Financial Reporting Flashcards
Inventories (IFRS)
1) Determine cost of inventory (incl. purchase + CC + other)
excludes abnormal waste, SC, S&G&A, storage
2) determine if WD req’d. record at lower of cost & NRV
NRV is defined as the selling price less the relevant selling costs (commission, shipping and royalties [i.e. costs to make the sale and cost of completion) [IAS 2.6]
3) conclude if WD req’d
4) quantify impact
5) AJE
6) impact on users’s objective
Inventory AJE to INCREASE
Rev and inv. recognized in same period.
WD exp. recognized in period WD occurs.
DR Inventory
CR COGS
CR Gain
Revenue recognition (IFRS) Steps
o Step 1: Identify the contract with the customer [IFRS 15.9].
o Step 2: Identify the separate performance obligations, if they exist [IFRS 15.22/27]. @@@ (benefit on own and separately identifible) always likely going to be 2 PO
o Step 3: Determine the overall transaction price [IFRS 15.47]. NTS: TOTAL AMOUNT OF CONTRACT VALUE (without the free units)
o Step 4: Allocate the transaction price to the separate performance obligations [IFRS 15.73]. @@@
o Step 5: Determine when the performance obligation is complete and revenue can be recognized [IFRS 15.31].
Revenue is recognized as control is passed, either over time or at a point in time.
a) Analyze for EACH performace obligation in current (defer rev) and future periods (when to recognize)
b) quantify impact
RR (IFRS) Step 2:
o Step 2: Identify the separate performance obligations, if they exist [IFRS 15.22/27]. @@@ (benefit on own and separately identifible) always likely going to be 2 PO
RR (IFRS) Step 3
o Step 3: Determine the overall transaction price [IFRS 15.47]. NTS: TOTAL AMOUNT OF CONTRACT VALUE, amount cusotmer pays (without the free units)
Revenue recognition (ASPE) Steps
- 1) Identify issue with timing of RR
- 2) identify separate components (UNDER ASPE NEED TO ANALYZE EACH, EACH SEPARATELY)
- 3) assess criteria FOR EACH OF THE COMPONENTS (ultimate collection, performance achieved, measurement)
- 4) Conclusion for EACH
- 5) Adjusting entry
- 6) Impact on users
RR Gross vs net
1) ID issue with classification of rev
2) Assess whether principal or agent
Principal - provides itself
agent - arranges
3) conclude on treatment
Principal - gross
agent - net
4) quantify adjustment
5) impact on users
RR right of return
1) recognize all:
revenue for transferred products, net of returns
refund liability
asset for right to recover products (CA - costs to recover)
2) update for changed expectations
Warranties
1) determine which type: assurance or service
Assurance: product will function as required –> IAS 37 for liab.
service: warranty as separate performance obligation
Assets held for sale (IFRS)
1) ID issue with asset held for sale
2) Assess classificiation: available for immediate sale and if sale highly probable (GO THROUGH EACH CRITERIA)
3) Assess measurement: inital (lower of CA and FV less costs to sell) AND subsequent. not depreciated while classified as HFS.
4) conclude on measurement
5) if HFS, present as non-current asset until sold
6) determine if D/O: go through criteria
7) conclude on disclosure
- Non-current assets (or disposal group) to be disposed of other than by sale should continue to be classified as held and used until they are disposed of
- Non-current assets (or disposal group) to be sold should be classified as held for sale when all of the following are met:
o Management commits to a plan to sell
o Steps to locate a buyer and complete the sale have started
o It is being actively marketed at a reasonable price
o It is available for immediate sale in its present condition
o The sale is probable and expected to occur within a year
o Actions required to complete the sale indicate it’s unlikely significant changes to the plan will be made or that the plan will be withdrawn - Non-current assets (or disposal group) held for sale should be measured at lower of carrying amount and fair value less costs to sell, and should not be amortized
Reference: IFRS 5.06 - .15, .25
Assets held for sale (ASPE)
o 1. Start with definition ASPE3475.03:
o 2. Determine if it’s a component ASPE3475.03
o 3. Now, determine if its been disposed of or classified as HFS
Walkthrough ASPE2475.08 criteria
o 4. Determine the measurement ASPE3475.13:
Measure at lower of CA and FV – costs to sell
No longer depreciated after its reclassified as HFS
o 5. Determine how it should be presented on the FS
* Assets/liabilities of the disposal group should be presented separately on the BS
o Don’t offset and presented in a single amount
* Results should be reported on the IS as a separate element, with re-presentation for the PY
Government assistance (ASPE & IFRS)
1) ID issue with gov’t assistance (has it been recevied)
2) determine when to record - accrue when reasonable assurance compliance
3) analyze how to record (SEPARATELY)
Non-capital/expenses:
* Current expenses – included in income
* Future expenses – deferred and amortized to income as expenses incurred
Capital expenditures: CHOICE (2)
* Deducted from capital asset with depreciation on net amount
* Deferred and amortized to income
NTS: same NI impact
4) conlcude on how to record for EACH
5) quantify impact
6) tie to user’s objective
Government assistance - capital expenditures how to treat
Capital expenditures: CHOICE (2)
1)* Deduct grant spent on capital asset from cost of asset, with depreciation on net amount
2) * Record as deferred revenue. (Deferred) and amortized to income (along with dep. on capital asset).
e.g. 250k asset purchased from 200k grant tinyco.
1) When bought:
DR Asset 250k
CR Cash 250k
Grant rec’d
DR Cash 200k
CR Asset 200k (just asset)
Depreciation: on 50k
2) when bought: same under net method.
Grant rec’d:
DR Cash 200k
CR Deferred grant rev. 200k (asset + liab)
Depreciation: 225k AND amortize revenue to income on same basis of asset.
Normal dep on asset AND,:
DR Def grant.
CR Other income.
Gov’t grant - expenses how to treat
Non-capital/expenses:
* Current expenses – included in income
* Future expenses – deferred and amortized to income as expenses incurred
can show revenues and expenses separately or net of grant, for simplicity, do net of grant.
i.e. to record expneses:
DR Deferred grant
CR Net income
To record unspent repayment:
DR Deferred grant
CR A/P
JE for recognizing government grant
DR Cash / A/R
CR Deferred grant liab.
Gov’t assistance: forgivable loans
treat as grant
Gov’t assistance: repyament
account for in period when conditions arise that cause to be payable
Foreign exchange (ASPE)
5) APSE 1651
a) .14: At the transaction date, each asset, liability, revenue or expense arising from a foreign currency transaction of the reporting enterprise shall be translated into Canadian dollars by the use of the exchange rate in effect at that date.
i) So, transactions should be recorded at the rate in effect when transaction occurred
(1) For revenues, expenses, gains and losses, average rate can be used for those that don’t occur on a specific date (e.g. 2 weeks of service)
(2) For purchases of capital assets, use the spot rate
ii) AT YEAR END:
(1) Per ASPE1651.16: At each balance sheet date, monetary items denominated in a foreign currency shall be adjusted to reflect the exchange rate in effect at the balance sheet date.
(i) Monetary items (assets and liabilities) should be adjusted at the exchange rate at YE and adjustment gets recognized in gain/loss (HOWEVER, note that once the capital asset is recorded at the transaction date, the value does not change everything just goes into the FX gain/loss. The AP would change as at each FX rate.
cost of an item of PPE is recognized as an asset when it meets two criteria
i) o It is probable that future economic benefits associated with the item will flow to the entity.
ii) o The cost of the item can be measured reliably.
Costs related to the day-to-day servicing of an asset
not capitalized. Rather, they are expensed [IAS 16.12]:
Costs that are directly attributable to the asset
capitalized [IAS 16.17]:
i) o In this case, the employee costs are related to the construction.
ii) o The costs for site preparation (disposal costs) are required to be incurred to prepare the building.
Costs explicitly excluded from capitalization (PPE)
i) o Relocation costs if not directly related to the construction [IAS 16.20]
ii) o Abnormal costs, such as the damaged floor [IAS 16.22]
Investment property: how to recognize
1) FV method (initially at cost), subseuqent at cost or FV. no depreciaiton, test for impairment
2) Cost method (depreciate over useful life when avialable for use, test for impairment)
either way, have to get fair value for both methods (cost needs to disclose)
Investment property (IFRS)
1) Determine if it meets the definition of an investment property
2) Determine recognition (economic benefit, reliable cost)
3) Now, determine the measurement at recognition (cost)
4) Subsequent measurement: cost model or FV model (FV will need to be determined regardless for disclosure)
5) depreciate based on useful life
6) impairment test
7) Conclude on impact FS and which method to use
8) conclude on user’s objectives
Investment property (IFRS): FV model
1) No depreciation
2) gains/losses in change in FV are to P&L
Users: increases earnings, however volitile
test for impairment
Under this model, no depreciation is recognized, and the investment property is adjusted to fair value at every reporting period.
Changes in fair value are recognized in net income [IAS 40.35]. If the property’s fair value continues to be above the fair value at year-end, this would increase earnings for 2023 and positively affect the ratios linked to the debt covenant.
Investment property (IFRS): cost model
a) recognized at cost and depreciated over useful life
b) dep. when asset available for use
users: reduces earnings (dep. for 6 months)
test for impairment (when NBV > FV)
(1) * The land and building are recognized at original cost, and the building is depreciated based on useful life (similar to PP&E).
(2) * The depreciable amount of an asset shall be allocated on a systematic basis over its useful life. In addition, depreciation of an asset begins when it is available for use, that is, when it is in the location and condition necessary for it to be capable of operating in the manner intended by management [IAS 16.50].
(a) o Depreciation should have started when STH purchased the land and building in January 2023 as it was available for use, and the building would have to be depreciated over its useful life, which is 30 years. This would reduce earnings and would also negatively affect the ratios linked to the debt covenant, for 2023 and going forward.
(3) * Going forward, the appraised fair values should be used to determine if the property is impaired and the fair value should be disclosed
NMT (ASPE)
a) .06: An entity shall measure an asset exchanged or transferred in a non-monetary transaction at the more reliably measurable of the fair value of the asset given up and the fair value of the asset received, unless:
i) (a) the transaction lacks commercial substance;
ii) (b) the transaction is an exchange of a product or property held for sale in the ordinary course of business for a product or property to be sold in the same line of business to facilitate sales to customers other than the parties to the exchange;
iii) (c) neither the fair value of the asset received nor the fair value of the asset given up is reliably measurable; or
iv) (d) the transaction is a non-monetary non-reciprocal transfer to owners to which paragraph 3831.14 applies.
NMT (commerical substance) ASPE
Commercial substance exists when the entity’s future cash flows are expected to change significantly as a result of the transaction, such as when the configuration of the future cash flows of the two assets differ significantly (risk, timing, or amount of future cash flows) or the entity-specific values of the assets differ significantly.
NMT (IFRS)
various (IAS 16 PPE [in the measurement section] and IAS 38 tangible)
Intangible assets (ASPE)
Definition 1) identifibale [separable and arises from legal right] 2) control 3) future economic benefits
Recognition 1) future economic benefits 2) reliable measurement
Measurement (depends on whether acquired or intnernally generated
Subsequent measurement
Intangible assets (IFRS)
ANALYZE SEPARATELY FOR EACH COMPONENT!
1) definition (ID, control [power and restrict access], future economic benefit]
2) recognition
3) determine if internally generated or separately acquired
3a) development costs: walk through criteria ALL then can capitalize -> discuss at least D
3b) discuss which can be capitalized –> D at least 3
4) discuss amoritzation
5) provide conclusion
6) quantify impact
7) discuss impact
Impairment of long-lived assets
When carrying amount > FV
Impairment of financial assets (IFRS & ASPE)
- Determine if asset impaired (go through factors of indicators)
- determine impariment loss (record the allowance or reduce the carrying amount
Impairment of long-lived assets (IFRS)
- Discuss definition of impairment and evaluate against case facts
Assess for indications if it may be impaired (internal and external)@@@@@!!!! - Discuss recognition criteria for impairment
***Need to assess the recoverable amount –> to determine if its higher than carrying amount - Discuss initial measurement criteria
Where recoverable amount is higher of: VIU and FV less costs of disposal - Discuss subsequent measurement criteria
- Conclude on accounting treatment for impairment
Undiscounted cash flows (ASPE)
Used for impairment, when the carrying amoutn is not recoverable and exceeds its FV
where FV is undiscounted cash flows (remaining useful life, ARO costs, exclude interest)
FV less costs of disposal (IFRS) for Impairment
FV of price in market
Value in use (IFRS) for Impairment
discounted future expected cash flows
Impairment of long-lived assets (APSE)
- Discuss definition of impairment and evaluate against case facts
- Discuss recognition criteria for impairment
- Discuss initial measurement criteria
****(carrying amount is NOT recoverable and exceeds its FV). Where CA > sum of undiscounted cash flows - Discuss subsequent measurement criteria
- Conclude on accounting treatment for impairment
Recoverable amount (IFRS) for Impairment
The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs of disposal and its value in use.
value in use (IFRS) for Impairment
discounted future expected cash flows from use and eventual disposal of asset
exlcudes taxes and financing cash flows
discount rate is pre-tax
Lease (IFRS) steps
Recognition
1. determine if there’s lease
2. identify separate components
3. determine commencement
4. determine lease term
5 determine discount rate
Measurement: see standard
Lease (ASPE) Steps
1) ID issue
2) assess criteria to determine classification (BPO, lease term >75%, PV MLP >90%)
3)conclude if capital or operating (if at least 1 criteria met above, then capital lease)
Equity method (investments)
B/S: Cost + % share NI/NL – dividends received
I/S: % share NI/NL +/- amortization of purchase price
key takeaway: in cases of + NI, then equity would improve D+E ratio. max. equity w/o increase in liability.
Cost method (investments)
B/S: investment at cost
I/S: dividends/interest received/receivable
test for impairment
Consolidation (investments)
o B/S: assets and liabilities, goodwill, NCI separate line in SHE, consolidated R/E, eliminate interco.
o I/S: revenues/expenses, consolidated of parent and subsidiary + PP amortization, eliminate interco transactions, NVI
o Key takeaway: NI is the same under equity method. Just takes into account liabilities and assets. Interco AP/AR is eliminated
Investment (ASPE)
1) Determine significant influence –> none, so FI
2) Financial instrument –> FV or cost; depends on subsequent measurement
3) conclude on method to sue
4) explain how method works (FV market and cost is just initial investment)
5) Quantify impact
Significant influence factors (IFRS & ASPE) for investments
o Sig. influence – IFRS: investments in associates and JV
> 20% and other factors: BOD rep, participation in policy making process, material inter-co transactions, interchange of managerial personnel
o Sig. influence – ASPE: investments
> 20% and other factors: BOD rep, participation in policy making process, material inter-co transactions, interchange of managerial personnel
Types of investments:
1) Joint arrangement
2) Investment property (none for ASPE, just PPE)
3) Investment entity (none for ASPE); e.g. subsidiary
if none above, then it’s a financial instrument
Methods to record an investment:
Cost, equity, or consolidation
Joint arrangement IFRS - step 1
1) discuss evidence of joint arrangement
2) determine whether joint operation or joint venture (walk through classification of joint arrangement)
JO: rights to assets and obligations for the liabilities
JV: rights to net assets or the arragenment
Governement grant (ASPE)
o 1. Determine when to record the grant (complies and continue to comply)
-> can accrue when expected to be received (state when and how)
o 2. Analyze SEPARATELY if it relates to non-capital or capital items
Non-capital (expenses):
* Current expenses – included in income
* Future expenses – deferred and amortized to income as expenses incurred
Capital expenditures: [same NI impact]
* Deducted from capital asset with depreciation on net amount
* Deferred and amortized to income (pref. if want strong B/S asset).
o 3. Conclude on how to record
Governement grant (IFRS)
o 1. Determine when to record the grant (comply and will be received)
-> can accrue when expected to be received (state when and how)
o 2. Analyze SEPARATELY if it relates to non-capital or capital items
Non-capital (expenses):
* Current expenses – included in income
* Future expenses – deferred and amortized to income as expenses incurred
Capital expenditures: [same NI impact]
* Deducted from capital asset with depreciation on net amount
* Deferred and amortized to income (pref. if want strong B/S asset).
o 3. Conclude on how to record
Subsequent event
- Determine whether the incident relates to conditions that existed at the date of the FS
- Determine if a disclosure is required instead (ONLY IF DOES NOT RELATE TO CONDITIONS AT YEAR-END)
- Determine the details of disclosure
PPE (IFRS)
- The cost of an item of PPE is recognized as an asset when it meets two criteria [IAS 16.7]:
- o It is probable that future economic benefits associated with the item will flow to the entity.
- o The cost of the item can be measured reliably.
- Each cost incurred should be analyzed against the above criteria and additional guidance where appropriate, and concluded upon.
- Costs related to the day-to-day servicing of an asset are not capitalized. Rather, they are expensed [IAS 16.12]:
- o In this case, the bricks are likely regular maintenance.
- Costs that are directly attributable to the asset should be capitalized [IAS 16.17]:
- o In this case, the employee costs are related to the construction.
- o The costs for site preparation (disposal costs) are required to be incurred to prepare the building.
- Costs explicitly excluded from capitalization:
- o Relocation costs if not directly related to the construction [IAS 16.20]
- o Abnormal costs, such as the damaged floor [IAS 16.22]
- Calculate the total amount that should have been capitalized in relation to the fulfilment centre and compare to what had been recorded. Calculate the difference and adjust.
Remember, mention about deprecation.
- The impact of any adjustments on the user objectives should be considered.
NTS: use recognition criteria to detemrine whether to capitalze betterments.
Operating segment (IFRS 8)
1) ID issue
2) discuss operating segment criteria
3) provide conclusion that OP segment
4) discuss thresholds
5) provide conclusion on regions to be disclosed
Multi-layer issues
-multiple deliverable RR
- development costs
-intangible assets
- assets held for sale and DO
Convertible debt (ASPE)
Financial instruemnt
Briefly read also took notes.
2 methods to record convertible portion.
1) 0 to equity. 2) residual method to equity, after PV the liability component.
For stock options
compensation expense is measured as the fair value of the options
at the grant date estimated using an option pricing model.
Compensation is expense is not subsequently adjusted for any changes in the value of the options or underlying stock.
Increases equity.
For SARs,
compensation cost is measured as the amount by which the quoted
market price of the underlying shares exceeds the option price. Compensation
expense is subsequently adjusted for changes in value of the underling shares.
increases liability
Decommissioning Cost
1) The decommissioning liability is increased (accreted) each year, at the discount rate × the remaining decommissioning liability
2) The offsetting cost of the decommissioning liability is added to the cost base of the asset
3) There will be increased depreciation of the asset based on the decommissioning costs added to the cost of the facility, depreciated over 15 years
4) Each reporting date, Elcar must ensure the provision recorded is the best estimate of the costs at the end of the period
Borrowing and other costs
ASPE - choice to capitalize carrying costs (e.g. interest)
IFRS - requires bororwing costs related to acquisition/construction of a qualifying asset to be capitalized
What to always consider for an asset (where applicable)
Depreciation (when available for use) and impairment
How to calculate gain on exchange
FV - CARRYING VALUE (not the different between 2 assets).
EPS
1) Needed to determine first if basic was done correctly. Always do this as we know that the controller was gone. So assess basic first.
2) Basic EPS = Net income / WASO (where WASO is # of common shares / days)
3) Dilutive EPS: note that convertible debt makes EPS to be dilutive.
4) EPS = net income / WASO
Componentization
An asset has parts or components that have varying useful lives. This may arise in
the context of a significant part that has been replaced.
The issue is whether the individual components need to be identified and
depreciated separately.
- Apply case facts to IAS 16 par 43 or ASPE 3061 par 18 to determine if the
components should be amortized separately - Look for case facts to support whether the cost of the components is significant in
relation to the total cost of asset (if possible, calculate the percentage of total cost
that the components make up)
Business combination
1) definition (control, business)
2) which intangibles should be recorded separately from goodwill and what values, and unrecorded liablities that should be included in goodwill calculation
3) recalculate the good will
- Consideration Paid - Book Value of Investee’s Net Assets = Acquisition Differential
- Acquisition Differential +/- FV Differentials* = Goodwill
Case Facts to Look For
* Look for case facts on fair value on intangibles such as technology, customer lists etc.
* Look for assets that may not have been recoded on the balance sheet of the acquiree such as tax
losses or internally developed technology
* Look for assets that may have incorrectly been separated from goodwill such as the value of
employees, brand, etc.
* Look for liabilities that have not been included in the purchase price allocation such as taxes
payable, lawsuits, environmental liabilities, warranties etc.
Impairment of loans or receivable
ASPE: Go through impairment indicators
IFRS: 5.5.3 Subject to paragraphs 5.5.13–5.5.16, at each reporting date, an entity shall measure the loss allowance for a financial instrument at an amount equal to the lifetime expected credit losses if the credit risk on that financial instrument has increased significantly since initial recognition.
–> then measurment of expected credit losses IFRS.17
