Financial Reporting Flashcards
IFRS Revenue Recognition STEP #1: Is there a Contract
What are the criteria to be considered a contract? (5 criteria)
○ Must be approved by all parties
○ Rights to the goods/services to be transferred are identified
○ Payment terms can be identified
○ Contract has commercial substance (will affect future cash flows)
○ Customer is able and intends to pay consideration due
IFRS Revenue Recognition STEP #1: Is there a Contract?
What are the Criteria to combine contracts? (Must meet 1 or more of the following 3 Criteria)
○ If contracts are negotiated as a package with a single commercial objective
○ Amount of consideration to be paid for one contract depends on the price or performance of the other contract
○ Goods or services promised for one contract (or a portion of the goods/services) are a single performance obligation
Where is IFRS Rev Rec in the CPA Canada Handbook?
IFRS 15
Where is ASPE Rev Rec in the CPA Canada Handbook?
ASPE 3400
When can you recognize Revenue under IFRS? (Step 5)
When PO’s are satisfied, or when CONTROL is transferred (either at a single point in time or over time).
Under IFRS 15, when can revenue be recognized over time? (3 criteria)
○ customer simultaneously receives and consumes the benefits provided by the vendor’s performance (ex. rental of an office space)
○ vendor’s performance creates or enhances an asset (ex. work in progress on a construction contract on land owned by the customer) that the customer controls as the asset is created or enhanced
○ 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 (ex. work in progress on custom equipment that the vendor cannot sell to another party due to the customization)
Under ASPE 3400, when can revenue be recognized?
○ Performance is achieved (when the seller has transferred the significant risks and rewards of ownership to the buyer)
○ Reasonable assurance exists regarding the measurement of the consideration
○ Collection is reasonably assured
What are the methods of recording revenue under ASPE 3400?
- Percentage of completion method:
- when performance consists of more than one act
- may be on the basis of number of acts completed, extent of progress toward completion, or costs incurred relative to budgeted costs
- revenue can be recognized using a straight-line basis when performance consists of an indeterminate number of acts over a specific period of time - Completed contract method
- only appropriate when performance of a service consists of a single act or when the extent of progress toward completion cannot be measured
Where can Inventories be found in the CPA Canada Handbook for ASPE?
ASPE 3031
Under IAS 2, Inventories are made up of:
Inventories are assets:
A) held for sale in the ordinary course of business,
B) in the process of production for such a sale, or
C) in the form of materials or supplies to be consumed in the production process or in the rendering of services
Under IAS 2, which costs are Included in Inventory?
Costs Included in Inventory: any cost incurred to bring inventory to its present location and condition
○ Deduct any rebates or other costs that can be recovered
○ Storage and shipping to customer are EXCLUDED
Under IAS 2, Inventory is measured at the lower of:
Cost and Net Realizable Value.
NRV is estimated selling price in normal course of business LESS estimated costs of completion and costs to make the sale.
What is the difference in the treatment of Borrowing Costs in IFRS vs ASPE?
In IFRS you must capitalize borrowing costs, but in ASPE you have a choice whether to capitalize or expense them.
Where can you find PPE in CPA Canada Handbook under ASPE?
ASPE 3061
Under IAS 16, when can PPE be recognized as an asset? (2 Criteria)
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 (indirectly or directly)
○ The cost of the item can be measured reliably
Under IAS 16, what is included in the cost of PPE?
Cost of PPE includes:
○ its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates (sales taxes such as GST and HST are refundable, so not included)
○ 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
○ Decommissioning costs
○ DOES NOT INCLUDE: maintenance, training for employees
Where can Inventories be found in the CPA Canada Handbook for IFRS?
IAS 2
Where can you find PPE in CPA Canada Handbook under IFRS?
IAS 16
Under IAS 16, what are the measurement model choices for PPE?
Measurement Models: Cost Model and Revaluation Model
○ Under CM, asset is valued at cost and depreciated
○ Under RM, asset is valued at FMV and depreciated (must be used for an entire class of assets, not just one, and revaluations must be done regularly)
Under IAS 16, how do you record gains AND losses under the Revaluation Model?
To record an increase in FMV, or a gain:
- First record the gain in NI up to the amount of losses that were previously recorded as a result of revaluations of the asset
- Then record whatever gain is left in OCI
To record a decrease in FMV, or a loss:
- First record the loss in OCI up to the amount of gains that were previously recorded as a result of revaluations of the asset
- Then record whatever loss is left in NI
Under ASPE 3061, which Measurement Models are available for PPE?
Cost Model only
How do you calculate depreciation expense under IAS 16?
Cost less residual value, divided by useful life
How do you calculate depreciation expense under ASPE 3061?
Greater of:
a) Cost less residual value, divided by useful life
b) Cost less salvage value, divided by asset life
Which section of CPA Canada Handbook talks about Impairment of Assets under ASPE?
ASPE 3063
Which section of the CPA Canada Handbook talks about Impairment of Assets in IFRS?
IAS 36
Under IAS 36, what are the 4 steps for Impairment?
1) Level of asset grouping (indivudual asset or CGU)
2) When to test for impairment (when there are indicators of impairment, unless the asset is required to be tested annuall)
3) Measure the recoverable amount
4) Test for impairment and record loss, if any
Under IAS 36, how do you determine recoverable amount?
The recoverable amount is the higher of:
a. FV less costs of disposal b. Value in use (determined by discounting the estimated net future cash flows from continuing use or ultimate disposal)
Under IAS 36, how to you calculate Impairment loss/expense?
Impairment loss = carrying amount - recoverable amount
Under IAS 36, how do you record Impairment Loss for both individual assets and CGUs?
For Individual assets:
- Record impairment loss to NI, then adjust depreciation for future periods
For CGUs:
- Reduce goodwill of the CGU first, then the remaining loss is applied to the assets in the CGU on a pro rata basis
Under IAS 36, how do you reverse impairment? Can this be done in ASPE 3063?
Write the asset up to the lower of:
a) recoverable amount
b) carrying value that would have existed net of deprecation had the asset never been written down in the first place.
Recognize it in NI.
Cannot reverse impairment losses in ASPE.
In ASPE 3063, how are assets grouped for impairment instead of using CGUs (like in IAS 36)?
In ASPE, Asset impairment is based on asset group (concerned with cash inflows and outflows), not CGU (concerned with cash inflows only).
Under ASPE 3063, when can we test for impairment compared to IAS 36?
Only look for indicators of impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable
- IFRS requires you to look for impairment indicators each year, and requires that certain assets be tested each year
What are the steps to determine Impairment loss using ASPE 3063?
- Compare the carrying amount to undiscounted cash flows (recoverable amount).
- If the carrying amount > recoverable amount, impairment exists; move to Step 2.
- Determine fair value and compare it to the carrying amount.
Loss = Fair value – Carrying amount
Write the asset down to its FV.
Under IFRS, what are the 2 criteria to be able to classify financial instruments using the Amortized Cost Method?
a. The asset belongs within a business model whose objective is to hold financial assets in order to collect contractual cash flows, and
b. On specified dates, the contractual terms of the asset give rise to cash flows that are solely payments of principal and interest
Under IFRS, which assets are classified using the FVTOCI Method?
Includes:
a) equity investments designated as FVTOCI, and
b) debt instruments with cash flows that are solely payments of principal and interest where they’re held to collect cash flows and to eventually sell
Under IFRS, which assets can be classified using the FVTPL Method?
Includes a) assets that don’t qualify to be in amortized cost or FVTOCI, and b) assets classified as HFT (held for trading).
How does IFRS 1) measure/calculate impairment, and 2) account for Impairment of A/R?
- Impairment exists when PV of future cash flow < original amt
- uses Expected Credit Loss Approach: has an Allowance for Doubtful Accounts and Bad Debt Expense for PV of expected losses
- the difference in the ADA account is an impairment loss/gain called Bad Debts Exp or Bad Debts Recovery
How does ASPE account for and measure Impairment of A/R?
- Instead of the Expected Credit Loss Approach, ASPE requires that there is a “triggering event” before looking if there is any impairment.
- AR is adjusted to the highest of:
a. (usually)** PV of cash flows expected to be generated by holding the receivable (discounted to PV if collection is in longer than 1 year)
b. Amount that could be realized by selling the AR
c. Amount that’s expected to be realized by exercising the holder’s right to any collateral held to secure repayment of the AR (net any costs necessary to do it)
Under IFRS, what are the 3 Criteria to be a Held For Trading Asset? (Related to passive investments)
Criteria to be a HFT asset:
○ Acquired for the purpose of selling or repurchasing soon
○ Initially, its part of a portfolio of financial instruments that are managed together with a pattern of short term profit taking
○ It’s a derivative (except for a derivative that’s a financial guarantee contract or used as a hedge)
Under IFRS, what’s the subsequent measurement of DEBT instruments using FVTOCI?
Measured at amortized cost using the effective interest method, less impairment.
○ each reporting period, the asset is measured at fair value, with gains or losses reported in OCI net of tax
○ If it’s sold, the cumulative unrealized gains or losses are transferred to NI (recycled from OCI)
Under IFRS, what’s the subsequent measurement of EQUITY instruments using FVTOCI?
Measured at amortized cost using the effective interest method, less impairment losses.
○ measured at fair value, with gains and losses recognized in OCI net of tax
○ When it’s sold, it’s NOT recycled to NI. The cumulative gains/losses can be transferred from Accumulated OCI to another Equity account like RE
What are the 2 measurement methods available for Passive Investments under ASPE?
1) Amortized Cost, and
2) Fair value
Which financial assets must be measured using Fair Value under ASPE? (there are 2 of them)
1) equity instruments quoted in active markets, and
2) certain derivatives
Which 2 methods are available when using Amortized Cost under ASPE? (for passive investments)
Choice of the effective interest method and straight line method.
What are the 2 ways to measure a Related Party Transaction under ASPE?
AND how are gains/losses treated for both?
Either at:
1) carrying amount
- any difference between the carrying amounts of the goods exchanged go to equity. Gains: go to Contributed Surplus. Losses: go to debit CS up to the amount of previous gains, and the rest debited to RE
2) exchange amount
- gains/losses recognized in income, up to the FV of the asset. If exchange value < carrying amt, see if there’s impairment to the asset before transferring.
What are the 2 conditions for a government grant be recorded in Income under IAS 20?
Only recognize when 2 Criteria are met:
1. The entity will comply with the conditions of the grant
2. The grant will be received
What are the 2 ways that Government grants related to Income can be PRESENTED under IAS 20?
Either:
1) presetned separately as “Other Income”, or
2) Deducted from the related Expenses
What are the 2 ways that Government grants related to Assets can be PRESENTED under IAS 20?
Either:
a. As deferred income and brought into income over the life of the asset as iit’s depreciated
- For a non-depreciable asset, if the grant has conditions with it, it should be recognized as the conditions are met
b. Deducted from the asset’s carrying amount
What are the criteria for government loans to be treated as gov’t grants under IAS 20?
Criteria:
1. The entity will comply with the conditions of the grant
2. The grant will be received
When a gov’t loan provides favourable terms that basically qualify it as a grant, how do you calculate the amount that is a grant?
The grant is equal to the benefit derived from the loan.
Benefit Derived = Proceeds of the loan - discounted value using the effective interest method
What are the 2 choices in measurement for non-monetary grants under IAS 20?
Under IAS 20 you have the option to recognize the grant at FV or nominal value.
How can non-monetary grants be measured under ASPE 3831?
Measured at FV. No choice to use nominal value.
Where can you find the seciton on Non-Monetary transactions under ASPE in the CPA Canada Handbook?
ASPE 3831
How are non-monetary transactions measured using ASPE 3831?
Measured at the fair value of the asset received or given up, whichever is more reliable
○ If both are reliable, use fair value of asset given up
Under ASPE 3831, you can’t use FV to measure a non-monetary transaction when (4 things):
○ The transaction has no commercial substance
○ The transaction is an exchange of a product/property HFS in the ordinary course of business for a product/property to be sold in the same line of business to customers
○ Neither of the fair values of the asset received or the asset given up is reliable
○ Transaction is a non-monetary, non-reciprocal transfer to owners
Under ASPE 3831, when part of the consideration in a non-monetary transaction is Cash, A/R, or an N/R, then how do you account for it if the asset had been valued at its FAIR VALUE?
Cash is included in the fair value of the asset given up/received. It’s treated the same as a purely NMT
Under ASPE 3831, when part of the consideration in a non-monetary transaction is Cash, A/R, or an N/R, then how do you account for it if the asset had been valued at its CARRYING VALUE?
It depends on if the entity is giving up or receiving the cash.
- Entity paying the cash measures the NM asset received at the carrying amount of the asset given up, PLUS the fair value of the cash - Entity receiving cash measures the NM asset received at the carrying amount of the asset given up, LESS the fair value of the cash received. If the cash > carrying amount, a gain is recorded for the excess
Under IFRS Non-monetary transactions, when a revenue transaction occurs where the customer pays in consideration OTHER THAN CASH, how is the transaction valued?
The vendor measures the transaction at the fair value of the non-cash consideration received
○ If the fair value of the goods received isn’t available, use the stand-alone selling price of the goods/services promised to the customer in exchange for the consideration
Where are Leases in the CPA Canada Handbook under IFRS?
IFRS 16
Where are Leases in the CPA Canada Handbook under ASPE?
ASPE 3065
How do lessees present a lease under IFRS 16?
A lease liability and ROU asset
How is the Lease liability measured, and what is included in the value of the lease liability for Lessees under IFRS? (6 components)
Lease Liability is measured at the present value of all future lease payments.
Components of Measurement:
○ Fixed payments
○ Variable payments based on an index or a rate that is in effect at the commencement date
○ Bargain purchase option if the lessee is expected to pay
○ Guaranteed residual value, but only the expected amount is included
○ Termination penalties included if intended to pay
○ Non-lease component costs included if the lessee elects to include them
Which costs are included in ROU asset for Lessees under IFRS 16? (4 things)
ROU Asset is recognized at cost which includes:
○ Initial measurement of the lease liability
○ Lease payments made at or before commencement dates, less any lease incentives received
○ Initial directs costs incurred by lessee
○ Estimate of the costs to be incurred by the lessee at the termination of the lease to dismantle and remove the ROU asset and restore to conditions required under the lease
Under IFRS 16 for Lessees, what is the subsequent measuresment method for the ROU asset? (2 options)
1) Cost Model or 2) Revaluation model, but if it’s investment property, then can use the fair value model too
Under IFRS 16 for Lessees, the ROU asset is depreciated over the lessor of: ___
When is this not the case?
a. the lease term
b. the asset’s useful life
BUT If there’s reasonable certainty that the lessee will own the asset after the lease term (ex. BPO) then asset must be depreciated over the useful life of the asset
Under IFRS 16 for Lessees, if lease payments are made at the beginning of the period, how do you treat the first lease payment?
Don’t include it in the value of the Lease Liab, just credit cash instead. Include it in the ROU Asset value though.
For Lessees under IFRS 16, what is the subsequent measurement of the Lease liab? (what increases/decreases it?)
Interest exp increases the liab and lease payments decrease it.
For Lessees under IFRS 16, what is the difference in calculating the Interest Expense for the lease when payments are a) at the beginning of the year, and b) at the end of the year?
PMT at the beginning of the year: take balance of lease obligation at end of the prior year, LESS current year lease pmt * interest rate
PMT at the end of the year: lease obligation at end of the year before pmt * interest rate
For lessees under IFRS 16, how is the accounting for Low Value leases different than the usual treatment?
Can elect to expense lease payments on a straight-line or systematic basis over the lease term instead of ROU asset and liab
Asset is Low value if ALL of the following (3 items) apply:
○ Asset is of low value when new (< $5000 USD)
○ Lessee can benefit from the use of the asset on its own or together with available resources
○ The lease asset is not highly dependent on or highly integrated with other assets
How should Lesses derecognize a ROU assest under IFRS 16?
ROU asset should be full depreciated and written off along with the Accumulated Depreciation
How should Lessees derecognize a Lease Liability under IFRS 16 when there is a Residual Guarantee?
There’s a gain/loss on derecognition equal to the difference between the Cash promised for the residual guarantee, and the balance of the Lease Liab
For Lessees under IFRS 16, how should a ROU asset be derecognized (JE) if there’s no BPO and title transfers to the lessee automatically, if:
a) the company owns the asset
b) company doesn’t want to own the asset
a) Dr. Asset
Dr. Accumulated Depreciation
Cr. ROU asset
b) Dr. Loss
Dr. Accumulated Depreciation
Cr. ROU asset
For Lessees under IFRS 16, how should a Lease Liab be derecognized (JE) if there’ is a BPO and:
a) the company pays the BPO
b) company doesn’t pay the BPO
a) Dr. Lease Liability
Cr. Cash
b) Dr. Lease Liability
Cr. Gain on derecognition
Under IFRS 16 for Lessors, what are the 2 types of leases?
Operating lease and finance lease.
What is the 1 main requirement to be a finance lease under IFRS 16 for Lessors?
Lease transfers ALL risks/rewards of ownership to the lessee.
Under IFRS 16 for Lessors, what are the 5 Primary Criteria to be finance lease (if any 1 met, it is a finance lease):
- Title transfers to lessee at end of lease term
- BPO exists and it’s reasonably certain that the lessee will use it
- Lessee will receive substantially all (90%) of the economic benefits of the asset. Lease term/asset’s lifespan
- PV of the minimum lease pmt’s equal substantially all (90%) of the FV of asset
- Asset is specialized and only the lessee can use it without major modifications
For Lessors under IFRS 16, what are the Secondary Criteria to be Finance Lease?
○ Lessee can cancel the lease and any losses are borne by the lessee
○ Gains/losses from fluctuation in FV of the residual accrue to the lessee
○ Lessee is able to continue the lease for another period at a substantially lower rent than market rent
Under IFRS for Lessors, how is a finance lease initially recorded?
Consider it basically sold. Record Revenue and COGS, and credit the equipment and debit a receivable.
Under IFRS for Lessors, what is the Subsequent treatment for the Lease Receivable?
Interest income INCREASES the receivable, and pmt’s DECREASE the receivable.
Under IFRS 16 for Lessors, how is an operating lease recorded over the lease term?
Simply record lease revenue over the course of the lease straight-line or on another systematic basis regardless of the timing of cash flows.
What happens under IFRS 16 for Lessors when at the end of the lease the FV of the leased asset > expected residual value?
There’s a GAIN on derecognition
What happens under IFRS 16 for Lessors when at the end of the lease the FV of the leased asset < expected residual value? (when there’s a residual guarantee vs. when there’s no residual guarantee)
If there is a Residual Guarantee: The lessee pays the difference and there’s NO GAIN OR LOSS on derecognition
If there is no Residual Guarantee: There’s a LOSS on derecognition
For Sale and Leaseback transactions under IFRS 16, what is the first criteria to consider?
If the sale actually took place
Under IFRS 16 for a sale and leaseback, the sale did NOT take place if… (1 of 4 things)
○ seller-lessee has an obligation to repurchase the asset
○ seller-lessee has a right/option to repurchase the asset
○ seller-lessee has an obligation to repurchase the asset at the buyer-lessor’s request for an amount less than the original selling price of the asset
○ seller-lessee can or must repurchase the asset at the buyer’s request, for an amount equal to or more than the original selling price of the asset, and this amount is greater than the asset’s expected market value
In a sale and leaseback situation under IFRS 16, what would the transaction be considered as if:
a) the sale has taken place
b) the sale hasn’t taken place
a) sale and leaseback situation
b) financing arrangement
How would the seller-lessee recognize a sale and leaseback transaction under IFRS 16? (just the accts)
a) derecognize the asset and the gain is restricted by the buyer’s proportionate claim
b) Record a ROU asset and lease liability
How would you calculate the gain on sale for the seller-lessee for a sale and leaseback transaction under IFRS 16?
Gain = buyer’s proportionate claim * (FV of asset - BV of asset)
How would you calculate the proportionate claim of the seller-lessee for a sale and leaseback transaction under IFRS 16?
Seller-Lessee’s Proportionate Claim = PV of lease payments / Fair value of asset
How would you calculate the proportion of claim of the buyer-lessor for a sale and leaseback transaction under IFRS 16?
Buyer-Lessor Proportion of Claim = (FMV of asset – PV of lease payments) / FMV of asset
