Technicals Flashcards
Accounts receivable (A.S.P.E.)
- 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: A.S.P.E. 3856.05(h), .16, .17
Inventory valuation (A.S.P.E.)
- 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: A.S.P.E. 3031.07, .10-12, .29
Inventory costs (A.S.P.E.)
- 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: A.S.P.E. 3031.11, .12, .17
Internally generated intangible assets – R&D (A.S.P.E.)
• 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: A.S.P.E. 3064.37, .40, .41
Goodwill and intangible assets – Amortization (A.S.P.E.)
• 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: A.S.P.E. 3064.56, .57, .61
Investments (A.S.P.E.)
• 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: A.S.P.E. 3051 and 3856.11 - .15
Financial instruments – Impairment (A.S.P.E.)
• 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: A.S.P.E. 3856.16 - .19
Deductibility of expenses (Taxation)
• General limitation – To be deductible, expense or outlay must be made or incurred by the taxpayer for the purpose of gaining, producing or maintaining income, and be expected to generate income related to the taxpayer’s business or property
Reference: ITA 18(1)(a)
Common business expenses DISALLOWED (Taxation)
- Amortization / Impairment / Accounting Gains & Losses (deduct via CCA)
- Personal expenses and membership / club dues
- Charitable donations – deduction to determine Taxable Income for a Corp.
- Political contributions – limited tax credit available for an individual; Federal Accountability Act deems corporate political contributions to be illegal, resulting in no deduction or credit.
- Taxes, interest and penalties related to tax
- Meals & entertainment (50% for business purposes, deductible for remote or temporary work sites, or special events for employees)
- Expenses re: issue or sale of shares and refinancing costs (deduct over 5 years)
- Life insurance premiums (except where the policy has been assigned as collateral)
- Unpaid amounts & unpaid remuneration (accrued salary which is unpaid 180 days after fiscal period is deemed not to have been incurred until actually paid)
- Carrying charges on vacant land (non-deductible portion added to ACB)
- Soft costs on construction of building (include interest, legal, accounting fees, insurance, property taxes; must be capitalized)
Reference: ITA 20(1), 18, 67.1, 78
Common business expenses ALLOWED (Taxation)
- Automobile expenses
- Home office expenses
- Convention expenses (limited to 2 per year)
- Foreign taxes (deductions in excess of 15% on foreign-source property income, since foreign tax credits limited to 15%; if no foreign tax credit can be claimed, entire amount of foreign non-business income tax is deductible)
- Inventory valuation (lower of cost or market, method must be consistent, LIFO not permitted)
- Reserves – no deduction for a reserve, contingent liability or sinking fund in general, but reserve is permitted for doubtful debts, amounts not due under an installment sales contract; any reserve deducted in one year must be taken into income the next year
Reference: ITA 10, 18, 20, 126(1)
Capital Cost Allowance (CCA) (Taxation)
- CCA may be claimed on all tangible capital property other than land, must be available for use
- Inducements (such as leasehold improvements) may be included in income or used to reduce capital cost
- Most classes subject to Accelerated Investment Incentive of 1.5 × CCA on net additions (except 53, 43.1, and 43.2, which are subject to 100% CCA in the year of purchase)
- Dispositions are credited to UCC at lesser of cost and proceeds (excess of proceeds over original cost result in a capital gain)
- Terminal loss – when there is a balance of UCC in the class but there are no assets remaining, the UCC can be claimed as a terminal loss (capital loss cannot arise on the disposition of depreciable property)
- Recapture – arises when the balance in the class is negative (i.e. when the adjustment re: disposal is in excess of the UCC) and is taken into income
- Recapture / Terminal loss calculated as: Lesser of a) proceeds and b) cost; less UCC. If positive, then recapture. If negative, then terminal loss.
Reference: ITA 20(1)(a), ITR Schedule II
Reporting alternatives – Specific Items (Audit & Assurance)
CAS 805 Report – Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement
• A report providing audit level assurance on individual financial statements or accounts, rather than financial statements on the whole
• May not be a practical alternative if the financial statements on the whole are not being audited
The auditor must
• comply with all CAS’s relevant to the audit (CAS 200)
• determine the acceptable financial reporting framework to be applied and document the agreed terms of the audit engagement, including the expected form of any reports to be issued (CAS 210)
CAS’s written in the context of an audit of financial statements are to be adapted as necessary when applied to audits of other historic financial information.
When forming an opinion and reporting on a single financial statement or on a specific element of a financial statement, the auditor shall apply the requirements in CAS 700, adapted as necessary in the circumstances of the engagement. Reference: CAS 805
Retiring allowance rollover to RRSP (Taxation)
A retiring allowance (also called severance pay) is an amount paid to officers or employees when or after they retire from an office or employment, in recognition of long service or for the loss of office or employment. A retiring allowance includes:
• payments for unused sick-leave credits on termination; and
• amounts individuals receive when their office or employment is terminated, even if the amount is for damages (wrongful dismissal when the employee does not return to work).
Individuals with years of service before 1996 may be able to directly transfer all or part of a retiring allowance to a registered pension plan (RPP) or a registered retirement savings plan (RRSP). The amount that is eligible for transfer is limited to:
• $2,000 for each year prior to 1996
• Additional $1,500 for each year prior to 1989 (if no vested contributions to RPP or DPSP by employer)
Reference: ITA 60(j.1)
Shareholder loan (Taxation)
- Principal amount must be added to shareholder’s income ITA 15(2)
- No imputed interest under ITA 80.4(3)
- Can be deducted under ITA 20(1)(j) when it is repaid
- Exception: If loan repaid prior to second balance sheet date of corporation, then principal amount need not be added to shareholder’s income, per ITA 15(2.6), but imputed interest under ITA 80.4(2) would apply. However, it cannot be a series of loans and payments (as per ITA 15(2.6), 20(1)(j))
- Exception: Loan advanced as an employee, rather than shareholder, to acquire residence, auto for work or shares of the company, under ITA 15(2.4), as long as at the time the loan was made, bona-fide arrangements were made for repayment of the loan within a reasonable amount of time
Reference: ITA 15, 20(1)(j), 80.4
Revenue recognition – Consignment sales (A.S.P.E.)
- 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: A.S.P.E. 3400.13 - .15
