Financial Reporting Flashcards
Chapter 3 - Cash and Receivables
- Cash and Equivalent inclusions/exclusions (1.1-1.3)
- A/R initial recognition criteria (2.1)
- What is loss allowance and how is measured?
- Difference between IFRS and ASPE
Cash and cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes.
Per IAS 7 Statement of Cash Flows, “cash comprises cash on hand and demand deposits.” Examples of cash include:
- legal tender on hand on business premises, including petty cash
- deposits at banks that are accessible on demand, such as chequing and savings accounts
- foreign currency that can be easily converted into the company’s operating currency
Also per IAS 7, “cash equivalents are short-term, highly liquid investments that are readily convertible to a known amount of cash and which are subject to an insignificant risk of change in value.” Examples of cash equivalents include:
- drawn bank overdrafts used as part of cash management (deduction from cash equivalent)
- term deposits with a maturity date of three months or less from the date of acquisition
- investments in money market funds
- treasury bills (T-bills) with a maturity date of three months or less from the date of acquisition
Exclusions
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 of exclusions include:
- restricted cash (minimum balance requirements in bank accounts/funds held in escrow/ donations provided for a specific purpose in a not-for-profit organization)
- 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
No difference between IFRS and ASPE
- A/R initial recognition criteria (2.1)
Can be recognized as
(1) Amortized cost can be used as a classification if both of the following conditions are met (IFRS 9.4.1.2):
(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.
(2) fair value through other comprehensive income (FVTOCI) if the company’s business model for holding the receivables directs it not only to collect the contractual cash flows but also to sell.
(3) fair value through profit or loss (FVTPL) if the company will be holding the receivables to actively sell them as part of a portfolio.
Accounts receivable (AR) are initially recorded at their transaction price, which represents fair value at the transaction date (the date of the invoice). Collection period greater than one year – Discounted at the effective interest rate based on the customer’s credit risk and presented as long-term assets
Payment terms are commonly shown as “discount amount/discount period, net period due.”
For example, “2/10 net 30” would mean a 2% discount if the invoice is paid within 10 days, and the full amount is due within 30 days. Thus, no discount is available if the amount is paid off during the period from Day 11 to Day 30.
Loss Allowance
recognize a loss allowance for expected credit losses on the AR. Under this approach, an event does not need to occur to trigger the recognition of a loss. Instead, at each reporting date, the credit risk of the customer is assessed, as well as the future amount and timing of expected future cash flows. The expected credit losses are the present value of all cash shortfalls over the life of the receivable.
DR. BAD DEBT EXPENSE
CR. AFDA
Difference between IFRS and APSE
IFRS - (1) Impairment based on annual assessment
(2) Net realizable value of AR is adjusted for expected credit losses over the life of the receivable
ASPE - (1) Impairment based on a triggering event Net realizable value of AR is adjusted to the highest of:
PV of cash flows expected
Amount realized if sold
Amount expected if exercised right to collateral (net of costs)
Chapter 4 - Passive Investments
- FVTPL (2.1) - Straight forward dont need to do example
- Amortized Cost (2.2) - complete exaple 2.2.4
- FVTOCI (2.3) - complete example 2.3.4
- ASPE Difference (5)
(a) Calssification
(b) initial measurement’
(c) Transaction Costs
(d) Subsequent Measurement
(e) Classification of unrealized gain and losses
(f) Impairment
(g) Derecognition
Journal Entries
FVTPL
(1) Initial - Investment + Transaction Cost
DR. Investment in Shares
DR. Bank Charges and fees
CR. Cash
(2) Sebsequent - Adjust to FV
DR. Investment
CR. Unrealized Gain
(3) Derecognition
DR. Cash
CR. Investment in sahres
CR> Gain (Realized)
Amortized Cost
(1) Initial - Investment + Transaction Cost
DR Investments in Bonds
CR. Cash
(2) Sebsequent - Adjust to FV
DR. Cash (Face value * Coupon Rate)
CR. Interest Revenue (FV * Effective Interest Rate)
CR. Investment in Bonds
FVTOCI
(1) Initial - Investment + Transaction Cost (Captalized)
DR. Investment in Shares
CR. Cash
(2) Sebsequent - Adjust to FV
DR. Investment (FV - (Investment + Transaction Cost)
CR. Unrealized Gain - OCI
CR. Deferred taxes (liability)
(3) Derecognition
DR. Investment in shares
CR. Unrealized Gain - OCI
CR. Deferred Income Tax liability
DR. Cash
CR. Investment in shares
DR. AOCI (Total of all CR. Unrealized Gain - OCI)
CR, Retained Earnings
Chapter 5 - Inventories
(1) What is considered in the cost of inventory for (1) Merchandise/ (2) Manufacturing Inventory?
(2) What is inventory carried at?
(3) ASPE Difference?
(1) What is considered in the cost of inventory for (1) Merchandise/ (2) Manufacturing Inventory?
Merchandise inventory
• cost of purchase
• shipping costs to receive the merchandise
• import duties and any other unrecoverable taxes
Manufacturing inventory
• raw material
• direct labour
• manufacturing overhead
(2) What is inventory carried at?
Inventory is carried on the balance sheet at the lower of cost or net realizable value (NRV). NRV is the value that the company could realize through an ordinary sale of the inventory. It equals proceeds less selling costs.
(3) What is the difference between IFRS and ASPE?
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.
Chapter 6 - PPE
- When can PP&E be recognized?
- PPE Asset Costs (1.1 - 1.6)
- Are Spare parts, standby equipment, and servicing equipment\ considered PPE
- Revaluation Model (3)
- ASPE Difference (4)
- When can PP&E be recognized?
PP&E are expenditures on tangible items that have an extended future benefit of longer than one year. PP&E is held by the entity for the entity’s use in the production or supply of goods and services. It can also be held for 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 Costs (1.1 - 1.6)
PP&E asset costs
The cost of an asset capitalized as PP&E comprises three components:
• its 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, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period (DECOMMISSION PROVISION)
Purchased equipment
+ delivery of the asset
+ installation of the asset
+ testing that the asset is operational
Excludes training and maintenance (unless major inspection)
Purchased land and building \+ commissions \+ legal fees \+ title search \+ property transfer taxes
Construction of an asset \+ construction permits \+ site survey costs \+ construction costs, including labour, direct management salaries, and materials \+ direct borrowing costs \+ professional fees
are spareparts considered PPE
Spare parts, standby equipment, and servicing equipment
Spare parts that are immaterial in nature or have a short lifespan would be considered inventory.
Major spare parts would be classified as PP&E - expected to generate future economic benefit for the airline and has a measurable cost, so it meets the definition of PP&E. Additionally, it has a lifespan of greater than a year, so it would be considered capital.
Standby or servicing equipment would be recorded as part of PP&E.
- Revaluation Model (3)
Employing the revaluation method will result in gains and losses as the assets are written up or down to fair market value.
When an asset is increased to fair market value, a gain occurs, which is recognized as follows:
• The gain is first recorded to net income, up to the amount of losses that was previously recorded to net income as a result of revaluations on the asset.
• Then the remaining gain is recorded to other comprehensive income (OCI).
When an asset is written down to fair market value, a loss occurs, which is recognized as follows:
• The loss is first recorded to OCI, up to the amount of gains that was previously recorded to OCI as a result of revaluations on the asset.
• Then the remaining loss is recorded to net income.
When assets are adjusted for revaluations, the adjustment to the asset cost can be achieved by using one of two different approaches: the elimination method or the proportional method.
Under the elimination method, the accumulated depreciation is first reset back to zero, and the asset cost adjusted accordingly. After revaluation, the asset would be on the books with a cost equal to fair market value and accumulated depreciation of zero.
Under the proportional method, both the cost and accumulated depreciation are adjusted proportionally to achieve an overall carrying amount equal to fair market value. Both approaches show a net asset on the balance sheet recorded at fair market value.
- ASPE DIfference (4)
(i) can choose to capital or expense borrowing costs
(ii) Measurement Basis - Cost model only
(iii) Depreciation Greater of:
• cost less residual value divided by useful life
• cost less salvage value divided by asset life
Chapter 8 - Lease
- IFRS Lessee Lease Accounting - Finance (ONLY)
- Short-term lease or low value lease
- Determine if Finance or Operating Lease (Lessor IFRS - 5 criteria)
- IFRS Lesser Lease Accounting - Finance
- IFRS Lesser Lease Accounting - Operating
- Sale and Leaseback Transaction - establish of a sale has taken place. - ACCEPTED RISK
- Disclosures for Financing and Operating Leases (IFRS) - ACCEPTED RISK
- Difference between IFRS and ASPE (5 & 5.1)w
- IFRS Lessee Lease Accounting
Lessee under IFRS is are capitalized
From a Lessee prospective a ROU Asset and Lease Liability need to be recorded
DR. ROU Asset
*DR. Prepaid Insurance/Maintenance (Assuming not elected)
CR. Lease Liability
*CR. Cash (Assuming payment starts at BEG)
Lease Liability/Excel functions (PV)
• RATE -> borrowing rate.
• NPER -> # of terms
• PMT -> Fixed payments + Non-lease components IF ELECTED (if not elected do not consider or substract from Fixed payment if included)
• FV -> BPO or guaranteed residual value only. If there is no BPO or guaranteed residual value, assume this amount is nil. If there is both a BPO and a guaranteed residual value, the BPO is used as the required payment.
• TYPE -> 1 indicates the beginning of the period, and 0 (or leaving it blank) indicates the end of the period.
Subsequent Entries (3 - Required)
- Depreciation -> DR. Depreciation Expense / CR. Accumulated Amortization - ROU
- Insurance/Maintence Expense -> Maintenance Expense/Insurance / CR. Prepaid Maintaince/Insurance
- Lease Payments -> Dr. Lease Liability / CR. Cash (Can also include prepaid Maintenace/Insurance)
- Interest (Beg. Lease Liability*RATE) -> DR. Interest Expense / Cr. Lease Liability
Upon Derecognition, everything is reversed unless there is BPO and choose to forgo the purchase. Record an amount equal to the residual as a ‘Gain on Derecognition.
- Short-term lease or low value lease
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.
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.
Examples of low-value assets are tablets, personal computers, telephones, and small items of office equipment. A car would not qualify for this treatment because when it is new it is not of low value.
- Determine if Finance or Operating Lease (Lessor IFRS - 5 criteria)
The criteria / consideration factors for a finance lease can be summarized as follows: - Title transfers to the lessee by the end of the lease term. (TITLE TRANSFER)
- A BPO exists, and at the date the lease begins, it is reasonably certain that the lessee will exercise it.
- Duration - Lessee will receive substantially all the economic benefits expected to be derived from the use of the leased property over its lifespan. (>75%)
- The PV of lease payments amounts to substantially all of the FV of the asset. (>90%)
- The asset is specialized in nature and only the lessee can use it without major modifications.
- IFRS Lesser Lease Accounting - Finance
A finance lease is one that transfers substantially all of the risks and rewards of ownership to the lessee.
DR. Lease Receivable
DR. COGS
DR. Cash (Assuming payment starts at BEG, netted with Lease Receivable)
CR. Revenue
CR. Equipment/Inventory
Revenue = PV + BPO or Guaranteed Residual Value (BPO preferred)
Lease Receivable = PV + BPO or Guaranteed Res. Value (BPO preferred) or Ungauranteed Res. Value (+)
COGS = Cost of inventory - Ungauranteed Res. Value (-)
Subsequent
1. Interest Income (Beg. Lease Liability*RATE) -> DR. Lease Receivable / CR. Interest Income
- IFRS Lesser Lease Accounting - Operating
DR. Cash
DR. Deferred Lease Revenue (PMT amount)
DR. Equipment - Leased
CR. Inventory
Sebsequent
Recognize Revenue -> DR. Deferred Lease Revenue / CR. Lease Revenue
Depreciation Expense - > DR. Depreciation Expense / CR. Accumlated Depreciation - Equipment - Leased
- ASPE Difference
(A) Lessee - Can be capital or operating (expensed)
(B) Lessee - Does not consider title transfer and specialized assets
(C) Lesser - Assessed on the 3 original conidersation +
(i) the credit risk is normal when compared to the risk of collection of similar receivables; and
(ii) the amounts of any unreimbursable costs that are likely to be incurred by the lessor under the lease can be reasonably estimated.
(D) General - non-lease component costs whether elected or not must be excluded
(E) Interest rate is lower of: (i) rate implicit on lease or (ii) incremental borrowing rate of entity
- Determine if Finance or Operating Lease (Lessee ASPE)
Examples
Chapter 8 - 1.1.3/1.2.1/1.3.2 (IFRS Lessee’s - ONLY Finance)
Chapter 8 - 2.2.1 (IFRS Lessors - Financing)
Chapter 8 - 2.3.2 (IFRS Lessor’s - Operating)
Chapter 8 - 3.2 (IFRS Lessee’s - Sale and Leaseback)
Chapter 8 - 5.2 (ASPE Lessee - Financing)
Chapter 8 - 5.4 (ASPE Lessor - Financing)
Chapter 8 - 6 (ALL)
Chapter 9 - GoodWill and Intangible Assets
- Definition of Intangible Assets and recognition criteria (1)
- Goodwill - internally generated vs purchased - whats the difference?
- Research and Development Cost Capitalization (1.6)
- IFRS vs ASPE (5)
- Definition of Intangible Assets and recognition criteria (1)
Intangibles must meet the definition of an intangible asset as well as the recognition criteria.
To meet the definition of an intangible, all of the following criteria must be met:
- The asset is identifiable, which is illustrated as either:
a. being separable such that it can be transferred / sold to another entity
b. arising from contractual or other legal rights - The entity controls the future economic benefits of the asset.
- The asset will generate future economic benefits.
Further, an intangible is recognized when both of the following criteria are met:
1. It is probable that the expected future economic benefit of the asset flows to the entity.
2. Its cost can be measured reliably.
If the intangible asset does not meet both definition and recognition criteria, then it must be expensed (IAS 38.68).
- Goodwill - internally generated vs purchased - whats the difference?
Internally generated goodwill is never recognized on the financial statements, as it is not able to be measured reliably and is not an identifiable resource. - Research and Development Cost Capitalization (1.6)
RESEARCH
The research phase refers to the earlier stages in the process where the entity is still doing a lot of exploring and preliminary work.
The costs from this phase are expensed because during the research phase, an entity cannot demonstrate that the expenditures will result in a future economic benefit.
Typical research activities include obtaining new knowledge of a market; looking for, evaluating, and selecting research findings; and determining alternatives for new processes or techniques.
Development
These criteria are met, development expenditures can be deferred as an intangible asset.
1) the technical feasibility of completing the intangible asset so that it will be available for use or sale (Is the asset technically able to be completed?)
2) its intention to complete the intangible asset and use or sell it (Does the entity plan to complete it?)
3) its ability to use or sell the intangible asset (Once completed, does the entity have a use for the asset?)
4) how the intangible asset will generate probable future economic benefits — among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset (When the asset is in use, will it generate economic benefits?)
5) the availability of adequate technical, financial, and other resources to complete the development and use or sell the intangible asset (As the entity plans to complete it, does it have the means to do so? Often this is focused on having the money available to complete the development.)
6) its ability to measure reliably the expenditure attributable to the intangible asset during its development (Does the entity know the costs that are directly attributable so that it can measure the asset?)
If all six criteria are met, then the entity has supported that the asset will bring future economic benefit, and can be reliably measured. At this point, the entity may defer development expenditures. Therefore, the first step is to determine when the six deferral criteria are met. The next step is to assess the expenditures and determine whether they are eligible to be deferred.
Development expenditures are those that are incurred after the research phase. Examples include:
• the design, construction, and testing of pre-production or pre-use prototypes and models
• the design of tools, jigs, moulds, and dies involving new technology
• the design, construction, and operation of a pilot plant that is not of a scale economically feasible for commercial production
• the design, construction, and testing of a chosen alternative for new or improved materials, devices, products, processes, systems, or services
In addition, an entity may defer directly attributable costs that were necessary to generate the intangible. Examples include:
• costs of materials and services used or consumed in generating the intangible asset
• costs of employee benefits (as defined in IAS 19 Employee Benefits) arising from the generation of the intangible asset
• fees to register a legal right
• amortization of patents and licences that are used to generate the intangible asset
In addition to research expenditures, the following costs are not eligible to be deferred as development costs:
• selling, administrative, and other general overhead expenditure unless this expenditure can be directly attributed to preparing the asset for use
• identified inefficiencies and initial operating losses incurred before the asset achieves planned performance
• expenditure on training staff to operate the asset
- IFRS vs ASPE (5)
• ASPE permits an accounting policy choice with respect to development costs: capitalize or expense. This policy choice must be applied consistently on all internal projects.
• ASPE does not have specific guidance regarding intangible assets obtained by way of a government grant.
• ASPE does not address the review of residual value, though it may be reviewed as part of the review of the amortization method and useful lives.
• ASPE does not require annual impairment tests on intangibles that are not in use.
Chapter 10 - Impairment of Assets
- Steps of Impairment Testing - IFRS
- Steps of Impairment Testing - ASPE
- Reverals IFRS / ASPE
- Indicators of Impairment
- Steps of Impairment Testing IFRS / 2. Steps of Impairment Testing ASPE
CGU -> Test -> Determine Rec. Amount -> Write Down
Step 1: Asset Grouping
IFRS - Identify Cash Generating Unit (CGU) - smallest group of assets that generate independent cashflows from other assets or groups of assets
APSE - Identify Asset Group
Step 2: Impairment test requirements
IFRS - Annual test (required for goodwill and intangible assets not being amortized) or indictors of impairment (monitor annually)
APSE - Monitor for indicators of impairment
Step 3: Recoverable Amount
IFRS - Recoverable amount (discounted) -
(1) higher of fair value less costs of disposal
(2) and value in use, which is the discounted estimate of future cashflows from continuing use and ulitmate disposal
(NRV)
APSE - 2 Step Test -
(1) Compare Carrying Value to Recoverable amount (undiscounted), if carrying value is less than, then no impairment.
Step 4: Impairment test and write-down
IFRS - Writedown to recoverable amount , Loss = Recoverable amount - Carry amount
APSE - Writedown to fair value (discounted), Loss = FV(discounted) - Carry amount
DR. Impairment Loss
CR. Equipment, net
- Reverals IFRS / ASPE
Reversal
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
ASPE - can NOT be reversed - Indicators of Impairment (Own Card)
Indicators of impairment may be both internal and external. These include, but are not limited to:
Internal
• evidence of obsolescence or physical damage
• significant changes in the use of the asset / CGU, such as discontinuance, disposal, or restructuring
• declining asset / CGU 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
Chapter 11 - Decomissioning Provisions
- Recognition (3 criteria) - 1 - 1.3
- Initial Measurment
- Subsequent Measurement -
- Difference between ASPE and IFRS
- Recognition (3 criteria) - 1 - 1.3
• The 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.
• A reliable estimate can be made of the amount of the obligation. - Initial Measurment - Straight forward (find PV = FV/(1+rate)^n)
and record a DR. Asset / CR.Decommissioning provision - Subsequent Measurement -
(JE-i) DR. Interest Expense = PV*(rate), CR. decommissioning provision
(JE-II) DR. depreciation and CR. Acc. Dep. of the assets - Difference between ASPE and IFRS
Decommissioning provisions are referred to as asset retirement obligations under ASPE, and are covered in ASPE Section 3110 Asset Retirement Obligations.
Recognition and measurement
The recognition and measurement under ASPE is virtually the same as under IFRS, except for the following:
- Under IFRS, obligations are legally required or are constructive obligations / Under ASPE, an asset retirement obligation must be legally required to be recognized.
- Under IFRS, the increase in the carrying value of the decommissioning liability due to the passing of time is recorded as interest expense (borrowing cost), but under ASPE, this is not permitted. Under ASPE, the increase in the carrying value of the liability is considered an operating expense and is commonly referred to as an accretion expense, although other similar descriptors may be used.
Chapter 12 - Contingencies
- What is a contingent liabilitiy/asset?
- When do you record a provision for both contingent liability/asset? (IFRS & ASPE)
- If it meets recognition what amount for be applied for contingent liabilities - consider situations with multiple scenarios? (IFRS & ASPE)
- If it meets recognition what amount for be applied for contingent assets - consider situations with multiple scenarios? (IFRS & ASPE)
- What disclosures are required in either case whether recognized contengency or unrecognized but disclosure required?
- What are the key differences between ASPE and IFRS?
- What is a contingent liabilitiy/asset?
A contingent liability is considered a provision when:
• The entity has a present obligation arising as a result of a past event.
• It is considered probable that the entity will have an outflow of economic resources.
• The entity is able to make a reliable estimate of the outflow of economic resources.
A contingent asset “is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.”
- When do you record a provision for both contingent liability/asset? (IFRS & ASPE)
Contingent Liability
Is the contingent liability PROBABLE (IFRS - >50%) / LIKELY (ASPE - higher%) & measureable? -> RECORD PROVISION
Is the contingent liability unlikely & possible? -> NOTHING REQUIRED
ALL ELSE -> DISCLOSE
Contingent Asset
Is the contingent asset virtually certain (IFRS: judgment; ASPE: 100%) & measureable? -> RECORD PROVISION
Is the contingent asset is NOT probable (IFRS: judgment; ASPE: <100%) -> NOTHING REQUIRED
ALL ELSE -> DICLOSE
- If it meets recognition what amount for be applied for contingent asset/liabilities - consider situations with multiple scenarios? (IFRS & ASPE)
(a) When there is a range of possible outcomes, the provision should be recorded using the most likely outcome.
(b) Where there are multiple likely outcomes. In this case, the weighted average of these likely outcomes is calculated
- What disclosures are required in either case whether recognized contengency or unrecognized but disclosure required?
• brief description of the nature, timing, and uncertainty of payments
• amount of any expected reimbursements
• the carrying amount at the beginning and end of the period
• increases, decreases, reversals of unused amounts, and increases due to passage of time during the year - What are the key differences between ASPE and IFRS?
IFRS - Use best estimate of most likely outcome or if mulitple situations use Weighted Average/ Midpoint for continuous
ASPE - WHen there is arange and no best estimate take minimum amount.
Chapter 13 - Revenue From Contracts
IFRS
- Explain the 5 step in revenue recognition under IFRS
- Explain the 4 considerations in the first step of revenue recognition
- Explain the 2 considerations in the 2nd step of revenue recognition
- What are the 2 types of variable considerations?
- What are the constraints to variable consideration?
- What needs to considered for ‘Right of Return’ and how does it impact revenue recognition? (2 scenarios) -> 3.3
- What would qualify and not qualify for ‘significant financing consideration’
- Name 3 suitable methods of standalone pricing determination
- When is revenue recognized (control)? -> 5 & 5.1/5.2
- What are methods of measuring progress towards completion (input & output method)?
ASPE
- Explain the 3 steps in revenue recognition under ASPE
- What are the 2 methods of revenue recognition for services and when is it approrpiate to use them?
- What are the effects of uncertaintity and what can result in it (2)?
IFRS
1. Explain the 5 step in revenue recognition under IFRS
Step 1 - identify the Contract
Step 2 - Identify the Performance Obligation
Step 3 - Determine the transaction price
Step 4 - Allocate transaction price
Step 5 - recognize revenue when each obligation is satisfied
- Explain the 4 considerations in the first step of revenue recognition
(1) Contract is approved by all parties
(2) RIghts regarding goods and services & payment terms can be identified
(3) Contract has commercial substance
(4) Probable that collection of payment will be made, considering only customers ability and intention to pay - Explain the 2 considerations in the 2nd step of revenue recognition
(1) Can the customer benefit from the good or service on its own? (cellphone + cellphone plan -> Distinct goods)
(2) Is the promise to transfer the good or service seperately identified from other promises in the contract? (^ seperateable / building a deck requires materials and labour -> not seperatable) - What are the 2 methods for variable considerations?
Expected Value
Most Likely Amount - What are the constraints to variable consideration?
THere is a risk that the amounts are being included will not be received. Amount is limited to what would be HIGHLY PROBABLE. - What needs to considered for ‘Right of Return’ and how does it impact revenue recognition? (2 scenarios) -> 3.3
Revenue to be recognized is limited to an amount that is highly probable to be received. (like variable consideration)
If an estimate cannot be made, revenue is simply not recognized and the vendor sets up any money received as deferred revenue
DR. Cash
CR. Revenue
CR. Refund Liability
DR. COGS
DR. Asset - right to recover
CR. Inventory
- What would qualify and not qualify for ‘significant financing consideration’?
(1) Difference, if any, between the amount of promised consideration and the cash selling price of the promised goods or services
(2) the combined effect of:
o the expected length of time between when the entity transfers the promised goods or services to the customer and when the customer pays for those goods or services
o the prevailing interest rates is the relevant market - Name 3 suitable methods of standalone pricing determination
(1) Adjusted market assessment approach: Market price - the price customers would be willing to pay in the market.
(2) Expected cost plus a margin approach
(3) Residual approach: Calculate the residual amount of the transaction price after considering all other standalone amounts. - When is revenue recognized (control)? -> 5 & 5.1/5.2
Control over an asset is the major determination of when the performance obligation is met.
(A) PO is startisfied over time (1 of the following must be met)
(i) Customer simultaneously receives and consumes the benefit
(ii) Vendor’s performance creates or enhances an asset
(iii) Vendor’s performance does not create an asset with an alternative use to the vendor and vendor has enforceable right to payment for performance completed to date.
(B) PO is statisfied at a point in time - consider indicators of control
(i) THere is a present right to paymetn for the asset
(ii) legal title to the asset transferred
(iii) physical prossession has been transferred
(iv) the customer has significant risk and rewards of ownership
(v) customer has accepted the asset
- What are methods of measuring progress towards completion (input & output method)?
Output Method - proportion of goods and serivces transferred to date
Input Method - percentage of completion based on input of resources
ASPE
- Explain the 3 steps in revenue recognition under ASPE?
(1) Perofrmance is achieved (has the goods and services been sold)
(2) Revenue can be measured reliably
(3) Collection is reasonably assured - What are the 2 methods of revenue recognition for services and when is it approrpiate to use them?
The percentage of completion method - Costs incurred realtive to budgeted cost
The completed contract method -(single act) - What are the effects of uncertaintity and what can result in it (2)?
Defer recognition of revenue untill cash is received.
(1) Consideration is not determinable - Can occur when payment to be received is dependent on the resale of the goods by the buyer. Revenue should not be recognized
(2) Uncertainty regarding a right of return -
(a) subject to significant and unpredictable amounts of goods being returned - revenue should not be recognized
(b) subject to significant and predictable amounts of goods being returned, then it may be possible to make a provision for the expected amount of goods to be returned
Chapter 14 - Non-monetary Transactions
- What are the steps when considering NMT? and what do they each mean?
- What are the appropriate disclosures?
- What is the key difference between IFRS and ASPE?
- What are the steps when considering NMT? and what do they each mean?
(A) Does the transaction LACK commercial substance?
Commercial substance exists in an NMT 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. (20-year lease for inventory sold in 1 year)
• The entity-specific value of the asset received differs significantly from the entity-specific value of the asset given up. (land leased vs land sold)
(B) Is the transaction an exchange of a product/property held for sale in the ordinary course of business for a product/property to be sold in the same line of business?
This exclusion applies to transactions where two items are exchanged that are similar in nature.
(C) Are neither the fair value of either the asset received, nor the asset given up, reliably measurable?
In most cases, it is assumed that fair value can be reasonably estimated, and the lack of an exact dollar figure is not grounds to consider fair value immeasurable.
When an entity can reliably determine the fair value of both the asset received and the asset given up, the FAIR VALUE OF ASSET GIVEN UP IS USED.
(D) Is the transaction a non-monetary, non-reciprocal transfer to owners?
A non-monetary, non-reciprocal transfer to owners that represents a spinoff or other form of restructuring or liquidation is measured at the carrying amount of the non-monetary assets or liabilities transferred.
If YES TO ALL THEN -> MEASURE AT CARRY
IF NOT TO ANY -> MEASURE AT FV OR MORE RELIABLE AMOUNT
2. What are the appropriate disclosures? • nature of the transaction • basis of measurement • amount • if applicable, related gains and losses
- What is the key difference between IFRS and ASPE?
When an entity can reliably determine the fair value of both the asset received and the asset given up, the :
ASPE -> FV OF ASSET GIVEN UP IS USED.
IFRS -> FV of ASSET RECEIVED.
Chapter 15 - Related Party Transactions (RPT)
ASPE
- Draw the flow chart
- What does each point in the flowchart mean?
- What are the disclosures required?
- What is the IFRS Difference?
- KNOW THE JE FOR EACH SITUATION. Carry/Exchange and Non-monetary/Monetary
- Do examples in book.
- What does each point in the flowchart mean? (ASPE)
- Did a related party transaction occur?
A transaction between:
(a) Any party that can exercise direct/indirect/joint control or significant influence or vice-versa
(b) Parties subject to common control like above
(c) Members of immediate family - What the transaction part of normal operations
a transaction type that is usually, frequently, or regularly undertaken for generating revenue
**The sale of property, plant, and equipment — even when it is the primary business of the entity (such as a car dealership) — is deemed never to be in the normal course of operations. *** - Did the transaction have substantive transfer of ownership?
when a transaction results in unrelated parties having acquired or given up at least 20% of the total equity ownership interest
4, Is amount exchanged supported by independent evidence?
• independent appraisals, valuations, or approvals used to determine the exchange amount
• comparable recently quoted market prices
• comparable independent bids on the same transaction
• comparable amounts of similar transactions actually undertaken with unrelated parties
- Is the transaction a non-montery exchange or transsfer of a non-monetary asset
Non-monetary transactions are exchanges where neither party is giving up or receiving cash or the right to cash in the future.
5A. Is the transaction an exchange of product or property HFS in the normal course of operations to faciltate sales (Y = CV / N = 5B
Entities are exchanging items that are similar in nature
5B. Did the transaction have commercial substance? (Y = EV / N = CV)
Configuration of the future cash flows of the asset received differs from those of asset given up (land for sale vs land given for rent)
The entity-specific value of asset received differs significantly from the entity-specific value of asset given up
3. What are the disclosures required? • relationship • transaction details • amount • measurement basis • amounts and terms for any receivables or payables • contractual obligations • contingencies
- What is the IFRS Difference
(a) RPTs are recorded at exchange amount unless another standard provides guidance.
(b) Significant disclosures required, including nature of relationship and transactions, and key management compensation.
7. KNOW THE JE FOR EACH SITUATION. Carry (AFFECTS EQUITY) /Exchange (EFFECTS INCOME) and Non-monetary/Monetary
Monetary + Carry Amount
DR. Cash
DR. Retained Earnings
CR. Equipment
DR. Equipment
CR. Contributed Surplus
CR. Cash
Monetary + Exchange Amount
DR. Cash
DR. Loss on Sale
CR. Equipment
DR. Equipment
CR. Cash
Non-monetary + Carry Amount
DR. Equipment
DR. Retained Earnings
CR. Equipment
DR. Equipment
CR. Contribution Surplus
CR. Equipment
Non-monetary + Exchange Amount
DR. Equipment
CR. Gain on Sale (if valued higher than BV)
CR. Equipment
DR. Equipment
DR. COGS
CR. Revenue
CR. Equipment
- Do examples in book.
Chapter 16 - Government Assistance
- When is Government Grant Recognized?
- How are grants related to income presented?
- How are grants related to assets presented?
- ASPE Difference?
- When is Government Grant Recognized?
All grants are recognized when there is reasonable assurance of two criteria: - The entity will comply with the conditions attached to the grant (recorded as liability if not meet)
- The grant will be received.
- How are grants related to income presented?
A grant relating to income may be presented in one of two ways:
(A) separately as “other income”; or
(B) deducted from the related expense (a credit to the expense account)
Dr. Expense
CR. Cash
DR. Deferred Government Grant
CR. (A) Other Income - Gov. Grant OR (B) Expense (same as above)
- How are grants related to assets presented?
(A) as deferred income (a liability), and brought into income over the life of the asset as depreciation is incurred
Non-depreciable asset likely to carry conditions
DR. Depreciation Expense
CR. Accurmlated Depreciation
DR. Deferred Gov. Grant
CR. (A) Other Income - Gov. Grant
(B) deducted from the asset’s carrying amount
DR. Cash
CR. Asset
- ASPE Difference?
Under ASPE, non-monetary grants are recorded at fair value. There is no option to record them at a nominal value.
Chapter 17 - Non-Current Assets Held for Sale and Discontinued Operations
- How is a Non-current Asset HFS Classified? (ITP - CLMCC)
- What are 4 measurement considerations once an asset is classified as a non-current Asset HFS?
- How is a Discontinued Operation Classified?
- What are the measurement considerations once an asset is classified as a discontinued operation?
- ASPE Difference?
IFRS
1. How is a Non-current Asset HFS Classified?
Classification (Immediate, terms, probable -> ITP - CLMCC)
(A) be available for immediate sale in its present condition
(B) terms of sale must be usual and customary
(C) sale must be highly probable:
o management must be COMMITED
o has initiated an active program to LOCATE a buyer
o must be actively MARKETED for sale at a reasonable price
o sale should be expected to be COMPLETED within one year
o unlikely significant CHANGES to the plan will be made
- What are 4 measurement considerations once an asset is classified as a non-current Asset HFS?
(A) measured at lower of carrying value and fair value less costs to sell.
o loss recognized in income
(B) if fair value less costs to sell subsequently increases write-up to extent of previous impairment losses
o gain recognized
(C) presented as current assets separate from other assets in the statement of financial position
(D) depreciation ceases once classified as HFS
- How is a Discontinued Operation Classified?
Discontinued operations
Classification
(A) A component of an entity that either has been disposed of or is classified as HFS (refer to non-current assets HFS) and meets one of the following criteria:
o represents a separate major line of business or geographical area
o is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area
o is a subsidiary acquired exclusively to resell
(B) 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. - What are the measurement considerations once an asset is classified as a discontinued operation?
measured same as HFS
Present separately on statement of comprehensive income:
the post-tax profit or loss from the discontinued operation ( “Income from discontinued operations”)
the post-tax gain or loss related to remeasurement or disposal of discontinued operation - What is the difference between IFRS and ASPE?
ASPE
HFS criteria does not apply to distribution to owners.
HFS assets classified
o as either current or non-current depending on their nature
o current if sold prior to completion of statements
Chapter 18 - Foreign Currency Transactions
- What is a functional currency?
- Initial Measurement
- Subsequent Measurement
- Derecognition Measurement
- What is a functional currency?
An entity’s functional currency is the currency of the primary economic environment in which it operates. Basically, this means that an entity’s functional currency is the dollar (or equivalent) that it primarily uses in day-to-day operations. - Initial Measurement
Record transaction at the rate that day. - Subsequent Measurement
Income Statement - items are recorded and not adjusted
B/S Monetary Items - Restarted at period end
B/S Non-monetary Items - carried at historical cost, until dercognized - Derecognition Measurement
B/S - Derecognized at going exchange rate
Chapter 30 - Changes in Accounting (HAVE TO MEMORIZE THE TABLE)
- What are the 4 types and explain the following for each
a. what each one would represent
b. Application of change (prospective/retrospective)
c. Disclosures
Change in Policy - Voluntary
- provides information that is more reliable and relevant
- Retrospective
- Diclosure -
(1) Nature and description of change /
(2) F/S items and amount impacted for present and past periods /
(3) if retropective treatment not practical - explain how change was applied
Change in Policy - Unvoluntary
- Caused by change in account standard
- Follow transitional provisions
Disclosures -
(1) nature of change and description change
(2) Title of policy
(3) if retrospective, disclosure as voluntary change
Change in Estimate
- as a result of new information not previous available
- Prospective
- Disclosure
(1) nature of change
(2) F/S items and amount impacted for present and future periods / - if future period can be estimated - disclose
Error in Prior Period
- Error from prior period identified in current period
- Retrospective
- Disclosures
(1) Description
(2) F/S items and amount impacted for paste periods /
(3) If retrospective restatment is not practical, a description of how error was corrected
Difference between IFRS and ASPE look at attached image.
