Handbook and Analysis Flashcards
ASPE Revenue recognition
**ASPE 3400.A45 - A48 **
UPFRONT NON-REFUNDABLE FEES OR PAYMENTS
Analyzes whether the fee is a separately identifiable component, using case facts (Analyze)
A45. Enterprises may negotiate arrangements in which they may receive upfront non-refundable fees or payments upon entering into arrangements or on certain specified dates. The fees may be received by the seller for a license or other intangible right or for delivery of products or services, such as joining fees in health-club membership contracts, set-up fees in service contracts and initial fees in supply contracts. In some circumstances, the right, product or service provided in conjunction with the non-refundable fee has no utility to the buyer separate and independent of the seller’s performance of the other elements of the arrangement. In the absence of the seller’s continuing involvement under the arrangement, the buyer would not have paid the fee.
A46. Revenue is deferred when the upfront fee is in exchange for products delivered or services performed that have no utility to the buyer separate and independent of the enterprise’s performance of the other elements of the arrangement.
A47. Supply or service transactions may involve the charge of upfront non-refundable fees with subsequent periodic payments for future products or services. The upfront fees may be wholly or partly an advance payment for future products or services. The ongoing rights or services being provided or products being delivered are essential to the customers receiving the expected benefit of the upfront payment.
A48. In such cases, the upfront fee and the continuing performance obligation related to the services to be provided or products to be delivered are assessed as an integrated package. These upfront fees, even if non-refundable, are earned as the products and/or services are delivered and/or performed and should be deferred and recognized systematically over
**ASPE 3400.04 - 05 **
Identifies the financial reporting issue (Situation)
Analyzes the revenue recognition criteria in relation to case facts:
RECOGNITION
.04 Revenue from sales and service transactions shall be recognized when the requirements as to performance set out in paragraphs 3400.05-.06 are satisfied, provided that at the time of performance ultimate collection is reasonably assured.
.05 In a transaction involving the sale of goods, performance shall be regarded as having been achieved when the following conditions have been fulfilled:
(a) the seller of the goods has transferred to the buyer the significant risks and rewards of ownership, in that all significant acts have been completed and the seller retains no continuing managerial involvement in, or effective control of, the goods transferred to a degree usually associated with ownership; and
(b) reasonable assurance exists regarding the measurement of the consideration that will be derived from the sale of goods, and the extent to which goods may be returned.
.06 In the case of rendering of services and long-term contracts, performance shall be determined using either the percentage of completion method or the completed contract method, whichever relates the revenue to the work accomplished. Such performance shall be regarded as having been achieved when reasonable assurance exists regarding the measurement of the consideration that will be derived from rendering the service or performing the long-term contract.
Performance (Analyze)
Measurement (Analyze)
Collection (Analyze)
Recommends when to record revenue for each customer situation, consistent with analysis (Conclude)
Concludes on the impact of the adjustment on the management group bonus (Conclude)
ASPE Inventory
ASPE 3031.07
.07 The following terms are used in this Section with the meanings specified:
(a) Inventories are assets:
(i) held for sale in the ordinary course of business;
(ii) in the process of production for such sale; gold
(iii) in the form of materials or supplies to be consumed in the production process or in the rendering of services.
(b) Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
(c) Fair value is the amount of the consideration that would be agreed upon in an arm’s length transaction between knowledgeable, willing parties who are under no compulsion to act.
.08 Net realizable value refers to the net amount that an entity expects to realize from the sale of inventory in the ordinary course of business. Fair value reflects the amount for which the same inventory could be exchanged between knowledgeable and willing buyers and sellers in the marketplace. The former is an entity-specific value; the latter is not. Net realizable value for inventories may not equal fair value less costs to sell.
.09 Inventories encompass goods purchased and held for resale (for example, merchandise purchased by a retailer and held for resale, or land and other property held for resale). Inventories also encompass finished goods produced, or work in progress being produced, by the entity and include materials and supplies awaiting use in the production process.
MEASUREMENT OF INVENTORIES
.10 Inventories shall be measured at the lower of cost and net realizable value.
ASPE 1000
When the ownership passes
When to record the inventory, consistent with Analysis
ASPE Notes Receivable
ASPE 3856 (Financial instruments)
**
ASPE 3856.02**
**( Common examples of financial instruments) (Definition), **
.02 Common examples of financial instruments include:
(a) cash;
(b) demand and fixed-term deposits;
(c) commercial paper, bankers’ acceptances, treasury notes and bills;
(d) accounts, notes and loans receivable and payable;
(e) bonds and similar debt instruments, both issued and held as investments;
(f) common and preferred shares and similar equity instruments, both issued and held as investments; and
(g) options, warrants, futures contracts, forward contracts, and swaps.
**ASPE 3856.05 (h) )Definition of financial asset) **
h) A financial asset is any asset that is:
(i) cash;
(ii) a contractual right to receive cash or another financial asset from another party;
(iii) a contractual right to exchange financial instruments with another party under conditions that are potentially favourable; gold
(iv) an equity instrument of another enterprise.
The cost incurred by an enterprise to purchase a right to reacquire its own equity instruments from another party is a deduction from its equity, not a financial asset.
(ii). ASPE 3856.A8,
A8 When part of the consideration given or received in a transaction to acquire or issue a financial instrument in an arm’s length transaction is for something other than the financial instrument, its fair value is estimated using a valuation technique. The fair value of a financial instrument with a non-market rate of interest is not equal to the cash consideration. It can be estimated as the present value of all future cash receipts discounted using the prevailing market rates of interest for a similar instrument (similar as to currency, term, type of interest rate, or other factors) with a similar credit rating. Any difference between the fair value of a financial asset or a financial liability and the cash consideration is recognized immediately in net income unless it qualifies for recognition as some other type of asset or liability. For example, when an enterprise receives an interest-free loan from a government agency, in the absence of evidence to the contrary, the difference between the fair value of the loan and the cash received is accounted for as a government grant (see GOVERNMENT ASSISTANCE, Section 3800). Similarly, when an enterprise extends an interest-free loan to an employee, in the absence of evidence to the contrary, the difference between the fair value of the loan and the cash paid to the employee is accounted for as employee compensation.
ASPE 3856.11 (a) (iv) (Subsequent measurement)
Except for those financial instruments for which paragraphs 3856.14-.14A or 3856.15A apply, at each reporting date, an enterprise shall subsequently measure a financial instrument based on how it initially measured the instrument. If the enterprise initially measured the financial instrument at:
(a) fair value, it shall subsequently measure the instrument as follows:
(i) investments in equity instruments that are quoted in an active market and derivative contracts at fair value in accordance with paragraph 3856.12;
(ii) financial assets and financial liabilities at fair value, if the enterprise elects that fair value measurement shall apply in accordance with paragraphs 3856.13 or 3856.13A;
(iii)investments in equity instruments not quoted in an active market, when originated or acquired in an arm’s length transaction, at cost less any reduction for impairment;
(iv)all other financial assets at amortized cost; and
(v) financial liabilities at amortized cost; gold
(b) cost, it shall subsequently measure the instrument using the cost method less any reduction for impairment.
**ASPE 3856.12 **
An enterprise shall subsequently measure the following financial instruments at fair value without any adjustment for transaction costs it may incur on sale or other disposal:
(a) investments in equity instruments that are quoted in an active market (see paragraphs 3856.A9-. A11); and
(b) derivative contracts other than:
(i) derivatives that are designated in a qualifying hedging relationship in accordance with paragraphs 3856.30-.36 or FOREIGN CURRENCY TRANSLATION, paragraph 1651.39; and
(ii) derivatives that are linked to, and must be settled by delivery of, equity instruments of another enterprise whose fair value cannot be readily determined
Discusses whether the note receivable is an FI using the definition in ASPE 3856.
Discusses how the note receivable should be measured initially, supported by ASPE 3856; prepares journal entry if appropriate.
Discusses how the note receivable should be measured subsequently, supported by ASPE 3856; prepares journal entry if appropriate.
Discusses a valid risk related to the note receivable (Yes if explains the risk + why it is a risk, incorporating case facts) - Accuracy, valuation and allocation
Designs a valid procedure to address the risk identified for the note receivable (Yes if procedure is specific, clear, and useful in responding to the risk identified) - Recalcualte, inspect
Designs an additional valid procedure to address the risk identified for the note receivable
IFRS Notes Receivable
IAS 32.11 (definition and presentation of financial instruments) , IFRS 9 4.1.2 (classification and measurement of financial instruments), IFRS 5.4 (interest)
Discusses whether the note receivable is a financial instrument (FI) using the definition in IAS 32.
Discusses how the note receivable should be measured initially, supported by IFRS 9; prepares journal entry if appropriate.
Discusses how the note receivable should be measured subsequently, supported by IFRS 9; prepares journal entry if appropriate.
IAS 32.11 (definition and presentation of financial instruments) , IFRS 9 4.1.2 (classification and measurement of financial instruments), IFRS 5.4 (interest)
Discusses whether the note receivable is a financial instrument (FI) using the definition in IAS 32.
Discusses how the note receivable should be measured initially, supported by IFRS 9; prepares journal entry if appropriate.
Discusses how the note receivable should be measured subsequently, supported by IFRS 9; prepares journal entry if appropriate.
ASPE Warranty
ASPE 3856 (Definition of financial instrument)
ASPE — Discusses whether the warranty is a financial instrument (FI) using the definition in ASPE 3856.
Concludes that a journal entry is not necessary.
Discusses a valid risk related to the warranty
(Yes if explains the risk + why it is a risk, incorporating case facts)
Designs a valid procedure to address the risk identified for the warranty
(Yes if procedure is specific, clear, and useful in responding to the risk identified)
Designs an additional valid procedure to address the risk identified for the warranty
IFRS Warranty
IAS 32.11 (Definition and presentation of Financial instruments), IFRS 9.4.1.4 (Classification and measurement of financial instruments)
IFRS — Discusses whether the warranty is a financial instrument (FI) using the definition in IAS 32.
ASPE Securities
ASPE 3856.05(h) (iv), ASPE 3856.07 (Measurement)
Discusses whether the securities are financial instruments (FIs) using the definition in ASPE 3856.
Discusses how the securities should be measured initially, supported by ASPE 3856; prepares journal entry if appropriate.
Discusses how the securities should be measured subsequently, supported by ASPE 3856; prepares journal entry if appropriate.
Discusses a valid risk related to the securities
(Yes if explains the risk + why it is a risk, incorporating case facts) (Accuracy, valuation and allocation)
Designs a valid procedure to address the risk identified for the securities
(Yes if procedure is specific, clear, and useful in responding to the risk identified)
Designs an additional valid procedure to address the risk identified for the securities
IFRS Securities
Discusses whether the securities are financial instruments (FIs) using the definition in IAS 32.
Discusses how the securities should be measured initially, supported by IFRS 9; prepares journal entry if appropriate.
Discusses how the securities should be measured subsequently, supported by IFRS 9; prepares journal entry if appropriate.
ASPE Non-monetary transactions
ASPE 3831.06, ASPE 3831.10
Identifies that the exchange of land for furniture is a non-monetary transaction
Analyzes the non-monetary transaction fair value exemptions in relation to case facts:
Commercial substance
Ordinary course of business
Fair value reliably measurable
Non-monetary non-reciprocal transfer to owners
Recommends the amount at which the transaction should be measured, consistent with analysis
Concludes on the impact of the adjustment on the management group bonus
Recommends the amount at which the transaction should be measured, consistent with analysis
Concludes on the impact of the adjustment on the management group bonus
Discusses a valid risk related to the non-monetary transaction
(Yes = explains the risk + why it is a risk, incorporating case facts)
Designs a valid procedure to address the risk identified for the non-monetary transaction
(Yes = procedure is specific, clear, and useful in responding to the risk identified)
Designs an additional valid procedure to address the risk identified for the non-monetary transaction
ASPE Leases
ASPE 3065.06 (Classification, Operating vs capital lease), ASPE 3065.16 (Initial measurement), ASPE 3065.17 (Subsequent measurement)
Identifies the financial reporting issue related to the facility lease (Situation)
Analyzes the lease criteria in relation to case facts:
Ownership (Analyze)
Economic benefits transfer (>75% of useful life) (Analyze)
Recovery of investment (>90% of present value of minimum lease payments) (Analyze)
Recommends how to classify the lease, consistent with analysis (Conclude)
Discusses how to initially recognize the lease (Analyze)
Discusses how to subsequently measure the lease (Analyze)
Concludes on the impact of the adjustment on the management group bonus (Conclude)
Discusses a valid risk related to the leased facility
(Yes = explains the risk + why it is a risk, incorporating case facts)
Designs a valid procedure to address the risk identified for the leased facility
(Yes = procedure is specific, clear, and useful in responding to the risk identified)
Designs an additional valid procedure to address the risk identified for the leased facility
Recorded at lower of PVMLP and Fair value (Initial recognition)
Subsequent measurement - Depreciation over the lesser of lease term and the asset’s useful life
IFRS Foreign exchange
IAS 21.21, IAS 21. 23
Identifies the need to analyze whether the equipment and payable are correctly recorded
Discusses that the functional currency is the Canadian dollar
Analyzes if the transaction was initially recorded correctly
Analyzes if the payable is recorded correctly at year end
Analyzes if the equipment is recorded correctly at year end
Concludes on the treatment of the foreign currency transaction
Concludes on the impact on the financial statements and the valuation of OTE
IFRS Intangible assets
IAS 38 (11-17) (Definition criteria), IAS 38. 21 (Recognition criteria)
Identifies the need to analyze whether the customer list should be capitalized or expensed
Analyzes definition of intangible asset:
— identifiability
— control
— future economic benefit
Concludes on whether or not the customer list meets the definition of an intangible asset
Analyzes recognition criteria for an intangible asset:
— probable future benefits
— can be measured reliably
Concludes on the treatment of the customer list
Concludes on the impact on the financial statements and the valuation of OTE
Discusses annual amortization required since customer list has a definite life
Identifies annual impairment testing for the intangible asset
Capitalized cash flow method
Identifies that maintainable operating cash flow for 2 years must be calculated
Correctly starts with income before tax (or income after tax and adds tax back)
Correctly adjusts for:
— amortization (including both amortization per the income statement and amortization included in the cost of sales)
— accounting issues, consistent with AO1 and AO2
— both unusual items (discontinued product, bad debt expense)
— both expenses not giving rise to income (salary of owner/manager, informal apprenticeship program)
— interest on debt
Provides adequate notation/explanation of each adjustment that can be easily understood by Wutang
Calculates maintainable operating cash flow/normalized EBITDA
Correctly adjusts for a tax provision (incorporating a rate of 30% for tax)
Correctly adjusts for sustaining capital expenditures net of present value of CCA tax shield ($100,000 less present value of tax shield [10%])
Provides a subtotal for maintainable discretionary cash flow
Correctly applies the capitalization rate (12%) or the capitalization factor (8.33 or 1 ÷ 12%)
Correctly adds the present value of the tax shield on existing assets
Provides a subtotal for capitalized value of operations/enterprise value
Correctly adds back the shareholder loan as a redundant asset
Correctly deducts interest-bearing debt
Provides a rounded estimate of fair market value of the equity
Adjusted net asset valuation
Correctly:
— includes at least 6 assets, with at least 3 adjustments to FMV
— includes at least 5 liabilities
— deducts the forgone tax shield associated with fixed assets
— deducts latent taxes and selling costs associated with existing capital assets
Calculates net asset valuation
Comparison of valuation methods
Compares the adjusted net asset value to the capitalized cash flow value
States that the difference between the 2 valuations represents an additional premium as a result of goodwill in the company
Concludes on the appropriateness of the capitalized cash flow valuation
