a present obligation that exists because of past events
Is it a provision:
• a liability of uncertain timing or amount
Recognition criteria:
A provision shall be recognised when:
• an entity has a present obligation (legal or constructive) as a result of a past event;
• it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and
• a reliable estimate can be made of the amount of the obligation.
Measurement
• Best estimate of most likely outcome
• If multiple outcomes likely use weighted average
ASPE Non-Monetary Transactions
ASPE 3831
Measure at fair value unless any are true:
• Transaction lacks commercial substance
• Products exchanged that are held for sale in ordinary course of business are similar in nature
• FV of both assets are not reliably measured
• Is a NMT, non-reciprocal transfer to owners
Otherwise measure at carrying value
• When both FV of assets are known, measure at FV of asset given up
• No impact to the financial statements because recording revenue and expense
IFRS Non-Monetary Transactions
• When both FV of assets are known, revenue to be recognized at FV of asset received
ASPE Goodwill and Intangible Assets
Acquired intangible ASPE 3064 recognize if:
Definition
• Separately identifiable and costs reliably measured
• Control of asset
• Future economic benefits
Recognition
• Expected future economic benefits are probable
• Cost can be reliably measured
• Future benefit is assessed reasonability with supportable assumptions of mgmt. best estimate
Development costs capitalize if:
• Probable economic benefits
• Intention to complete and use or sell
• Resources available to – either technical or financial to use or sell
• Ability to use or sell
• Technical Feasibility of completing to be available for use or sale
• Expenditures reliably measured
Expenditure on an intangible item that was initially recognized as an expense shall not be recognized as part of the cost of an intangible asset at a later date
Measurement
• Research costs expensed
• Can choose to capitalize or expense development costs
• Amortize over useful life if not indefinte
IFRS Goodwill and Intangible Assets
Acquired intangible IAS 38 recognize if: Definition • Separately identifiable and costs reliably measured • Control of asset • Future economic benefits
Recognition
• Expected future economic benefits are probable
• Cost can be reliably measured
• Future benefit is assessed reasonability with supportable assumptions of mgmt. best estimate
Development costs must capitalize if:
• Probable economic benefits
• Intention to complete and use or sell
• Resources available to – either technical or financial to use or sell
• Ability to use or sell
• Technical Feasibility of completing to be available for use or sale
• Expenditures reliably measured
expenditures that were incurred prior to the deferral criteria being met may not be retroactively deferred
Subsequent – finite life-
• choice of cost model or revaluation model for assets traded on active market
• Amortize over life
Infinite life (including GW) –
• Assessed annual for impairment
• No amortization
ASPE Internally generated intangibles
ASPE 3064
• Internally generated goodwill shall not be recognized as an asset.
Recognize the following expenditures:
• Cost of materials and services used in generating the asset
• Fees to register a legal right
• Amortization of patents and licenses that are used to generate asset
• Interest costs when elected to capitalize
Not components:
• Selling & amin other general overhead
• Identified inefficiencies, initial operating losses
• Training staff
Speak to how the asset will be measured and amortized
ASPE Contingencies
Criteria ASPE 3290 if both: • Likely that future event will confirm impairment or liability 100% likely • The amount is reasonably estimated Measurement • Use minimum amount estimated • Do not accrue for contingent gain • Disclose
IFRS Contingencies
Criteria IAS 37 if both:
• Likely that future event will confirm impairment or liability (probable)
• The amount is reasonably estimated
Measurement
• Best estimate of most likely outcome
• If multiple outcomes likely use weighted average
ASPE Non-Current assets held for sale
Criteria ASPE 3475
Non-current asset held for sale:
• management commits to a plan to sell;
• it is available for immediate sale in its present condition;
• an active program to locate a buyer has been initiated;
• the sale is probable, and sale is expected to complete within one year;
• it is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and
• it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
If write up is needed, recognize gain to extent of prior losses
Discontinued Operations is either disposed or held for sale and meets one criteria:
• Separate major line of business or area,
• part of a single coordinated plan to dispose of major business or area,
• a subsidiary acquired exclusively to resell
Measurement
• Lower of carrying value and FV less disposal
• After-tax Loss to P&L
• Classified as non-current assets if they have not sold prior to the completion of the financial statements
• Disclosure
• Recommends the write down of the assets and the loss on the discontinued operations be presented separately on the income statement
IFRS Non-Current assets held for sale
Criteria IFRS 5
Non-current asset held for sale:
• management commits to a plan to sell;
• it is available for immediate sale in its present condition;
• an active program to locate a buyer has been initiated;
• the sale is probable, and sale is expected to complete within one year;
• it is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and
• it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
Discontinued Operations is disposed or held for sale and meets one criteria:
• Separate major line of business or area,
• part of a single coordinated plan to dispose of major business or area,
• a subsidiary acquired exclusively to resell
Measurement
• Lower of carrying value and FV less disposal
• After-tax Loss to P&L (discontinued operations to OCI, post tax)
• Classified as current assets since the assumption is they will be disposed of in 12 months
• Recommends the write down of the assets and the loss on the discontinued operations be presented separately on the income statement
ASPE Asset retirement obligations (ARO)
Decommissioning Provisions
ASPE 3110
Definition
• Is a legal obligation associated with retirement of tangible long-lived asset that the
entity is required to settle as a result of an existing law, statue, written or oral contract.
Recognition
Liability definition:
• There is a duty to others that entails settlement by future transfer or use of economic benefits at a specified date
• The duty obligates the entity, leaving little or no discretion to avoid it
• The transaction or event has already occurred
Measurement
Present value estimate of the expenditure required to settle the present obligation at balance sheet date
ASPE Investments
Criteria ASPE 3051
• Significant influence – Equity method – assets and income higher
• Cost method
• Strategic decisions will result in intercompany transactions
• Equity method will result in better looking financials, as long as the investment is profitable
• Equity method, no affect on tax purposes. Earnings reported under equity method are not taxable
IFRS Investments
Criteria IAS 28 –
Equity method: Initially at cost
• Subsequent add income, deduct dividends
Calculation:
Associate NI x Ownership% = Share of income
+/- FV differential, net of tax
+ realized interco G/L from prior year, net of tax
-Unrealized interco G/L in current year, net of tax
Unrealized inventory profit:
sales in ending inventory X GP% X % ownership
Bank uses financial statements
• To assess assets for collateral
• Cash flow projection to assess ability to meet the loan payments but will not provide a pic of A&L
• To assess obligations to other lenders
• Bank is looking to protect its interests
GAAP helps the bank ensure comparability and consistency
ASPE vs IFRS
ASPE
o Used by private companies that have simple reporting systems and operations
o Allows for simpler accounting policy choices with less note disclosures that take less resources to administer
o More cost-effective method
IFRS
o Must be used by public companies but can be used by private companies if they need more guidance on complex transactions and operations.
o Often used by private companies that have external investors to satisfy the needs of the users or if the company is planning to go public
o Increased requirement of note disclosures can be difficult or costly to administer
o Would need to spend more time of training and compliance
ASPE Financial Instruments - Hedge
ASPE only allows hedge accounting to be used when:
• A forward contract is used to hedge an anticipated foreign currency cash flow.
• A forward contract is used to hedge an anticipated purchase or sale of a commodity.
• An interest rate swap is used to hedge interest rate risk in a recognized interest-bearing loan receivable or loan payable.
As a result of these restrictions, hedge accounting cannot be applied to foreign debt
Measurement
If the forward contract qualifies for hedge accounting, generally it is not recognized until it matures, and the gain or loss is recorded as an adjustment against the hedged item, not to OCI or net income.
IFRS Financial Instruments - Hedge
Per IFRS 9 hedge can only be used when all are met
• Must consist of eligible hedged item and eligible hedge instrument
• At inception, the relationship is formally designated and documented along with the risk mgmt. objective and strategy
• Three effectiveness requirements are met:
• Economic relationship between the hedge item and the hedge instrument
• Credit risk does not dominate the change in value
• Hedging ratio is the same for the relationship and the quantity of the hedged item and the quantity of the instrument
• Eligible hedged item
• Existing asset or liability
• Unrecognized firm commitment
• Highly probable future transaction
Net investment in foreign operations
ASPE - Changes in Accounting Policies, estimates and standards or errors
ASPE 1506:
Voluntary policy change that provides more reliable information
o Apply retrospectively
o Disclose nature, reason, amount, years and accounts impacted
o Do not need to prove more reliable information for subsidiaries, defined benefit obligation, jointly controlled enterprise, income taxes, development costs, convertible debt
Standard requires the change
o Apply consistent with transitional provision
o Disclose title of standard, nature, description, periods
Change in estimate that provides new information not previously available
o Prospectively
o Disclose, nature, amount
Error from prior period
o Retrospectively
o Disclose description, amount, account and priors impacted, restatement
o ASPE does not allow for impartibility of restatement
IFRS - Changes in Accounting Policies
IFRS 8:
Voluntary policy change that provides more reliable information
o Apply retrospectively
o Disclose nature, reason, amount, years and accounts impacted
Standard requires the change
o Apply consistent with transitional provision
o Disclose title of standard, nature, description, periods
Change in estimate that provides new information not previously available
o Prospectively
o Disclose, nature, amount
Error from prior period
o Retrospectively
o Disclose description, amount, account and priors impacted, if retrospective restatement not practical then description of how error was corrected
ASPE & IFRS Events after reporting period
Adjusting events
• Court case related to an event that occurred prior to year end settled
• Information indicating asset was impaired
• Customer goes bankrupt
• Sales of inventories give evidence to NRV lower than BV
• Discovery of fraud or errors
Non-adjusting events – not reported but disclose nature and estimate
• Dividends declared after reporting period
• Destruction of a major plant
• Announcing a major restructuring
• Changes in tax rates or tax laws enacted or announced
Financial statement Prior year impact – Net of tax
affects net income and deferred tax liability
IFRS: Board authorization date of the financial statements
ASPE Joint Arrangements (Shared Control)
ASPE 3056 Joint Arrangements
• Jointly controlled operations
o Require the investor to recognize its share of assets, liabilities revenues and expenses
• Jointly controlled assets
o Require the investor to recognize its share of assets, liabilities revenues and expenses
• Jointly controlled enterprises
o Either use the equity method or cost method
IFRS Joint Arrangements (Shared Control)
IFRS 11
Joint operations
• No investment account
• Recognize share of assets, liabilities, revenues, expenses
• Each party has rights to the assets of the joint arrangement
Joint Ventures
• Use equity method
• Acquisition- Transfer asset to JV
• GW from fair value differentials as part of investment, not separate
• Increase or decrease investment by share of P&L, offsetting to equity income
• Dividends received is a reduction to investment
• The parties have rights to the net assets of the entity.
ASPE Foreign Operations
Direct Method • Cash Receipts from customers o +- in def rev o +- in AR • - cash paid to suppliers • +- in AP and accrued liabilities • +- in inventory and prepaid • Possible cogs items like amort • -cash paid to employees o +- in wage payable • -cash paid for interest o +- interest expense • -cash paid for taxes o +- in tax payable • = Cash flows from operating activities
Indirect method • Net Income • + Depreciation • +- loss or gain on assets • Changes in working capital: +-change in: • AR • Inventory • Prepaids • AP and accruals • Def rev • =Cash flows from operating activities
IFRS Foreign Operations
• Indirect advantage: it focuses on the differences between net income and net cash flow from operations
o Simpler
o More cost effective to prepare
- The direct method is though of being superior and is the recommended standard.
- The difference between the two only impacts cash flows from operations. Cash flow from investing and financing are the same under both methods
As a general rule (watch for exceptions):
• Operating activities impact current assets and liabilities.
• Investing activities impact long-term assets.
• Financing activities impact long-term liabilities and equity.
• Interest paid can be shown as either operating or financing
• Interest earned can be shown as operating or investing
• Dividends can be shown as operating or financing
• ASPE: interest, dividend income are all operating. Dividends paid are financing
ASPE - Bill and Hold revenue requirements
Under ASPE 3400 the following criteria are required to be met to recognize revenue when delivery has not occurred:
• the risks of ownership must have passed to the buyer;
• the customer must have made a fixed commitment to purchase the goods;
• the buyer, not the seller, must request that the transaction be on a bill and hold basis, and the buyer must have a substantial business purpose for ordering the goods on a bill and hold basis;
• there must be a schedule for delivery of the goods that is reasonable and consistent with the buyer’s business purpose
• the seller must not have retained any specific performance obligations such that the earning process is not complete;
• the ordered goods must have been segregated from the seller’s inventory and not be subject to being used to fill other orders; and
• the product must be complete and ready for shipment.
EPS
net income available to common shareholders after any preferred share dividends are paid / WACSO
Diluted EPS
Net earnings available to common shareholders + income effect of dilutive PCS /
WACSO + share effect of dilutive PCS
PCS = potential common stock
Step 1: Calculate basic EPS
Step 2: Identify all PCS (convertible bonds or shares, stock options
Step 3: Calculate incremental EPS for each class of PCS (dilutive or anti-dilutive)
Income impact / number of additional common shares
Bonds: the after-tax interest that will not be paid if option is exercised
Convertible preferred shares: number of shares X dividend per share (include cumulative) / number of additional shares
Stock options: Only when in the money Exercise price
