Financial Reporting Flashcards
What is the difference between cash-based and accrual-based accounting?
Cash-based accounting: records transactions whenever there is cash flow (amount paid or recieved)
Accrual-based accounting: records transactions in the period they occur allowing it to better capture a company’s true financial position.
*if using cash based accounting, F/S must be updated at year end to comply with ASPE or IFRS
What is required when a company first adopts ASPE or IFRS?
- Comparative statements must be restated and reported under the new GAAP in the year of adoption.
- More guidance is provided in IFRS 1 and ASPE 1500
What are cash and cash equivalents? Provide examples.
Cash and cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. Cash equivalents include short-term, highly liquid investments that are readily convertible to a known amount of cash with little risk of change in value. They may be grouped together as one line item on balance sheet.
Examples:
• Cash (chequing/savings accounts)
• Term deposits with maturity date of three month or less from the date of acquisition
What is restricted cash?
Restricted cash is cash in which a company is not able to utilize cash for general purposes. This amount it not to be included in cash and cash equivalents and requires not disclosure.
IFRS 9: Accounts Receivable
- Initial measurement
- Receivables greater than a year
- Impairment
- (a) Amortized cost if both the following criteria are met:
• the financial asset is held within a business model whose objective is
to hold financial assets in order to collect contractual cash flows
• the contractual terms of the financial asset give rise on specified dates
to cash flows that are solely payments of principal and interest
(b) 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
(c) FVTPL if the company will be holding the receivables to actively sell them as part of a portfolio.
2. 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
3. Impairment based on annual assessment
ASPE 3856: Accounts Receivable
- Initial measurement
- Receivables greater than a year
- Impairment
- (a) Amortized cost if both the following criteria are met:
• the financial asset is held within a business model whose objective is to
hold financial assets in order to collect contractual cash flows
• the contractual terms of the financial asset give rise on specified dates
to cash flows that are solely payments of principal and interest
(b) 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
(c) FVTPL if the company will be holding the receivables to actively sell them as part of a portfolio.
2. 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
3. Impairment based on triggering event assessment
What are passive investments in financial assets and when are they recognized?
Passive investments in financial assets are investments that are made for the purpose of earning a return on the investment until cash is needed at a future date.
Passive investments are recognized when the entity becomes party to the contractual provision of the instrument.
IFRS 9: Passive Investments
- Initial measurement
- Subsequent measurement, impairment, unrealized gain/loss
Initial measurement - fair value
Subsequent measurement based on classification below -
(a) Amortized cost - amortized cost using effective interest method
• Criteria: part of business model and cash flows solely principal and
interest
• Impairment: discounted cash flows are less then CV, loss recorded in
P/L
• Unrealized gain/loss:; N/A
(b) FVTOCI -
Debt: amortized cost using effective interest rate method
Equity: FV
• Criteria:
Equity - investments that do not qualify as held for sale
Debt - held for collecting cash flows and to sell instrument
• Impairment: through P/L (not applicable to FV measurement)
• Unrealized gain/loss: OCI
(c) FVTPL - FV
• Criteria: for assets that don’t meet amortized cost criteria and assets
designated as FVTPL (designation is irrevocable)
• Impairment: not separated from overall change in FV
• Unrealized gain/loss: P/L
IFRS 9: Passive Investments
- Initial and subsequent measurement
Initial measurement - fair value
Subsequent measurement based on classification below -
(a) Amortized cost - amortized cost using effective interest method
ISPE 3856: Passive Investments
- Initial measurement
- Subsequent measurement, impairment, unrealized gain/loss
Initial - FV
Subsequent -
Equity instrument:
• FV if quoted in active market
• Cost if not
Other: amortized cost
Impairment: Highest of
• Present value of expected cash flow if asset is held
• Selling price
• Amount realizable from collateral net of costs
Unrealized gain/loss: P/L
What kind of costs are included in merchandise inventory?
Any costs incurred to bring the inventory to its present location and condition.
Examples of costs added to inventory include:
• cost of purchase
• shipping costs to receive the merchandise
• import duties and any other unrecoverable taxes
Note: storage costs are explicitly excluded from inventory
What kind of costs are included in manufacturing inventory?
- direct materials
- direct labour
- manufacturing overhead
Describe the three inventory costing methods.
- Specific identification: when a unit of inventory is sold it is moved to cost of sales. ( low volume, highly distinguishable)
- FIFO: the oldest inventory items are moved to cost of sales first. As a result, the cost of the older inventory is assigned to COGS, and the cost of the newer inventory is assigned to ending inventory
- Weighted average cost: The weighted average cost per unit is applied to the units in ending inventory and cost of goods sold. Formula: [(Beginning inventory cost + Cost of purchases to date) / (Qty of inventory in beginning inventory + Qty of purchases to date)]
IAS 23 & ASPE 3031: Inventories
How is inventory to be recorded? Are there any differences between ASPE and IFRS
Inventory is to be recorded at the lower of cost and NRV. NRV is the estimated selling price in the ordinary course of business less costs of completion and estimated costs necessary to make sale.
IFRS requires capitalization of borrowing costs where as ASPE allows a choice to either capitalize or expense them.
IAS 23 & ASPE 3031: Inventories
Definition of inventory
In order o be considered inventory the assets must meet one of the following criteria:
a) held for sale in the ordinary course of business;
b) in the process of production for such
sale; or
c) in the form of materials or supplies to be consumed in the production process or in the rendering of services
