Financial reporting

Question 1

Borrowing costs - PPE IFRS

Answer 1

IAS 23 Borrowing Costs requires the
capitalization of borrowing costs (such as interest paid on any financing arrangements) directly
attributable to the acquisition, construction, or production of a qualifying asset. Had these acquisition,
construction, or production expenditures not been incurred, an entity’s borrowing costs would be
lower.

Question 2

Qualifying assets - PPE

Answer 2

Qualifying assets are those that take a substantial period of time to get ready for their intended use or
sale.
-likely to include tangible non-current assets that are being constructed
- intangible assets during the development period.
- Inventory may be a qualifying asset if the criteria are met
- inventory purchased for resale are specifically excluded.
judgment must be exercised in determining whether the length of time test is met and whether interest should be capitalized.

Question 3

Recognition of a provision- contingent liability

Answer 3

A contingent liability is considered a provision when: * The entity has a present obligation arising because of a past event. * It is considered probable that the entity will have an outflow of economic resources. * The entity can make a reliable estimate of the outflow of economic resources.

Question 4

Accounts receivable

Financial Reporting (ASPE)

Answer 4

Accounts receivable (ASPE)
* Considered a financial instrument (financial asset), as it represents a contractual right to receive cash or another financial asset from another party
* As such, accounts receivable must be tested for impairment at the end of the reporting period if significant adverse changes during the period cast doubt on collectability
* If impaired, then should be written down to the amount expected to be collected through the use of an allowance account
* The amount of the reduction shall be recognized as a bad debt expense in net income.

Reference: ASPE 3856.05(h), .16, .17

Question 5

Inventory valuation

Financial Reporting (ASPE)

Answer 5

Inventory valuation (ASPE)
* Inventories shall be measured at the lower of cost and net realizable value (NRV).
* The cost of inventories shall comprise all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition.
* NRV is the estimated selling price in the ordinary course of business less estimated selling costs
* Estimates of NRV are based on the most reliable evidence available, at the time the estimates are made, of the amount the inventories are expected to realize upon sale.

Reference: ASPE 3031.07, .10-12, .29

Question 6

Inventory costs

Financial Reporting (ASPE)

Answer 6

Inventory costs (ASPE)
* The cost of inventories shall comprise all purchase, conversion and other costs incurred in bringing the inventories to their present location and condition
* Trade discounts, rebates and other similar items are deducted in determining the costs of purchase
* Storage, administrative overhead, and selling costs are specifically excluded from the cost of inventories

Reference: ASPE 3031.11, .12, .17

Question 7

Internally generated intangible assets – R&D

Financial Reporting (ASPE)

Answer 7

Internally generated intangible assets – R&D (ASPE)
* Research costs are always expensed when incurred
* Accounting policy choice to either capitalize or expense development costs
* Development costs can be capitalized if all of the following exist:
o Technically feasible
o Intention to complete it
o Ability to use or sell it
o Availability of adequate technical, financial and other resources to complete the development
o Ability to reliably measure the expenditures attributed
o Probable future economic benefits will be generated

Reference: ASPE 3064.37, .40, .41

Question 8

Goodwill and intangible assets – Amortization

Financial Reporting (ASPE)

Answer 8

Goodwill and intangible assets – Amortization (ASPE)
* Intangibles are to be amortized over their estimated useful lives unless they are considered to have an indefinite life
* Assets with indefinite lives are not to be amortized until the life is no longer considered indefinite (however it must still be tested for impairment)
* Amortization method and useful life should be reviewed annually
* The expected useful life must consider:
o expected use of the asset,
o expected useful life of related assets,
o contractual, legal and regulatory provisions and other economic factors

Reference: ASPE 3064.56, .57, .61

Question 9

Investments

Financial Reporting (ASPE)

Answer 9

Investments (ASPE)
* Investments subject to significant influence can be accounted for using the equity or cost method
* Investments without significant influence:
o Not quoted on an active market – accounted for using cost method
o Quoted on active market – accounted for at fair value

Reference: ASPE 3051 and 3856.11 - .15

Question 10

Financial instruments – Impairment

Financial Reporting (ASPE)

Answer 10

Financial instruments – Impairment (ASPE)
* Financial instruments tested for impairment at the end of each reporting period. Where impairment exists, reduce the carrying value to the highest of:
o Present value (PV) of cash flows expected from holding the asset
o Net realizable value (if asset sold)
o Amount entity expects to realize from exercising its right to collateral
* Impairment can be reversed if asset subsequently recovers in value

Reference: ASPE 3856.16 - .19

Question 11

Revenue recognition – Consignment sales

Financial Reporting (ASPE)

Answer 11

Revenue recognition – Consignment sales (ASPE)
* Consignment sales include goods shipped but not yet billed
* They could be returned if not sold or only billed for to the extent sold
* Performance is not considered complete upon delivery for such goods, as the risks and rewards are deemed not to have been transferred from the seller to the buyer because of the seller’s continuing involvement
* As such, revenue cannot be recognized up until either the goods can no longer be returned or a payment is made in regards to them

Reference: ASPE 3400.13 - .15

Question 12

Asset criteria

Financial Reporting (ASPE)

Answer 12

Asset criteria (ASPE)
Definition of an asset:
* Future benefit
* Entity can control the benefit
* Event that caused benefit already occurred

Reference: ASPE 1000.25
 

Question 13

PPE – Betterments

Financial Reporting (ASPE)

Answer 13

PPE – Betterments (ASPE)
* A “betterment” enhances service potential (increase in physical output or service capacity, associated operating costs are lowered, useful life is extended, or quality of output is improved)
* If the expenditure can be classified as a betterment  capitalize asset
* If the expenditure cannot be classified as a betterment  expense as repair and maintenance

Reference: ASPE 3061.14

Question 14

Non-monetary transactions

Financial Reporting (ASPE)

Answer 14

Non-monetary transactions (ASPE)
* Asset exchanged in a non-monetary transaction should be measured at the more reliably measurable of the fair value of the asset given up and the fair value of the asset received, unless the transaction lacks commercial substance or neither the fair value of the asset received nor the fair value of the asset given up is reliably measurable, in which case, it should be measured at the carrying value of the asset given up
* A non-monetary transaction has commercial substance when the entity’s future cash flows are expected to change significantly as a result of the transaction, i.e.
o the risk, timing and amount of the future cash flows of the asset received differ significantly from the risk, timing and amount of the cash flows of the asset given up; or
o the entity-specific value of the asset received differs from the entity-specific value of the asset given up, and the difference is significant relative to the fair value of the assets exchanged

Reference: ASPE 3831.06, .07, .11

Question 15

Non-monetary transactions

Financial Reporting (IFRS)

Answer 15

Non-monetary transactions (IFRS)
* Asset exchanged in a non-monetary transaction should be measured at the more reliably measurable of the fair value of the asset given up and the fair value of the asset received, unless the transaction lacks commercial substance or neither the fair value of the asset received nor the fair value of the asset given up is reliably measurable, in which case, it should be measured at the carrying value of the asset given up
* A non-monetary transaction has commercial substance when the entity’s future cash flows are expected to change significantly as a result of the transaction, i.e.
o the risk, timing and amount of the future cash flows of the asset received differ significantly from the risk, timing and amount of the cash flows of the asset given up; or
o the entity-specific value of the asset received differs from the entity-specific value of the asset given up, and the difference is significant relative to the fair value of the assets exchanged

Reference: IAS 16.24-.26

Question 16

Impairment of long-lived assets

Financial Reporting (ASPE)

Answer 16

Impairment of long-lived assets (ASPE)
* Steps:
1. Determine if factors indicating impairment exist
2. Group asset with other assets/liabilities to form group at the lowest level that generates cash flow (i.e. cash generating unit)
3. Determine if there is impairment by comparing net book value to recoverable amount (i.e. undiscounted future cash flows)
4. Calculate impairment by comparing carrying amount to fair value
* Cannot reverse write-downs

Reference: ASPE 3063.04-.09, .12, .18
 

Question 17

Impairment of assets

Financial Reporting (IFRS)

Answer 17

Impairment of assets (IFRS)
* An entity is required to assess whether there are any indicators of impairment at the end of each reporting period. If an indication of impairment exists, the asset will need to be tested for impairment.
* To test for impairment, compare the asset’s recoverable amount to the carrying value. The extent to which the carrying value exceeds the recoverable amount (if any) is the impairment loss.
* Recoverable amount: Higher of the fair value less costs to sell and value in use
o Fair value less costs to sell: price that would be received to sell an asset or paid to transfer a liability between market participants, less incremental costs directly attributable to the disposal of the asset (excluding finance cost and income tax expense)
o Value in use: Present value of the future cash flows from the continuing use of the asset and its ultimate disposal
* Impairment can be reversed if the asset subsequently recovers in value, but not to more than the “would be” value had the impairment not been recognized.
Reference: IAS 36

Question 18

Investments – Equity method

Financial Reporting (IFRS)

Answer 18

Investments – Equity method (IFRS)
* IAS 28: an entity with significant influence over an investee shall treat the investee as an associate and account for its investment in the associate using the equity method
* Significant influence can be demonstrated by owning (directly or indirectly) 20% or more of the voting power of the investee
* The entity may be able to demonstrate influence, even with less than 20% ownership. Evidence of influence can include:
o Representation on the board of directors
o Participation in policy-making processes
o Material transactions between the entity and its investee
o Provision of essential technical information
* Under the equity method, the investment is initially recognized at cost, and is adjusted for the post-acquisition change in the investor’s share of the investee’s net assets

Reference: IAS 28

Question 19

Accounting for subsidiaries

Financial Reporting (ASPE)

Answer 19

Accounting for subsidiaries (ASPE)
An enterprise can make an accounting policy choice to account for its subsidiaries using one of the following methods:
* Cost method
* Equity method
* Consolidation method

** Once a method has been selected, it must be applied consistently (i.e. all subsidiaries must be accounted for using the same method)

Reference: ASPE 1591, ASPE 3051

Question 20

PPE – Costs

Financial Reporting (ASPE)

Answer 20

PPE – Costs (ASPE)
* PPE costs represent the amount of consideration given up to acquire, construct, develop, or better a PPE and comprise of all costs directly attributable to the acquisition, construction, development or betterment, including installing it at the location and in the condition necessary for its intended use
* PPE costs include direct construction or development costs (such as materials and labour) and overhead / carrying costs directly attributable to the construction or development activity
* The cost of each item of PPE acquired as part of a basket purchase (i.e. when a group of assets is acquired for a single amount) is determined by allocating the price paid for the basket to each item on the basis of its relative fair value at the time of acquisition

Reference: ASPE 3061.03, .06, .08

Question 21

Capital lease criteria – Lessee

Financial Reporting (ASPE)

Answer 21

Capital lease criteria – Lessee (ASPE)
* Must meet one of the criteria:
o Transfer of ownership or bargain purchase option at the end of the lease term
o Lease term at least 75% of economic life of asset
o PV of minimum lease payments at least 90% of FV of leased asset
 Discount rate = lower of lessee’s incremental borrowing rate and implicit rate in the lease

Reference: ASPE 3065.06

Question 22

Capital lease criteria – Lessor

Financial Reporting (ASPE)

Answer 22

Capital lease criteria – Lessor (ASPE)
* Capital lease if all of the following exist:
* Credit risk is normal
* Unreimbursable costs are estimable
* Any one of the following criteria are met:
o Transfer of ownership or bargain purchase option at the end of the lease term
o Lease term at least 75% of economic life of asset
o PV of minimum lease payments at least 90% of FV of leased asset
 Discount rate = implicit rate in the lease

Reference: ASPE 3065.07

Question 23

Types of capital leases – Lessor

Financial Reporting (ASPE)

Answer 23

Types of capital leases – Lessor (ASPE)
* Sales-type lease
o Arise when a dealer uses leasing as a way to sell their products
o Record as sale
* Direct financing lease
o At inception, FV of the leased property is equal to its carrying value
o Usually arises when a lessor acts as intermediary between manufacturer and lessee
o Record as lease receivable (payments to be received and guaranteed residual value, if any)
o Difference between lease receivable and carrying value should be recorded as unearned finance income
o Finance income will be recognized each year

Reference: ASPE 3065.29, .30, .37

Question 24

Compound Financial Instruments

Financial Reporting (ASPE)

Answer 24

Compound Financial Instruments (ASPE)
* Financial instruments, or their component parts, should be classified as a liability or equity in accordance with the substance of the contractual arrangement on initial recognition and the definitions of a liability and an equity instrument
* Financial instruments that contain both a liability and an equity element, including warrants or options issued with and detachable from a financial liability, should be separated into component parts, as follows:
o The equity component is measured as zero, i.e. the entire proceeds of the issue are allocated to the liability component; or
o The less easily measurable component is allocated the residual amount after deducting from the entire proceeds of the issue the amount determined for the component that is more easily measurable
* The sum of the carrying amounts assigned to the liability and equity components on initial recognition is always equal to the carrying amount that would be ascribed to the instrument as a whole, i.e. no gain or loss can arise from recognizing and presenting the components of the instrument separately

Reference: ASPE 3856.20 - .22

Question 25

Revenue recognition – Completed contract method

Financial Reporting (ASPE)

Answer 25

Revenue recognition criteria – Completed contract method (ASPE)
* The completed contract method would only be appropriate when performance consists of the execution of a single act or when the enterprise cannot reasonably estimate the extent of progress toward completion.
* NOTE: There is no equivalent recognition criteria under IFRS.

Reference: ASPE 3400.18

Question 26

Revenue recognition – Percentage of completion method

Financial Reporting (ASPE)

Answer 26

Revenue recognition criteria – Percentage-of-completion method (ASPE)
The percentage-of-completion method is appropriate when:
* performance consists of the execution of more than one act, and
* revenue would be recognized proportionately by reference to the performance of each act.

For practical purposes, when services are provided by an indeterminate number of acts over a specific period of time, revenue would be recognized on a straight line basis over the period unless there is evidence that some other method better reflects the pattern of performance.

The amount of work accomplished would be assessed by reference to measures of performance that are reasonably determinable and relate as directly as possible to the activities critical to the completion of the contract.

Reference: ASPE 3400.17

Question 27

Revenue recognition – Effect of uncertainties (returns)

Financial Reporting (ASPE)

Answer 27

Revenue recognition – Effect of uncertainties (returns) (ASPE)
Recognition of revenue requires that the revenue is measurable and that ultimate collection is reasonably assured.
* If significant and unpredictable amounts of goods being returned, do not recognize revenue
* If the amount of returns can be reasonably estimated based upon experience, it may be possible to provide for an allowance for a returns expense.

Reference: ASPE 3400.19-.21

Question 28

Inventory measurement – Cost formulas (specific identification)

Financial Reporting (ASPE)

Answer 28

Inventory measurement – Cost formulas (specific identification) (ASPE)
* The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects shall be assigned by using specific identification of their individual costs.

Reference: ASPE 3031.22

Question 29

Inventory measurement – Allocation of overhead

Financial Reporting (ASPE)

Answer 29

Inventory measurement – Allocation of overhead (ASPE)
* The allocation of fixed production overheads to the costs of conversion is based on the normal capacity of the production facilities.
* The actual level of production may be used if it approximates normal capacity.
* Unallocated overheads are recognized as an expense in the period in which they are incurred.

Reference: ASPE 3031.14

Question 30

Intangible assets

Financial Reporting (ASPE)

Answer 30

Intangible assets (ASPE)
* In order to meet the definition of an intangible asset, assets must meet the identifiability, control, and future economic benefits tests.
* An asset meets the identifiability criterion in the definition of an intangible asset when it:
o is separable, or
o arises from contractual or other legal rights
* An entity controls an asset if the entity has the power to obtain the future economic benefits flowing from the underlying resource and to restrict the access of others to those benefits.
* An intangible asset shall be recognized if, and only if:
o it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and
o the cost of the asset can be measured reliably.

Reference: ASPE 3064.12, .13, .21

Question 31

Lease inducements

Financial Reporting (ASPE)

Answer 31

Lease inducements (ASPE)
* Lease inducements are an inseparable part of the lease agreement and, accordingly, are accounted for as reductions of the lease expense over the term of the lease.

Reference: ASPE 3065.27

Question 32

Internally generated intangible assets

Financial Reporting (IFRS)

Answer 32

Internally generated intangible assets (IFRS)
* Research is defined as original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding
* Development is defined as the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems, or services before the start of commercial production or use
* Research costs are always expensed
* Development costs must be capitalized if all of the following exist:
o Technically feasible
o Intention to complete it
o Ability to use or sell it
o Probable future economic benefits will be generated
o Availability of adequate technical, financial and other resources
o Ability to reliably measure the expenditures attributed
* Costs meeting the tangible asset criteria should not be capitalized as intangible

Reference: IAS 38.4, .8, .54, .57

Question 33

Intangible assets – Amortization

Financial Reporting (IFRS)

Answer 33

Intangible assets – Amortization (IFRS)
* Intangibles are to be amortized over their estimated useful lives unless they are considered to have an indefinite life
* Assets with indefinite lives are not to be amortized until the life is no longer considered indefinite, but they must be tested for impairment annually
* Assets with definite lives can be reported following either the cost model or the revaluation model
* Amortization method and useful life should be reviewed annually
* Consider expected use, life of related assets, contractual provisions, product life cycles and other economic factors

Reference: IAS 38.72, .88, .97, .104, .107, .109

Question 34

Intangible assets – Definition and recognition

Financial Reporting (IFRS)

Answer 34

Intangible assets – Definition and recognition (IFRS)
* To meet the definition of an intangible asset the item must be: identifiable, the entity must have control over the future benefit and the item must meet the recognition criteria
* The asset is identifiable if it either:
o It can be separated from the entity
o Arises from contractual, legal right that allow it to be transferrable or separable
* The entity controls the asset if it has the power to obtain future economic benefits
* Recognition criteria:
o Probable that the expected future economic benefits will flow to the entity
o Cost of the asset can be measured reliably

Reference: IAS 38.12, .13, .17 .21

Question 35

Discontinued operations

Financial Reporting (IFRS)

Answer 35

Discontinued operations (IFRS)
* A component of an entity where its operations and cash flows can be clearly distinguished operationally and for financial reporting purposes, from the rest of the entity and it has been disposed of or classified as held for sale
* Report results of discontinued operations on the statement of comprehensive income for current and prior periods, net of tax, segregated as follows:
o the post-tax profit or loss of discontinued operations
o the post-tax gain or loss recognized on the measurement to fair value less costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operation.

Reference: IFRS 5.03, .31 - .33

Question 36

Assets held for sale

Financial Reporting (IFRS)

Answer 36

Assets held for sale (IFRS)
* 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

Question 37

Borrowing costs

Financial Reporting (IFRS)

Answer 37

Borrowing costs (IFRS)
* Interest and other costs that an entity incurs in connection with the borrowing of funds
* Capitalize borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset
* Possible qualifying assets:
o Inventories
o Manufacturing plants
o Intangible assets
o Investment properties

Reference: IAS 23.05, .07, .08

Question 38

Share-based compensation

Financial Reporting (IFRS)

Answer 38

Share-based compensation (IFRS)
* For equity-settled share-based payment transactions, the entity shall measure the goods or services received, and the corresponding increase in equity, directly, at the fair value of the goods or services received, unless that fair value cannot be estimated reliably, in which case fair value of the equity instruments granted is used
* Transactions with employees and others providing similar services require use of the fair value of the equity instruments granted measured at grant date, because typically it is not possible to estimate reliably the fair value of the services received

Reference: IFRS 2.10, .11

Question 39

Revenue recognition criteria

Financial Reporting (ASPE)

Answer 39

Revenue recognition criteria (ASPE)
Revenue from sales and service transactions shall be recognized when:
* Performance is satisfied (risks and rewards transferred, significant acts complete, no continuing managerial involvement)
* Consideration is measurable
* Collection reasonably assured

Reference: ASPE 3400.04 - .06

Question 40

Revenue recognition – performance criteria

Financial Reporting (ASPE)

Answer 40

Revenue recognition – performance criteria (ASPE)
Performance would be regarded as being achieved when all of the following criteria have been met:
* Persuasive evidence of an arrangement exists
* Delivery has occurred or services rendered
* Price to the buyer is fixed or determinable

In determining if the seller’s price to the buyer is fixed or determinable, an entity would consider the impact of the following factors:
* Cancellable sales arrangements;
* Right of return arrangements;
* Price protections and/or inventory credit arrangements; and
* Refundable fee for service arrangements.

Reference: ASPE 3400.07, .10

Question 41

Revenue recognition – collectability criteria

Financial Reporting (ASPE)

Answer 41

Revenue recognition – collectability criteria (ASPE)
* Recognition of revenue requires that the revenue is measurable and that ultimate collection is reasonably assured
* When there is reasonable assurance of ultimate collection, revenue is recognized even though cash receipts are deferred
* When there is uncertainty as to ultimate collection, recognize revenue only as cash is received

Reference: ASPE 3400.19

Question 42

Revenue recognition – multiple deliverables

Financial Reporting (ASPE)

Answer 42

Revenue recognition – multiple deliverables (ASPE)
* Evaluate all deliverables to determine whether they represent separate deliverables
* If you can identify separate deliverables, revenue recognition criteria should be assessed for each deliverable separately
* If two or more transactions are linked together in such a way the commercial effect can’t be understood without reference to the series of transactions as a whole, then the recognition criteria will be applied to the series of transactions as one

Reference: ASPE 3400.11

Question 43

Government assistance

Financial Reporting (ASPE)

Answer 43

Government assistance (ASPE)
* Assistance for non-capital items:
o Include in net income for period when incurred
o When government assistance relates to expenses of future accounting periods, the appropriate amounts shall be deferred and amortized to income as related expenses are incurred.
* Assistance for capital items:
o Reduce cost of capital item with any depreciation computed on the net amount; or
o Defer and amortize on the same basis of depreciation
* Provided there is reasonable assurance that the enterprise has complied and will continue to comply with the conditions for receipt of the government assistance, the accrual basis of accounting for the assistance is appropriate

Reference: ASPE 3800

Question 44

Discontinued operation

Financial Reporting (ASPE)

Answer 44

Discontinued operation (ASPE)
* A discontinued operation is a component of an entity where its operations and cash flows can be clearly distinguished from the rest of the entity and it has been disposed of or classified as held for sale
* Report results of discontinued operations on I/S for current and prior periods, net of tax

Reference: ASPE 3475.03, .30

Question 45

Assets held for sale

Financial Reporting (ASPE)

Answer 45

Assets held for sale (ASPE)
* Long-lived assets to be disposed of other than by sale should continue to be classified as held and used until they are disposed of
* Long-lived assets 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 It’s available for immediate sale in its present condition
o Steps to locate a buyer and complete the sale have started
o The sale is probable and expected to occur within a year
o It’s being actively marketed at a reasonable price
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
* Asset held for sale should be measured at lower of carrying amount or fair value less cost to sell, and should not be amortized

Reference: ASPE 3475.04, .08, .13

Question 46

Accounting changes – change in estimate

Financial Reporting (ASPE)

Answer 46

Accounting changes – change in estimate (ASPE)
* The use of reasonable estimates is an essential part of the preparation of financial statements and does not undermine their reliability
* An estimate may need revision if changes occur in the circumstances on which the estimate was based or as a result of new information or more experience
* By its nature, the revision of an estimate does not relate to prior periods and is not the correction of an error.
* The effect of a change in an accounting estimate is recognized prospectively by including it in net income in:
o the period of the change, if the change affects that period only; or
o the period of the change and future periods, if the change affects both.

Reference: ASPE 1506.20 - .23

Question 47

Related Party Transactions

Financial Reporting (ASPE)

Answer 47

Related Party Transactions (ASPE)
* For transactions carried out in the normal course of operations
o monetary related party transactions, or non-monetary RPT with commercial substance should be recorded at their exchange amount, unless
 it is a non-monetary RPT that is an exchange of a product/property to be resold in the same line of business. This type of RPT will be recorded at carrying amount, adjusted for any additional consideration/
* For transaction NOT in the normal course of business
o monetary RPT, or non-monetary RPT with commercial substance should be recorded at their exchange amount, IF
 the change in ownership interest in item transferred/service provided is substantive, and
 the exchange amount is supported by independent evidence
* When the RPT has been measured at carrying amount, any difference between the carrying amounts of items exchanged, together with any related tax amounts, shall be booked to equity.

Reference: ASPE 3840.08-.09, .18, .22, .29

Question 48

Lease Accounting –
Land & Building

Financial Reporting (ASPE)

Answer 48

Lease Accounting – Land & Building (ASPE)
When a lease contains both land and building, it must first be determined whether the terms allow ownership to pass or provide for a bargain purchase option.
o If yes, the lessee will capitalize the land separately from the building, based upon fair values.
o If no, is the FV of the land at the inception of the lease significant in relation to the total FV of the leased property?
 If yes, the land and building(s) are considered separately for purposes of classification. The lessee and lessor allocate the minimum lease payments between the land and building(s) in proportion to their fair values. Both parties classify the portion of the lease applicable to land as an operating lease.
 If no, the land and building are considered a single unit, and the economic life of the building is considered the economic life of the unit.

Reference: ASPE 3065.70 - .72

Question 49

Subsequent Events

Financial Reporting (ASPE)

Answer 49

Subsequent Events (ASPE)
* In general, there are two types of subsequent events:
o those that provide further evidence of conditions that existed at the financial statement date; and
o those that are indicative of conditions that arose subsequent to the financial statement date.
* Financial statements shall be adjusted when events occurring between the date of the financial statements and the date of their completion provide additional evidence relating to conditions that existed at the date of the financial statements.
* Disclosure shall be made of those events occurring between the date of the financial statements and the date of their completion that do not relate to conditions that existed at the date of the financial statements but:
o cause significant changes to assets or liabilities in the subsequent period; or
o will, or may, have a significant effect on the future operations.

Reference: ASPE 3820.04, .07, .10
 

Question 50

Contingencies

Financial Reporting (ASPE)

Answer 50

Contingencies (ASPE)
* Existing condition involving uncertainty as to a possible gain or loss
* Uncertainty will result in a range of probabilities
o likely
o unlikely
o not determinable
* Contingent losses
o must be accrued if the future event is likely and a reasonable estimate of the loss can be made
o disclosed if the future event is likely but a reasonable estimate of the loss CANNOT be made
o disclosed if the future event is not determinable
* Contingent gains
o must NOT be accrued
o disclosed if the future event is likely

Reference: ASPE 3290

Question 51

Revenue Recognition

Financial Reporting (IFRS)

Answer 51

Revenue Recognition (IFRS)
In a transaction involving the sale of goods or provision of services, the amount of revenue to recognize and how it is measured is determined by applying the following five steps:
* identify the contract with the customer
* identify separate performance obligations in the contract
* determine the overall transaction price
* allocate the transaction price to the separate performance obligations in the contract
* determine when the performance obligation(s) is satisfied, as revenue is recognized when (or as) the entity satisfies the performance obligation
o revenue is recognized as control is passed, either over time or at a point in time

Reference: IFRS 15

Question 52

Accounting Policies, Changes, Errors

Financial Reporting (IFRS)

Answer 52

Accounting Policies, Changes, Errors (IFRS)
Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. Changes in accounting estimates result from new information or new developments and, accordingly, are not corrections of errors.

Only change a policy if:
* Standard/interpretation requires it, or
* Change will provide more relevant and reliable information to users
Apply changes to policy retrospectively unless it is impractical.

Changes to accounting estimates should be applied prospectively.

Corrections to errors should be applied retrospectively unless it is impractical

Reference: IAS 8

Question 53

Property, Plant and Equipment

Financial Reporting (IFRS)

Answer 53

Property, Plant and Equipment (IFRS)
Initial recognition if:
* The future economic benefits associated with the asset will flow to the entity, and
* The cost of the asset can be reliably measured.
Initial measure- recorded at cost.
Subsequent measurement
* Carried at cost less accumulated depreciation, and impairment losses, OR
* Carried at revalued amount, i.e. FV, less subsequent depreciation if FV can be reliably measured
o An increase in value is credited to OCI, unless it is a reversal of a revaluation decrease previously recognized as an expense
Significant components are required to be depreciated over their estimated useful life.

Reference: IAS 16

Question 54

Agriculture

Financial Reporting (IFRS)

Answer 54

Agriculture (IFRS)
This standard is intended to apply to the following which relates to agricultural activity
* Biological assets
* Agricultural produce at the point of harvest
* Government grants related to biological assets
Initial recognition if:
* The entity controls the asset as a result of a past event.
* The future economic benefits associated with the asset will flow to the entity, and
* The cost of the asset can be reliably measured.
Initial measurement at:
* FV, less estimated point of sale costs
* Cost, if no reliable measurement of FV is available.
Subsequent measurement
* FV, less estimated point of sale costs
* Cost, less accumulated depreciation if no reliable measurement of FV is available.
Reference: IAS 41

Question 55

Revenue recognition – Identification of the performance obligations

Financial Reporting (IFRS)

Answer 55

Revenue Recognition – Identification of the performance obligations (IFRS)
Performance obligations are identified as each promise to transfer to the customer either:
* a good or service (or bundle of goods or services) that is distinct; or
* a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer
A good or service that is promised to a customer is distinct if:
* the customer can benefit from the good or service on its own or together with other resources readily available to the customer; and
* the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract
Two or more promises are not separately identifiable if the nature of the promise, within the context of the contract, is to transfer a combined item in which the promised goods or services are inputs.

If a promised good or service is not distinct, it is combined with other promised goods or services until the entity identifies a bundle of goods or services that is distinct.

Reference: IFRS 15.22-.30

Question 56

Provisions, Contingent Liabilities, Contingent Assets

Financial Reporting (IFRS)

Answer 56

Provisions, Contingent Liabilities, Contingent Assets (IFRS)
Provisions- a liability of uncertain timing or amount. May be recognized when:
* The entity has a present legal or constructive obligation as a result of a past event,
* It is probable that an outflow of economic benefits will be required to settle the obligation; and
* A reliable estimate can be made of the amount of the obligation
Contingent liabilities  NOT recognized:
* A possible obligation that arises from past events, whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly in the control of the entity;
* A present obligation that arises from past events is not recognised when an outflow of future economic benefits is not probable or the amount of the obligation cannot be measured reliably.
Contingent assets NOT recognized:
* – 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.

Reference: IAS 37

Question 57

Warranties

Financial Reporting (IFRS)

Answer 57

Warranties (IFRS)
* Two types of warranties:
o those that provide a customer with assurance that the related product will function as the parties intended because it complies with agreed-upon specifications
o those that provide the customer with a service in addition to the assurance that the product complies with agreed-upon specifications
* Warranty shall be accounted for in accordance with IAS 37 (Provisions, Contingent Liabilities and Contingent Assets) if:
o The customer does not have the option to purchase a warranty separately, and
o The warranty does not provide the customer with a service in addition to the assurance that the product complies with agreed-upon specifications.

Reference: IFRS 15.B28 – B31

Question 58

Business combinations

Financial Reporting (IFRS)

Answer 58

Business combinations (IFRS)
* For a business combination to occur, there must be:
o an acquirer who has gained control, and
o a business that has been purchased
 A business is defined as “an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing goods or services to customers, generating investment income (such as dividends or interest) or generating other income from ordinary activities.”
 “Determining whether a particular set of assets and activities is a business should be based on whether the integrated set is capable of being conducted and managed as a business by a market participant.”

Reference: IFRS 3

Question 59

Earnings per share (EPS)

Financial Reporting (IFRS)

Answer 59

Earnings per share (EPS) (IFRS)
* Basic EPS: Net earnings available to common shareholders / weighted average common shares outstanding (WACSO) during the year
* Diluted EPS: Hypothetical measure of company earnings attributable to each common shareholder assuming all dilutive securities have been converted to common shares; dilutive elements must be ranked from most to least dilutive in completing the diluted EPS calculation.
o Stock options: the difference between the number of ordinary shares issued from exercising the options and the number of ordinary shares that would have been issued at the average market price during the period — difference is treated as an issue of ordinary shares for no consideration (no impact on the earnings in the EPS calculation).
o Convertible bonds: dilutive impact if the after-tax interest per share that would be issued is less than the basic EPS — the after-tax interest on the bond increase earnings and the number of shares issued on conversion is added to the WACSO.

Reference: IAS 33

Question 60

Capital lease criteria – Lessee

Financial Reporting (IFRS)

Answer 60

Capital lease criteria – Lessee (IFRS)
* A lease is a contract that conveys the right to control the use of an identified asset for a period of time in exchange for consideration
* Expensing lease payments is only available for short-term leases or those with a low underlying asset value
* Recognition:
o A right of use asset and a lease liability are recorded at the commencement date of the lease
* Initial measurement:
o Lease liability is equal to the present value of future lease payments, discounted using the rate implicit in the lease (if unknown, use lessee’s incremental borrowing rate)
o Right of use asset initially includes initial direct costs, dismantling costs, and value of the lease liability, less any lease incentives
* Subsequent measurement:
o Lease liability increases to reflect interest and decreases to reflect payments
o Right of use asset is amortized over its useful life (if asset is transferred to lessee at end of lease term or lessee is expected to exercise bargain purchase option) or the lease term

Reference: IFRS 16

Question 61

Contributions — revenue recognition

Financial Reporting (ASNPO)

Answer 61

Contributions — revenue recognition (ASNPO)
* Contributions of materials and services can be recognized only when fair value can be reasonably estimated and when the materials and services are used in the normal course of operations and would otherwise have been purchased.
* Fair value of assets is estimated using market or appraisal values. Fair value of contributed materials and services is determined by comparing to the purchase of similar materials and services.
* Recognition of contributions is not required; however, the criteria for recognition must be met if an NPO wishes to record contributions. Once an accounting method has been determined, it must be applied consistently to all periods and for all types of contributions.
* The nature and amount of the contributions must be disclosed in the financial statements.

Restricted contributions — deferral method Reference: ASNPO 4410.31, .33
* Funds are not recognized as revenue until they are used.
* If the funds are used for capital assets that are amortized, they are deferred and recognized over time.
* Contributions are recognized as deferred contributions on the financial statements.

Restricted contributions — restricted fund method Reference: ASNPO 4410.57, .62
* At least one restricted fund, and one general fund, must be used.
* Contributions in the restricted fund can be recognized as revenue upon receipt.

Reference: ASNPO 4410.16, .19-.20, .24

Question 62

Capital lease criteria – Lessor

Financial Reporting (IFRS)

Answer 62

Capital lease criteria – Lessor (IFRS)
* Each lease is classified as financing or operating:
o Financing — Substantially all of the risks and rewards incidental to ownership of the asset are transferred to the lessee
o Operating — No substantial transfer of the risks and rewards incidental to ownership of the asset to the lessee
* Finance lease:
o Initially measured as a receivable equal to the net investment in the lease, which is future lease payments discounted using the interest rate implicit in the lease
o Finance income is recognized over the lease term at a constant rate of return
* Operating lease:
o Lease payments received are recognized in income either on the straight-line basis or another systematic basis

Reference: IFRS 16

Question 63

Foreign currency transactions

Financial Reporting (IFRS)

Answer 63

Foreign currency transactions (IFRS)
* Initial measurement:
o At the functional currency, by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction.
* Subsequent measurement:
o Monetary items should be translated at the closing rate on the financial reporting date.
o Non-monetary items measured at historical cost should be translated using the exchange rate on the date of the transaction.
o Non-monetary items measured at fair value should be translated using the exchange rate on the date when the fair value was measured.

Reference: IAS 21.21-23

Question 64

Stock options

Financial Reporting (ASPE)

Answer 64

Stock options (ASPE)
* Initial measurement:
o The fair value is initially estimated based on the stock price at the grant date of stock options.
o The stock options are recorded as contributed surplus, which is an equity account.
* Subsequent measurement:
o The fair value of an option estimated at the grant date is not subsequently adjusted for changes in the price of the underlying stock or its volatility, the life of the option, dividends on the stock, or the risk-free interest rate.
o The compensation cost is recognized as an expense over the period in which the related employee services are rendered.
o An entity can choose whether to set up full compensation cost in the year of issuance or use the best available estimate of the stock options expected to be exercised.

Reference: ASPE 3870.24-.51

Question 65

Stock appreciation rights

Financial Reporting (ASPE)

Answer 65

Stock appreciation rights (ASPE)
* Initial measurement:
o The initial compensation expense is calculated as the amount that the market value of the shares of the enterprise’s stock covered by the grant exceeds the value of the rights specified.
o The compensation cost is recorded as a liability.
* Subsequent measurement:
o Increases or decreases in the market value of those shares between the date of grant and the measurement date result in a change to compensation expense.
o The compensation cost is recognized as an expense over the period in which the related employee services are rendered.
o An entity can choose whether to set up full compensation cost in the year of issuance or use the best available estimate of the rights expected to be exercised.

Reference: ASPE 3870.24-.51