Financial reporting Flashcards
Process to recognize revenue - IFRS
IFRS 15
- Identify the contract
- Identify performance obligations
- Determine transaction price
- Allocate the transaction price
- Recognize revenue
Revenue recognition criteria - ASPE
ASPE 3400
- Performance has been achieved - risks and rewards of ownership have transferred to buyer
- Reasonable assurance exists regarding measurement of consideration
- Ultimate collection is reasonably assured
Revenue Recognition (IFRS) - Identify a contract 5 attributes of a contract + 2 assessments
IFRS 15
- The contract has been approved by all parties
- The rights regarding goods & services to be transferred can be identified
- The payment terms can be identified
- The contract has commercial substance
- Ultimate collection is reasonable assured, considering only the customer’s ability & intention to pay
- Assess if it must combine 2 or more contracts
- Assess if it includes contract modifications
Revenue Recognition (IFRS) - Identify the contract Contract combination criteria
Combination of contracts - IFRS 15:
A vendor shall combine 2 or more contracts entered into at or near the same time with the same customer (or related parties) and account for the contracts as a single contract if one or more of the following criteria are met:
1. The contracts are negotiated as a package with a single commercial objective
2. The amount of consideration to be paid in one contract depends on the price or performance of the other contract
3. The goods/services promised in the contracts are a single performance obligation
Revenue Recognition (IFRS) - Contract modification & criteria for a new contract
Contract Modifications - IFRS 15
A contract modification is a change in the scope/price of a contract that is approved by the parties to that contract. In order to impact revenue recognition, the modification must result in new or a change to rights and obligations.
A contract modification shall be treated as a separate contract if both of the following criteria are met:
- The change in the scope of the contract is due to the addition of distinct goods or services
- The price of the contract is increased by the amount of the vendor’s stand-alone selling price of the additional promised goods or services and any appropriate adjustments to that price to reflect the circumstances of the particular contract.
Revenue Recognition (IFRS) - Accounting treatment for a contract modification wherein the remaining goods and services are distinct
Termination - IFRS 15
If the remaining goods and services are distinct, and has met both criteria to be treated as a separate contract:
terminate the existing contract and replace with a new contract
Revenue Recognition (IFRS) - Accounting treatment for a contract modification that results in some, but not all of the remaining goods and services being separated as distinct (IFRS)
Mixed approach - IFRS 15
Terminate and replace the existing contract with a new contract for distinct services, and continuation for the remainder
Revenue Recognition (IFRS) - Accounting treatment for a contract modification wherein the remaining goods and services are not distinct
Continuation - IFRS 15
Treat the modification as part of the original contract and adjust revenue as needed
Revenue Recognition (IFRS) - Performance obligations 2 steps to determine what items in a contract are distinct goods/services
IFRS 15
- Can the customer benefit from the good/service on it’s own?
- Is it available for sale on its own?
- Can it be consumed on its own?
- Is the promise to transfer the goods/services separately identifiable from other promises in the contract?
- Are the goods or services significantly affected by one or more of the other goods/services in the contract?
- Can the entity? fulfil its promise by transferring the goods/services independently
Revenue Recognition (IFRS) - Transaction Price 5 things to consider when determining transaction prices
Determine the transaction price - IFRS 15
- Variable consideration
- Right of return
- Significant financing components
- non-cash consideration
- Consideration payable to a customer
Revenue Recognition (IFRS) - Transaction Price 2 possible methods to calculate variable consideration
Variable consideration - IFRS 15
Two methods to account for variable consideration:
1. Expected value : takes the range of possible outcomes and considers the probability of each. The sum of probability-weighted amounts is used as the measurement. This is usually considered the appropriate approach when there are multiple outcomes.
2. Most likely amount : The most likely amount takes the one outcome that is considered to be the most likely and uses this as the measurement. This is usually considered an appropriate approach if a contract has two possible outcomes, such as a bonus that will either be received or not.
Revenue Recognition (IFRS) - Transaction price Define constraining estimates of variable consideration & 5 factors that include likelihood of revenue reversal
When variable consideration is included in revenue, there is a risk that amounts are being included that will not be received. The amount recognized should be limited to an amount that is highly probable to be received. That is, when the uncertainty associated with the variable consideration is resolved, a significant reversal is unlikely to occur.
Factors that could increase the likelihood or the magnitude of a revenue reversal include, but are not limited to, the following:
- The amount of consideration is highly susceptible to factors outside the entity’s influence. Those factors may include volatility in a market, the judgment or actions of third parties, weather conditions and a high risk of obsolescence of the promised good or service.
- The uncertainty about the amount of consideration is not expected to be resolved for a long period of time.
- The entity’s experience (or other evidence) with similar types of contracts is limited, or that experience (or other evidence) has limited predictive value.
- The entity has a practice of either offering a broad range of price concessions or changing the payment terms and conditions of similar contracts in similar circumstances.
- The contract has a large number and broad range of possible consideration amounts.
Revenue Recognition (IFRS) - Allocate transaction price 4 steps to allocation transaction prices
Allocate proportionately to each performance obligation of each distinct good/service based on stand-alone selling price at contract inception
- Determine stand-alone selling prices using:
- adjusted market assessment
- expected cost + margin
- residual approach
- Allocate the discount proportionately
- Allocate the variable consideration as attributable
- Allocate the changes in transaction price on the same basis as at contract inception
Revenue recognition (IFRS) - Recognize Revenue 3 Criteria for a performance obligation to be satisfied over time
A vendor transfers control of a good or service over time, and therefore satisfies a performance obligation and recognizes revenue over time, if one of the following criteria is met:
- The customer simultaneously receives and consumes the benefits provided by the vendor’s performance (for example, rental of an office space)
- The vendor’s performance creates or enhances an asset (for example, work in progress on a construction contract on land owned by the customer) that the customer controls as the asset is created or enhanced.
- The vendor’s performance does not create an asset with an alternative use to the vendor, and the vendor has an enforceable right to payment for performance completed to date (for example, work in progress on custom equipment that the vendor cannot sell to another party due to the customization).
Revenue Recognition (IFRS) - Recognize Revenue Indicators that revenue may be recognized at a single point in time
Consider:
- A present right to payment
- Legal title has transferred
- Physical possession has transferred
- The customer has the significant risks and rewards of ownership
- Customer’s acceptance
Revenue recognition (IFRS) - Recognize Revenue 2 methods of measuring progress towards completion
- Output method:
The amount of revenue recognized is based on direct measurements of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract. - Input method:
The amount of revenue recognized is based on an estimate of the percentage of completion of the project based on input measures such as resources consumed, labour hours expended, costs incurred, time elapsed or machine hours used.
The nature of the good or service that is to be transferred shall be considered when determining whether to use the input or output method. For example, if the entity has a contract to deliver 10 office desks, it would normally use an output measure (the output being the number of desks actually delivered) rather than an input measure, as it is a better measure of the performance achieved.
Costs included in inventory (IFRS & ASPE)
The general rule is that any cost incurred to move
inventory from its purchased state to a point where it may be sold should be included in the cost of inventory.
1. Merchandise inventory - cost of purchase
- shipping costs to receive merchandise
- import duties/unrecoverable taxes
- Recovered costs (vendor rebates) should be netted against the cost of inventory
2. Manufacturing inventory - cost of conversion
- Raw material
- Direct labour
- Manufacturing overhead
Allocating manufacturing overhead to cost of inventory (IFRS & ASPE)
Both IFRS and ASPE require the use of absorption costing to allocate overhead costs to inventory. This simply means that the overhead costs are “absorbed” by the inventory and included in its cost.
Costs are allocated to inventory using a predetermined overhead rate (POHR) based on a cost driver, such as units produced or machine hours.
- The POHR is determined at the beginning of the period, before manufacturing occurs. Total period overhead costs for allocation are estimated and then divided by the normal volume of the cost driver at normal capacity.
- An entity may use expected volume of production, provided that this approximates normal capacity. The amount of overhead allocated to a product should not be increased as a result of low production or an idle plant.
Inventory - 2 accepted cost flow assumptions (IFRS & ASPE)
- FIFO
- Weighted average cost : The weighted average cost per unit is applied to the units in ending inventory and cost of goods sold.
Weighted average cost per unit calculation
[(Beginning inventory cost + Cost of purchases to date) / (Quantity of inventory in beginning inventory + Quantity of purchases to date)].
Inventory - IFRS & ASPE Borrowing Cost differences
IFRS requires the capitalization of borrowing costs, as directed under IAS 23 Borrowing Costs.
ASPE does not require borrowing costs to be capitalized; rather, it allows companies to either capitalize borrowing costs or expense them.
Definition of Inventory
Inventories include:
- material or supplies waiting to be used
- products in the process of being manufactured
- finished goods (purchased or manufactured) that are ready to be sold.
Inventory (IFRS & ASPE) -
When can raw materials or merchandise received be considered as inventory?
- Asset meets definition of inventory in relevant standard (ASPE 3031 or IAS 23)
- Ownership has transferred as per FOB terms
Inventory (IFRS & ASPE) -
When should inventory be derecognized and converted to COGS?
- Use completed contract method (revenue recognition)
- “When inventories are sold, the carrying amount of those inventories shall be recognized as an expense in the period in which the related revenue is recognized.” (ASPE 3031.33 & IAS 2.34)
Impairment of Assets - Four Step Process (IFRS)
- Assets grouped as CGU’s
- When to test for impairment:
- REQUIRED annually for goodwill & intangibles not being amortized
- MONITOR annually all other assets. Annual impairment test becomes required when indicators of impairment exist
- Recoverable amount : determine recoverable amount as higher of fair value less costs of disposal and value in use
- Impairment test and write-down to recoverable amount: Loss write-down = Recoverable amount - carrying amount
(Dr. Impairment expense, Cr. Asset account)
(Depreciation charge is adjusted for future periods)
Impairment -
3 internal & 3 external indicators of impairment
Internal:
- Evidence of obsolescence or physical damage
- Significant changes in use of the asset/CGU, such as discontinuance, disposal, restructuring
- Declining performance
External:
- significant decline in market value
- significant change in the technological, market, economic, or legal environment in which the entity operates, having an adverse effect on the use of the asset
- increases in market interest rates, decreasing the asset / CGU recoverable amount
Impairment (IFRS) -
Definition of a CGU
Cash generating unit (CGU):
A CGU is the smallest group of assets that generate independent cash flows from other assets or groups of assets.
Used only for IFRS
Impairment of Assets:
Determining recoverable amount (IFRS & ASPE differences)
Recoverable amount is higher of: (1) Fair value less costs of disposal and (2) Value in use, which is the estimate of future cash flows from continuing use and ultimate disposal. IFRS - DISCOUNTED CASH FLOWS ASPE - UNDISCOUNTED CASH FLOWS
Impairment -
Reversal of Impairment, IFRS vs. ASPE
IFRS - Can be reversed up to the lesser of its recoverable amount and the carrying value that would have existed had the asset never been written down. The reversal of the impairment loss is recognized in net income.
ASPE - Can NEVER be reversed
Impairment (ASPE) -
Asset Group
a long-lived asset shall be grouped with other assets and liabilities to form an asset group at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. (Per Section 3063 Impairment of Long-Lived Assets)
The IFRS “cash generating unit” is generally at a lower level than ASPE’s “asset group.” CGUs are concerned with cash inflows only, while asset groups relate to a unit that produces both inflows and outflows.
Impairment of Assets - Four Step Process (ASPE)
- Assets grouped as ASSET GROUPS
- When to test for impairment
- MONITOR assets & CGU’s for indicators of impairment (including goodwill)
- Test for recoverability only when events or changes in circumstances indicate that the carrying amount may not be recoverable.
- No annual testing required
- Test for impairment:
Compare carrying value to recoverable amount (higher of fair value less costs of disposal and UNDISCOUNTED value in use)- If carrying value > recoverable amount there is no impairment
- Determine impairment loss & write down:
Loss write-down = FAIR VALUE - carrying amount
(Dr. Impairment expense, Cr. Asset account)
(Depreciation charge is adjusted for future periods)
**NOTE: Recoverable amount is not used in write-down after the impairment test
PPE -
Definition of Property, Plant & Equipment & 2 criteria for recognition
tangible assets with future benefit of longer than one year and held to produce goods and services or rental to others
PP&E is only recognized as an asset if the following criteria apply:
- It is probable that future economic benefits associated with the item will flow to the entity.
- The cost of the item can be measured reliably.
PPE -
Asset life vs. Useful life
Asset life: estimated length of time that the asset will last
Useful life: period of time that the asset produces economic benefit for the business
PPE -
3 components of PPE asset costs
- Purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates
- Any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management
- The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located
PPE - Capitalized costs
Definition & 6 possible categories
Costs incurred to point that asset is available for use.
- purchase costs, including duties, unrecoverable taxes net of discounts and rebates
- costs to bring asset to location and condition for use
- major inspection costs
- major spare parts
- standby or servicing equipment
- Dismantling, removal, and restoration costs
Land and building costs include commissions, legal fees, cost to make asset usable. Allocate costs separately to land and building.
PPE -
When to capitalize Repairs and maintenance (IFRS vs. ASPE)
Costs incurred to enhance the service potential of assets may be capitalized
- Physical output or service capacity is increased
- Associated operating costs are lowered
- Life of useful life is extended
- Quality of output is improved
Directly attributable costs must be capitalized and amortized over remaining useful life of asset
ASPE 3061.14 : costs incurred to enhance the service potential of capital assets are considered betterments.
IAS 16.13 & .14 : Uses terms major replacement rather than betterment. Carrying amount of replaced asset must be derecognized.
PPE - Cost recognition
Componentization (IFRS & ASPE)
Some PP&E have significant parts with different usage rates within the asset. Parts with similar useful lives be grouped together for purposes of depreciation.
Required under both IFRS & ASPE but ASPE provides less guidance
PPE -
Capitalized costs for purchased equipment
- Delivery of asset
- Installation of the asset
- Testing that the asset is operational
- Non-refundable costs (e.g. import duties & taxes)
PPE -
Capitalized costs for land & building
- Purchase price
- Commissions
- Legal fees
- Title search
- Property transfer tax
- Costs required to make the land and building usable for the company’s purposes (e.g. drainage, removal of old buildings, etc)
PPE -
Capitalized costs for construction of an asset
All directly attributable costs of the construction can be capitalized. For example:
- Construction permits
- Site survey costs
- construction costs, including labour, direct management salaries, and materials
- direct borrowing costs incurred to finance the construction until the occupation permit is obtained (ASPE DIFFERENCE - option to capitalize OR expense borrowing costs)
- professional fees
PPE -
How to calculate straight-line method of depreciation? (IFRS vs. ASPE)
IFRS:
(Cost of asset - residual value) / estimated useful life
ASPE - Greater of:
(Cost of asset - residual value) / estimated useful life
(Cost of asset - salvage value) / asset life
PPE -
How to calculate declining balance method of depreciation?
Carrying value of asset × Depreciation rate
The declining balance method assumes that the benefit derived from the asset is higher in its initial years and less as the asset ages. Management applies a rate for depreciation to the cost of the asset in the initial year. In subsequent years, the rate is applied to the carrying value of the asset, or net book value (cost less accumulated depreciation). This continues until the carrying amount equals the salvage value, and then depreciation stops.
PPE -
How to calculate units of production method of depreciation?
Management must first estimate the total units that will be generated by the machine over its estimated useful life. The cost less the residual value is divided by the total units to calculate the per-unit depreciation rate.
Each year, the total number of units produced by the machine is multiplied by the per-unit depreciation rate to arrive at the depreciation expense for the year.
PPE -
Cost Model vs. revaluation model
Cost model: Assets are recorded at historical cost less accumulated depreciation. (IFRS & ASPE)
Revaluation: Assets are recorded at fair market value. However, they are still depreciated each year. The method or application of depreciation does not change because the revaluation method is being used. (IFRS ONLY, Not an option for ASPE)
Cash & cash equivalents -
Definition of cash & cash equivalents
Cash and cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes (IAS 7, ASPE 3856)
Cash & cash equivalents -
Exclusions from cash & cash equivalents
As a general rule, anything that cannot be easily converted to cash or that has a risk of a change in value is excluded from cash and cash equivalents
EXAMPLES:
• restricted cash (minimum bank acct balance, funds held in escrow, non-profit restricted donations)
• foreign currency where there is a limited market for exchange into the company’s operating currency
• foreign currency where the exchange rate is unstable and subject to material fluctuations
• publicly traded shares
• publicly traded bonds
• term deposits with a maturity date of greater than three months from the date of acquisition
• T-bills with a maturity date of greater than three months from the date of acquisition commoditieS
Cash & cash equivalents -
A/R initial & subsequent measurement
Initial measurement: fair value (transaction price) @ transaction date
Subsequent measurement: amortized cost using the effective interest rate method less any impairment losses
Cash & cash equivalents -
2 conditions to use amortized cost classification on A/R
(a) the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows and
(b) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
Cash & cash equivalents -
A/R 2 defining characteristics
Accounts receivable are a financial instrument.
- They arise out of credit sale transactions from the normal course of business
- They are typically short term and unsecured.
Cash & cash equivalents -
A/R impairment (Bad Debt Expense) - IFRS
IFRS 9:
- NRV or A/R and corresponding AFDA must be reassessed at each reporting date (expected credit loss approach)
- Changes in AFDA are recognized as an impairment gain or loss through profit & loss.
- May reverse impairment losses up to the amount of amortized cost that would have been if no impairment had been recognized
Cash & cash equivalents -
A/R impairment (Bad Debt Expense) - ASPE
ASPE 3856:
- Does not use AFDA
- Requires an event to trigger the recognition of impairment loss
- NRV of A/R is adjusted to the highest of:
(1) PV of expected cashflows
(2) amount realized if sold
(3) amount expected if exercised right to collateral (net of costs)
Journal entry to record an increase in A/R that are estimated to be uncollectable
Dr. Bad Debt expense
Cr. AFDA
Flip when you want to decrease AFDA balance
Journal entry to derecognize A/R (evidence exists that receivable is uncollectable)
If the amount was accurately written off in a previous period:
Dr. AFDA
Cr. A/R
If a portion of the amount was written off previously, but the full amount is now uncollectible:
Dr. Bad debt expense (total amt)
Cr. A/R (total amt)
Dr. AFDA (previous write-off)
Cr. Bad debt expense (previous write-off)
Passive investments -
Recognition and initial measurement (IFRS & ASPE)
IFRS 9 & ASPE 3856
Recognize: when the entity becomes party to the contractual provision of the instrument — that is, when the entity gains control over the asset.
Initial measurement: all investments are recorded at fair value. Fair value is the price that would be received in an ordinary transaction between market participants at the measurement date. Essentially you are looking for the value that the investment would sell for in the market.
Passive investment -
3 possible investment categories under IFRS & how to choose
- Amortized Cost - for financial assets held in order to collect contractual cash flows, when the cash flows consist solely of principal and interest (ie. bank deposits, A/R balances, bonds held to maturity)
- FVTOCI - Equity investments irrevocably designated FVTOCI and NOT held for trading; debt instruments with cash flows that are solely payments of principal and interest, held for collecting cash flows
and to sell the instrument. - FVTPL - assets that don’t qualify for amortized cost; assets classified as held for trading; assets irrevocably designated FVTPL
Passive investment -
3 criteria to be classified “asset held for trading”
- It is acquired or incurred principally for the purpose of selling or repurchasing in the near term
- On initial recognition, it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking
- It is a derivative (except for a derivative that is a financial guarantee contract or a designated and effective hedging instrument).
Note receivable -
Initial and subsequent measurement IFRS vs ASPE
Initial measurement (IFRS & ASPE): fair value + transaction costs (fair value = PV discounted future cashflows using imputed or market interest rate) for terms > 90 days
Subsqnt measurement - IFRS: amortized cost using effective interest rate
Subsqnt measurement - ASPE: amortized cost, interest rev can be calculated using effective interest method OR straight line method
Passive investment -
For assets classified amortized cost, what is the appropriate accounting treatment for: Transaction costs, subsequent measurement, classification of unrealized gains & losses, impairment & derecognition
Transaction costs: add to carrying value
Subsequent meas: amortized cost using effective interest method
Classification of unrealized gains & losses: N/A
Impairment: If discounted cash flows using original effective interest rate are less than CV - record loss in P&L
Derecognition: gain or loss recognized in P&L
Passive investment -
For assets classified ASPE what is the appropriate accounting treatment for transaction costs
Add to CV if carried at cost.
Expense if will be carried at FV.
Passive investment -
For assets classified ASPE what is the appropriate accounting treatment for impairment
Highest of
- Present value of expected cash flow if asset is held
- Selling price
- Amount realizable from collateral net of costs
Passive investment -
Subsequent measurement for assets classified ASPE
Equity instruments:
- FV if quoted in active market
- Other – amortized cost (choice to recognize interest revenue through effective interest or straight line)
An entity may choose to recognize any financial asset at fair value. This choice must be made upon initial recognition and the entity must be able to determine fair value in each reporting period.
Passive investment -
For assets classified ASPE what is the appropriate accounting treatment for unrealized gains & losses
Recognize through P&L - ASPE does not allow OCI
Passive investment -
Derecognition for assets classified ASPE
Gain or loss recognized in profit or loss (net income)
Passive investment -
For assets classified FVTPL, what is the appropriate accounting treatment for transaction costs
Expense immediately
Passive investment -
Subsequent measurement & classification of unrealized gains & losses for assets classified FVTPL
Subsequent measurement: Fair value
Classification of unrealized gains & losses: recognize through Profit or loss
Passive investment -
For assets classified FVTPL, what is the appropriate accounting treatment for impairment
Not separated from overall change in fair value
Passive investment -
Derecognition for assets classified FVTPL
Gain or loss recognized in profit or loss
Passive investment -
For assets classified FVTOCI, what is the appropriate accounting treatment for transaction costs
Add to carrying value
Passive investment -
Subsequent measurement & classification of unrealized gains & losses for assets classified FVTOCI
Passive investment -
Subsequent measurement & classification of unrealized gains & losses for assets classified FVTOCI
Passive investment -
For assets classified FVTOCI, what is the appropriate accounting treatment for classification for impairmenta
Debt investment - The cumulative loss is
transferred to profit or loss.
Equity investment - The impairment loss is not separated from other fair value changes.
Passive investment -
Derecognition for assets classified FVTOCI
Derecognition:
Debt investments - Current gain/loss recognized plus cumulative gain/loss transferred from OCI to profit or loss.
Equity investments - Amounts in OCI are not recycled to net income
Related party transactions:
Decision tree to measure at carrying amount or exchange value (ASPE)
- Related-party transaction occurs
- Is the transaction in the normal course of operations? (no = carrying value, yes = step 3)
- Is the change in ownership interests in the item transferred substantive (20% of more)? (no = carrying value, yes = step 4)
- Is the amount of the exchange supported by independent evidence (comparable to market price)? (no = carrying value, yes = step 5)
- Is the transaction a non-monetary exchange or transfer of a non-monetary asset? (no = exchange amount, yes = step 6)
- Is the NMA’s transferred held for sale in normal course of operations? (no = carrying value, yes = step 7)
- Does the transaction have commercial substance? (no = carrying amount, yes = exchange amount)
Related party transactions -
Measurement & disclosures under IFRS
RPTs are recorded at exchange amount unless another standard provides guidance.
Significant disclosures required, including nature of relationship and transactions, and key management compensation.
Government assistance -
Definition (what is included?)
IAS 20 & ASPE 3800
Assistance by government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity.
Includes forgivable government loans
Government assistance -
Grants Related to Income - definition, recognition & 2 options for presentation
IAS 20 & ASPE 3800
A grant related to income is one that provides resources to cover expenses, such as a grant for salaries and wages. The grant is recognized as the related expense is incurred
2 options for presentation:
- Separately as “other income”
- Deducted from the related expense (a credit to the expense account)
Government assistance -
Grants Related to Assets - definition, recognition & 2 options for presentation
IAS 20 & ASPE 3800
A grant related to assets is one that provides resources to cover the purchase of an asset(s).
Recognized as income over the period necessary to match it with the related costs. This is done on a systematic basis, usually in line with the depreciation policies of the asset.
2 options for presentation:
- as deferred income liability, brought into income over life as asset as depreciation is incurred
1a. For non depreciable asset - recognized over the period that carrying conditions are met - Deducted from the asset’s carrying amount
Government assistance -
When to recognize grant
IAS 20 & ASPE 3800
Grants are recognized when reasonable assurance exists that:
1. the entity will comply with the conditions of the grant
2. the grant will be received
Government assistance -
Initial recognition for grant received prior to conditions being met
IAS 20 & ASPE 3800
Recognize as a deferred government grant (a liability) until the conditions are met.
Government assistance -
Initial recognition for grant where conditions have been met but grant has not been received
IAS 20 & ASPE 3800
Recognize as government grant receivable (an asset).
Government assistance -
Initial recognition for a government loan that has favourable interest terms
IAS 20 & ASPE 3800
Recognize a benefit equal to the proceeds of the loan less the discounted value using the effective interest method and account for the benefit as a government grant
Government assistance -
Non-monetary grants (IFRS vs ASPE)
IAS 20: recognize grant at fair value OR at nominal amount
ASPE 3800: non-monetary grants are always recorded at fair value
Leases - Lessee perspective (IFRS)
Lease classification options
All leases are capitalized, recognizing a ROU asset and lease liability.
Limited exceptions are for short-term leases of one year or less and low value leases. For these types of leases, the lease payment is expensed as incurred.
Leases - Lessee perspective (IFRS)
Costs to include in ROU asset initial measurement
The ROU asset is recognized at cost, which includes:
• the initial measurement of the lease liability
• any lease payments made at or before the commencement date, less any lease incentives received
• any initial direct costs incurred by the lessee
• an estimate of costs to be incurred by the lessee at the termination of the lease to dismantle and remove the ROU asset or restore it to the condition required under the terms of the lease
Leases - Lessee perspective (IFRS)
4 costs that should not be included in the initial measurement of a lease liabilty
- Variable payments that are not based on an index or rate (expense as incurred)
- Unguaranteed residual values or BPO unlikely to be exercised
- Non-lease component costs that are not elected to be included
- Termination penalties that the lessee does not expect to incur
Leases - Lessee perspective (IFRS)
3 options for subsequent measurement of ROU asset
- Cost model (most common)
- Revaluation model
- Fair value model (investment properties only)
Leases - Lessee perspective (IFRS)
Subsequent measurement of ROU asset- cost model
The ROU asset is measured at cost less accumulated depreciation and any accumulated impairment losses
The ROU asset is depreciated over the lesser of:
• the lease term
• the asset’s useful life (must use this option if there is reasonable certainty lessee will obtain ownership at end of lease term)
Asset must be tested for impairment annually in line with other PPE
Leases - Lessee perspective (IFRS)
Subsequent measurement of lease liability- cost model
The actual lease payments made are recorded as a reduction in the liability when paid.
Each year, the company also recognizes interest expense on the lease obligation.
Leases - Lessee perspective (IFRS)
Discount rate to use for initial measurement of lease liability
Discount at rate implicit in the lease if it is readily determinable, and if not, then the entity’s incremental borrowing rate
Leases - Lessee perspective (IFRS)
Lease liability remeasurement - when does it happen & what is the accounting impact
The lease liability may be remeasured if there is a change in the future lease payments.
- Modified future lease payments are discounted to calculate the revised lease liability.
- Any adjustments are recognized against the ROU asset and the lease liability.
Leases - Lessee perspective (IFRS)
When can an entity elect to expense lease payments under IFRS?
If the lease is a short-term lease of one year or less, or if the leased asset is of low value, the company may elect to expense lease payments on either a straight-line basis or a systematic basis over the term of the lease. This election is considered for each individual lease.
Leases - Lessee perspective (IFRS)
3 criteria for a leased asset to be considered low value
A leased asset is of low value only when all of the following apply:
• The asset is of low value when it is new.
• The lessee can benefit from the use of the asset on its own or together with readily available resources.
• The lease asset is not highly dependent on or highly integrated with other assets.
Ex: tablets, personal computers, telephones, and small items of office equipment.
Leases - Lessee perspective (IFRS)
5 disclosures required of a lessee
- depreciation and interest expense related to ROU assets
- the expense related to short-term leases, low-value leases, and variable payments directly expensed
- additions to ROU assets and the net carrying amount at the end of the period, separated for each class of ROU asset
- any gain or loss on sale-leasebacks
- details of the lease arrangement including basis, terms, restrictions, lease commitments, nature of leasing activities, exposure to future cash flows related to variable payments, extension or termination options, and residual value guarantees
Leases - Lessee perspective (ASPE)
2 lease classification options & 3 criteria to decide
ASPE requires that lessees classify a lease as operating or capital. If one of the following 3 criteria are met, the lease must be classified capital lease:
- TITLE TRANSFER - There is reasonable assurance that ownership of the asset will transfer to the lessee by the end of the lease term (evidenced through title transfer or BPO)
- LIFESPAN - The lease term is of such a duration that the lessee will receive substantially all the economic benefits expected to be derived from the use of the leased property over its lifespan (generally 75% +)
- PRESENT VALUE - The present value of the minimum lease payments amounts to substantially all (usually 90% or more) of the fair value of the asset
Leases - Lessee perspective (ASPE)
Operating lease - Initial and subsequent measurement
if none of the 3 criteria are met (Title transfer, lifespan, PV), then the lease is operating in nature and the lease payments are expensed as incurred.
Leases - Lessee perspective (ASPE)
Capital lease - Initial measurement & 3 differences from IFRS
The leased asset and lease liability are recognized at the discounted minimum lease payments that the lessee will pay.
Same as IFRS calculation EXCEPT -
- Executory costs must be excluded from the minimum lease payments
- The discount rate used is the lower of the rate implicit in the lease, if known, and the entity’s borrowing rate.
- The leased asset cannot be initially recognized at an amount higher than its fair value. If this is the case, the discount rate used must be adjusted so that the present value of the minimum lease payments is equal to the fair value of the leased asset. Under IFRS, the ROU asset would be tested for impairment at each reporting period
Leases - Lessor perspective (IFRS)
5 criteria for a finance lease
The lease must meet ONE of the following criteria:
- TITLE TRANSFER - Title transfers to the lessee by the end of the lease term.
- A BPO exists - and at the date the lease begins, it is reasonably certain that the lessee will exercise it.
- LIFESPAN -The lease term is of such a duration that the lessee will receive substantially all the economic benefits expected to be derived from the use of the leased property over its economic life.
- PRESENT VALUE - The PV of the lease payments amounts to substantially all of the FV of the asset.
- SPECIALIZATION - The asset is specialized in nature and only the lessee can use it without major modifications.
Leases - Lessor perspective (IFRS)
3 additional items to assess for lease classification
Indicators that individually or in combination could also lead to a lease being classified as a finance lease:
- Lessee can cancel the lease and must bear the lessor’s costs/loss of cancellation
- Gains or losses from fluctuation in FV of the residual accrue to the lessee
- The lessee has the option to continue lease for a second term at a rent substantially lower than market rate
Leases - Lessor perspective (ASPE)
5 criteria to distinguish a capital lease
- TITLE TRANSFER - There is reasonable assurance that ownership of the asset will transfer to the lessee by the end of the lease term (evidenced through title transfer or BPO)
- LIFESPAN - The lease term is of such a duration that the lessee will receive substantially all the economic benefits expected to be derived from the use of the leased property over its lifespan (generally 75% +)
- PRESENT VALUE - The present value of the minimum lease payments amounts to substantially all (usually 90% or more) of the fair value of the asset
- CREDIT RISK - the credit risk is normal when compared to the risk of collection of similar receivables
- UNREIMBURSABLE COSTS - the amounts of any unreimbursable costs that are likely to be incurred by the lessor under the lease can be reasonably estimated
Leases - Lessor perspective (IFRS + ASPE)
Manufacturer dealer vs. Finance company main differences (reason for leasing, revenue recognition)
Manufacturer or dealer: Lease offered as a financing mechanism to facilitate sale of its own products –> The lessor recognized both the sale of the asset with the corresponding profit and finance revenue over the life of the lease.
Finance company: entity does not have prior interest in asset, purchases asset at FV and leases it out immediately –> lessor reports only finance revenue over the life of the lease. No interest in taking asset back at the end of the lease.
Leases - Lessor perspective (IFRS + ASPE)
6 items used to calculate lease payment
Fixed payments
+ BPO
+ guaranteed residual value
+ variable payments linked to index or rate
+ Penalties for terminating the lease (that are likely)
- lease incentives
= Lease payments
Leases - Lessor perspective (IFRS + ASPE)
Net investment in lease calculation
PV of lease pmts discounted back to inception date using implicit interest rate
+ PV of unguaranteed residual value, discounted using implicit rate
= net investment in the lease
EXCLUDE PMTS MADE BEFORE COMMENCEMENT
Leases - Lessor perspective (IFRS + ASPE)
Manufacturer or dealer journal entry to record a lease
Dr. Lease receivable (net investment in lease)
Cr. Revenue
Dr. COGS [Cost of inventory - PV of unguaranteed residual (if applicable)]
Cr. Equipment
DO NOT include pmts received before commencement date in lease receivable
Leases - Lessor perspective (IFRS + ASPE)
Finance company journal entry to record a lease
Dr. Lease receivable
Dr. Cash (initial lease pmt)
Cr. Equipment (selling price of equipment)
Leases - Lessor perspective (IFRS + ASPE)
Interest revenue calculation
Interest revenue for the period: Carrying value of lease x implicit rate x number months in period / 12 = Interest revenue for period
Leases - Lessor perspective (IFRS + ASPE)
Journal entry for subsequent measurement of finance lease (lease payments received & interest recognized)
Dr. Cash (lease pmt)
Cr. Lease receivable (lease pmt)
Dr. Lease receivable (interest amt)
Cr. interest income (interst amt)
Leases - Lessor perspective (IFRS + ASPE)
Derecognition of a finance lease
A lease is derecognized by the lessor when the lessor’s contractual right to the cash flows from the asset has expired, which is normally at the end of the lease term
If the lessee returns the asset to the lessor at the end of the lease term, the lessor will recognize the asset in accordance with IAS 16 Property, Plant and Equipment. When the lessor subsequently disposes of the equipment, any gain or loss on disposal will be recognized through P&L.
Leases - Lessor perspective (IFRS + ASPE)
Accounting for operating lease
No lease receivable required.
IFRS 16 requires that the lease be recognized on a straight-line basis over the lease term or on some other systematic basis depending on use, irrespective of the timing of cash flows.
Ex. If lease payment is lower in year 1, average lease payment from full term is recognized as revenue and lease receivable is recognized for amount pertaining to future periods
Non-Monetary transactions (ASPE) -
2 criteria for commercial substance to exist
Commercial substance exists when the entity’s future cash flows are expected to change significantly as a result of the transaction.
For a transaction to have commercial substance, either of the following two ASPE criteria must be met:
• The configuration of the future cash flows of the asset received differs significantly from the configuration of the future cash flows of the asset given up.
• The entity-specific value of the asset received differs significantly from the entity-specific value of the asset given up.
Non-Monetary transactions (ASPE) -
2 options for measuring transaction value
- More reliable measure of fair value of asset given up or asset received. Asset given up preferred when both can be reliably measured.
- Carrying amount (specific criteria)
Non-Monetary transactions (ASPE) -
4 NMT fair value exemptions
- COMMERCIAL SUBSTANCE - The transaction lacks commercial substance.
- ORDINARY COURSE OF BUSINESS - The transaction is an exchange of similar items (product / property held for sale in the ordinary course of business for a product / property to be sold in the same line of business to customers who were not parties to the exchange)
- FAIR VALUE RELIABLY MEASURABLE - The fair value of neither the asset received, nor the asset given up, is reliably measurable.
- NON-MONETARY/NON-RECIPROCAL TRANSFER TO OWNERS - The transaction is a non-monetary, non-reciprocal transfer to owners (restructuring or liquidation)
Non-Monetary transactions (ASPE) -
How does partial monetary consideration (cash) affect measurement at fair value or carrying amount
Fair value: When an exchange meets the criteria for measurement at fair value, the cash is simply included as part of the fair value of the asset given up or the asset received
Carrying value:
- The entity paying the cash measures the non-monetary asset received at the carrying amount of the asset given up, plus the fair value of the cash paid.
- The entity receiving the cash measures the non-monetary asset received at the carrying amount of the asset given up less the fair value of the cash received. If the cash exceeds the carrying amount, a gain is recognized for the amount of the excess.
Non-Monetary transactions (IFRS) -
Main difference between IFRS and ASPE
Per IFRS 15.66
The fair value of the ASSET GIVEN UP is given preference for fair value transactions. If the fair value of the item received is unknown, the entity shall the stand-alone selling price of the asset given up.
In ASPE the asset given up receives preference
Non-current assets HFS (IFRS & ASPE) -
3 required conditions for a non-current asset be considered held for sale (HFS)
Must meet all three:
• The asset must be available for immediate sale in its present condition.
• The terms of the sale must be usual and customary
• The sale must be highly probable.
Non-current assets HFS (IFRS & ASPE) -
5 requirements for a sale to be highly probable
o Management must be committed to a plan to sell the asset (or disposal group).
o An active program to locate a buyer and complete the plan must have been initiated.
o The asset (or disposal group) must be actively marketed for sale at a price that is reasonable in relation to its current fair value.
o The sale should be expected to qualify for recognition as a completed sale within one year from the date of classification; if the sale will take longer than one year and the events that cause the delay are beyond the entity’s control, this condition can be waived.
o Actions required to complete the plan should indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn
Non-current assets HFS -
Classification requirements on balance sheet for non-current assets held for sale (IFRS vs ASPE)
IFRS: current assets separate from other assets
ASPE:
o as either current or non-current depending on their nature
o current if sold prior to completion of statements
Non-current assets HFS (IFRS & ASPE) -
Initial measurement
Lower of its carrying value and its fair value less costs to sell
Any loss on the classification to HFS is recognized in income.
Non-current assets HFS (IFRS & ASPE) -
Depreciation
HFS assets are depreciated up to the point of reclassification. Once classified as HFS, depreciation ceases.
Non-current assets HFS -
Depreciation or impairment reversal (IFRS vs ASPE)
If the fair value less costs to sell of the HFS asset subsequently increases:
IFRS: reversal limited to extent of previous impairment losses (including prior to HFS designation), gain recognized for reversal
ASPE: reversal limited to the losses incurred since the asset was classified as HFS
Discontinued operations (IFRS & ASPE) - Definition of a component of an entity
A component of an entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity.
Discontinued operations (IFRS & ASPE) - Criteria for a component of an entity to be considered a discontinued operation
It has been classified as HFS or disposed AND must meet one of the following criteria:
- It represents a separate major line of business or geographical area of operations.
- It is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations.
- It is a subsidiary acquired exclusively with a view to resale
Discontinued operations (IFRS & ASPE) - 2 steps an entity must apply to determine whether a component should be classified as a discontinued operation
- Determine whether the component meets one of the three criteria for discontinued operations.
- Determine whether the component’s assets (together) either:
a. have already been sold
b. meet the HFS criteria (the criteria are applied to the component’s asset group, not to each individual asset in the component)
Discontinued operations (IFRS & ASPE) - Measurement of discontinued operation
Measure the same as assets HFS - The assets of the component are measured at the lower of the carrying value and the fair value less costs to sell. Any loss on the classification is recognized in income.
Measurement is considered at the component level, not at the individual asset level.
Discontinued operations (IFRS & ASPE) - Financial statement presentation
A discontinued operation’s non-current assets are presented separately from other assets on the statement of financial position. If the non-current assets qualify as HFS, then they are presented as in accordance with the relevant standard. Additionally, the discontinued operation may have liabilities, which are also presented separately from other liabilities.
On the statement of comprehensive income, an entity shall disclose a single amount comprising the total of the following:
• the post-tax profit or loss on the discontinued operation
• the post-tax gain or loss related to the remeasurement or disposal of the discontinued operation
