Financial Reporting (ASPE)

Question 1

Accounts Receivable

Answer 1

*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 2

Inventory Valuation

Answer 2

*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 3856.05(h), .16, .17

Question 3

Inventory Costs

Answer 3

• 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 4

Internally Generated Intangible Assets - R&D

Answer 4

• 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 5

Goodwill and Intangible Assets - Amortization

Answer 5

• 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 6

Investments

Answer 6

• 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 7

Financial Instruments - Impairment

Answer 7

• 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 8

Revenue Recognition - Consignment Sales

Answer 8

• 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 9

Asset Criteria

Answer 9

Definition of an asset:
* Future benefit
* Entity can control the benefit
* Event that caused benefit already occurred

Reference: ASPE 1000.25

Question 10

PPE - Betterments

Answer 10

• 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 11

Non-Monetary Transactions

Answer 11

• 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 12

Impairment of Long-Lived Assets

Answer 12

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 13

Accounting for Subsidiaries

Answer 13

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 14

PPE - Costs

Answer 14

• 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 15

Capital Lease Criteria - Lessee

Answer 15

• 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 16

Capital Lease Criteria - Lessor

Answer 16

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 17

Types of Capital Leases - Lessor

Answer 17

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 18

Compound Financial Instruments

Answer 18

• 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 19

Revenue Recognition - Effect of Uncertainties (Returns)

Answer 19

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 19

Revenue Recognition - Completed Contract Method

Answer 19

• 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 20

Revenue Recognition - Percentage of Completion Method

Answer 20

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 21

Inventory Measurement - Cost Formulas (Specific Identification)

Answer 21

• 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 22

Inventory Measurement - Allocation of Overhead

Answer 22

• 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 23

Intangible Assets

Answer 23

• 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 24

Lease Inducements

Answer 24

• 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 25

Revenue Recognition Criteria

Answer 25

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 26

Revenue Recognition - Performance Criteria

Answer 26

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 27

Revenue Recognition - Collectability Criteria

Answer 27

• 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 28

Revenue Recognition - Multiple Deliverables

Answer 28

• 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 29

Government Assistance

Answer 29

• 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 30

Discontinued Operations

Answer 30

• 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 31

Assets Held for Sale

Answer 31

• 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 32

Accounting Changes - Change in Estimate

Answer 32

• 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 33

Related Party Transactions

Answer 33

• 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 34

Subsequent Events

Answer 34

• 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 35

Lease Accounting - Land & Building

Answer 35

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 36

Stock Options

Answer 36

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

Question 36

Contingencies

Answer 36

• 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 37

Stock Appreciation Rights

Answer 37

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