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Unit 1 Flashcards

Accounting Principles, Assumptions & Concepts

1
Q

Accounting Principles Assumptions & Concepts

A

Chapter 3
IFRS Preface: Conceptual Framework to Financial Reporting
ASPE: HB 1000, Financial Statement Concepts

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2
Q

What are the elements of a financial statement

A

Asset
Liability
Equity
Revenue - Increases economic resources
Expense - decreases economic resources

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3
Q

What is equity

A

It is an ownership interest in assets of a profit-oriented coy after deducting liabilities. Examples are capital, distribution surplus, and retained earnings

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4
Q

Analysis of GAAP vs Cash-based accounting ie
Cash vs Accrual-based accounting

A

Discuss :
Comparability
Understandability and
Timeliness of financial framework

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5
Q

The conceptual Framework

A

Chapter 4
IFRS Preface: Conceptual Framework to Financial Reporting
ASPE: HB 1000, Financial Statement Concepts

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6
Q
A
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7
Q

What is the purpose of the conceptual framework?

A
  • To enable standard setters to develop standards based on consistent concepts
  • To allow preparers to develop consistent policies where no standards exist
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8
Q

Qualitative Characteristics of Useful Financial Information (IFRS)

A
  • Relevant
  • Faithful representation

** Enhancing**
- Comparability
- Verifiable
- Timely
- Understandable

CUTV

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9
Q

Underlying assumptions of FR

A
  • Economic entity
  • Financial capital maintenance
  • Proprietory
  • Stable monetary unit
  • Going-concern
  • Time-period
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10
Q

Attributes of relevance

A
  • Capable of making a difference in decision making
  • Information helps users predict future outcomes
  • Information confirms or changes future outcomes
  • Material enough that omitting, obscuring or mis stating could influence decision making
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11
Q

Attributes of faithful representation

A

It should :
- Faithfully represent substance over form and be
- Complete
- Neutral (be prudent when uncertain)
- Free from material error

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12
Q

How are elements of F/S measured?

A

How are elements of F/S measured
1. Historical cost
2. Current value
- Fair Value
- Value in use & fulfillment
- Current cost

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13
Q

Qualitative Characteristics of Useful Financial Information (ASPE)

A
  1. Understandability
  2. Relevance
    - Predictive & feedback value
    - timeliness
  3. Reliability
    - Representational faithfulness
    - Verifiability
    - Neutralism
    - Conversatism
  4. Comparability
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14
Q

What are the key differences in FS elements btw IFRS and ASPE?

A

Asset & Liability - IFRS does not define future benefits. ASPE does not define economic benefits.

Inome & Expense - Gains & losses are commonly used Canadian definitions in ASPE. IFRS does not define gains & losses

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15
Q

Why the need for Conceptual Framework

A
  • To provide a solid foundation for Accounting Standards
  • To approach emerging issues in a consistent manner
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16
Q

Recommend whether a private coy should adopt ASPE or IFRS

A
  • Public enterprises are mandated to apply IFRS
  • Private coys can apply ASPE or elect IFRS
  • The objectives of the F/S are important
  • The users are usually investors and creditors
  • ASPE are simpler, less onerous and easier to apply
  • ASPE is for smaller businesses with less complexities in thier transactions than public coys
  • Smaller coys have less users placing reliance on their F/S than public coys
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17
Q

Emerging trends on ASPE

A

Annual improvement on
1500 -1st time adoption
1510 - Current assets & liabilities
1540 - Cash flow statements
3856 - Financial instruments

3041 - Agriculture (new WEF 2022)

Ammendments:
3400 - Revenue portion
3462 - Employee future benefits

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18
Q

What are Emerging trends on ASNPO

A

Annual improvement on
1501 - 1st time adoption
4449 - Combinations by NPOs (new WEF 2022)

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19
Q

Emerging trends on IFRS

A

Annual improvement on
IFRS 1 - First time adoption
IFRS 9 - Financial Instruments
IAS 41 - Agriculture

Amendments to
IAS 16 - PPE (proceeds b4 intended use)
IFRS 3 - Business combination/reference to conceptual framework
IAS 37 - Provisions, contingent liabilities & assets related to onerous contracts

WEF January 2023
IFRS 17 (Insurance contracts) replaces the existing IFRS 4
IFRS 1 - Amendments to Presentation of financial statements

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20
Q

Revenue - ASPE

A

Chapter 17
ASPE: 3400, Revenue

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21
Q

What are the criteria to recognize revenue from
sale of goods

A

RCMP
Revenue from Sale of goods
1. Performance is achieved ( risks & rewards
transferred)
2. Measured reliably
3. Collection is reasonably assured

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22
Q

What are the criteria to determine perfomance is achieved under revenue recognition

A

**RCMP PSS
Revenue from sale of goods

  1. Performance achieved
    • Persuasive evidence of an arrangement
    • Service rendered
    • Seller’s price is fixed/determinable
  2. Measured reliably
  3. Collection is reasonably assured

* Write about POC% or CC method

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23
Q

ASPE revenue recognition for services /contract

A
  1. Percentage of completion method (POC%)- Used when performance has more than one act and % to completion can be reliably measured, then use the basis of :
    - Input (cost)
    - Output (# of acts completed) or
    - Extent of work done
  2. Completed contract method (CC) - When it consists of a single act or the percentage of completion cannot be reliably measured
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24
Q

Revenue recognition criteria for
Interest, Royalties & Dividend

A
  1. Probable that economic benefits will flow to the entity
  2. It can be reliably measured
    Interest : On a time proportion basis
    Royalties : As they accrue
    Dividend : Shareholders’ right to receive is established
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25
Q

Rev Recognition - Payment from seller to customer

A

-Discounts/rebates - Netted of revenue
- Reimbursement of costs - Identifiable benefits to the seller are recognized as a separate cost
- Goods/services provided by the customer - treated as an expense or asset purchase

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26
Q

When are multiple deliveries in a Bundle sale recognized?

A
  • Performance on remaining deliverables is probable
  • Deliverables have value on a stand-alone basis
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27
Q

How to allocate purchase price in a bundle sale

A

Seller uses relative stand-alone prices of each deliverable

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28
Q

Methods of estimating stand-alone selling prices

A
  1. Adjusted Market Assessment Approach
    - Evaluate the market and estimate the price
  2. Estimate Cost Plus a Margin Approach
    - Estimate the cost of each deliverable and add a margin
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29
Q

Revenue - IFRS

A

Chapter 19
IFRS: 15, Revenue from Contracts with Customers

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30
Q

What are the 5 IFRS steps to recognize revenue from contracts with customers?

A

I-STAR
- Identify contract
- identify Separate performance obligation
- determine the Transaction price
- Allocate the transaction price to each performance obligation
- Recognize revenue when each obligation is met

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31
Q

What are the steps to identify a contract

A

When ALL are met :
- The contract has been signed
- Right and payment terms to G/S can be identified
- Commercial substance exists
- Probable that consideration will be received for the G/S

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32
Q

What are the steps to identify separate POs

A

Only distinct G/S can be recognized as separate POs
- Can the customer benefit from the goods/ service on its own or with other available resources
- Can the promise to transfer the G/S be separately identified from other promises in the contract

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33
Q

How do you treat a contract modification

A

If both criteria occur, treat as a separate contract
- Change in scope is due to addition of distinct goods/services
- Price of contract has now increased by price of stand-alone price of same goods/services

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34
Q

What are the considerations that determine a transaction price

A
  • Variable consideration
  • Constraining estimates of variable consideration
  • Significant financing components
  • Non-cash consideration
  • Consideration payable to a customer
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35
Q

Methods of allocating revenue based on stand alone selling prices

A
  1. Adjusted market assessment approach
  2. Expected cost plus margin
  3. Residual approach : it is used if any of
    - The good/services being priced is sold for a broad range of amount OR
    - Seller has not yet established a price or its has never been sold as stand alone
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36
Q

Conditions for recognizing revenue for POs satisfied over time

A
  • Customer simultaneously receives and consumes the benefits provided by the PO
  • The PO creates / enhances an asset the customer controls as the asset is being created/enhanced
  • The PO creates an asset with no alternative use to the seller and the seller has an enforceable right to payment for PO completed to date
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37
Q

For revenue recognized over time, what are the methods of measuring progress towards completion

A

Output Methods - Measures goods transferred to date relative to what is left. That is, % of job completed.

Input Methods - It is based on estimates of percentage of completion based on inputs as resources consumed, labor expended. That % of cost incured to date.

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38
Q

What are the GL accounts for construction?

A
  1. Contract Asset Account
    • Costs & profits are debited
  2. Progress Billing Account
    - A contra account linked to the Contract Asset account.
    Interim Billings are credited here

Contra asset - Progress Billing = Asset/liability in SFP
Both closed after contract is completed

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39
Q

In the absence of a reliable measure of the outcome of a perf obligation, how is revenue recognized?

A

Cost recovery /zero profit method
- recognize revenue to the extent of the cost incurred

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40
Q

What are the steps to recognize revenue and COG in a fixed term contract?

A
  1. Estimate P/L on the contract
  2. Determine the stage of completion using the input/output method
  3. Calculate revenue for the period
  4. Ascertain COGS
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41
Q

Income recognition - consignment arrangement

A

At sale:
- Consignor recognizes sales income
- Consignee recognizes commission

42
Q

Inventory

A

Chapter 26
IAS:2, Inventories
ASPE: 3031, Inventories

43
Q

What are inventories

A

They are assets that are
- Held in the normal course of biz for sale(finished)
- in the process of production for sale (WIP)
- Materials/supplies to be used for production or rendering service (raw materials/consumables)

44
Q

Itemize inventory costs

A
  • Costs to bring an item to its present location and condition.
    They include:
  • Cost of purchase
  • Cost of conversion and
  • Costs to bring an item to its present location and condition
    *Net of vendor rebate and discounts
45
Q

What is the initial costs for Merchandise inventory?
Purchase cost (COGS)

A

Purchase price +shipping cost + import duties + transportation in + unrecoverable taxes less trade discounts and subsidies

46
Q

What are the methods of tracking inventory

A
  1. Periodic
    Inventory value is determined only when a physical count is carried out
  2. Perpetual
    Inventory value is maintained on a continual basis. Cost is determined after each transaction (sale or purchase)
47
Q

How are fixed inventory costs allocated

A
  1. When production is less than normal capacity:
    - allocate overhead based on based on normal capacity
    - expense under-allocated fixed cost into COGS
  2. When production is more than normal capacity
    - allocate overhead based on based on actual production. Meaning, overhead will be reduced
48
Q

Overhead cost allocation

A

IFRS requires using the Cost Absorption method.
- If actual production is less than normal capacity, allocation is based on normal capacity
The resulting under-recovered overhead is expensed during the period.
- If actual production exceeds normal capacity, allocation is based on actual production

49
Q

How is the cost of merchandise subsequently measured

A

The lower of cost and NRV
* cost is not replacement cost
* NRV = expected selling price - expected selling cost

50
Q

What are the methods of writing down inventory (impairment)

A
  • The entity will record an impairment if NRV is lower than cost. It can be recorded using the
  • Direct method (Adjusted against COGS)
  • DR COGS
  • CR Inventory Or
  • Indirect (allowance) method (Contra account is used and offset against inventory in SCI)
  • Dr Loss on inventory decline
  • Cr Allowance on inventory decline
    • the contra account will be adjusted in subsequent period to record the lower of cost and NRV*
51
Q

Difference btw IFRS & ASPE in inventory cost measurement

A
  • IAS 2 requires capitalization of cost for custom inventories
    manufactured over a long period
  • ASPE 3031gives a choice to capitalize or expense
52
Q

Revenue- Specific Application

A

Chapter 19
IFRS : 16

53
Q

Summary of long term construction contracts

A
  • Often a single PO satisfied over a period in time
  • Costs and profit are debited to Contract Asset a/c
  • Billings are credited to contract asset OR Progress Billing a/c
    End of Period*
    *** Net bal of contract asset and Progress billing a/cs are reported in SFP

End of Period
Contract asset and Progress billing a/cs are closed

54
Q

Long term construction contracts can be Cost-plus or Fixed. How are fixed construction contracts measured

A

Each period :
* Estimate the P or L on the contract
* Determine the stage of completion using the input or output based method
* Calculate revenue to record in the period
* Ascertain COGS (expense)

55
Q

Income recognition - Returns, rebates & volume discount

A

If an estimate can be made:
- A refund liability is recognized for consideration received
- A refund asset is recorded for goods to be returned
- Refund asset/liabilities are recorded separately in the income statement after the liability period has lapsed

56
Q

When is revenue recognized in a Bill n Hold sale

A
  • Control must have been transferred (eg product paid for)
  • Reason for B&S must be substantive
  • Items must be separately identifiable
  • Goods must be ready for physical transfer
  • Entity cannot have ability to use or direct the goods to another customer
57
Q

Principal / Agent relationship- Factors that point to an agency

A
    • Another party is responsible for fulfilling the contract
    • Entity does not bear inventory risk
    • Has no discretion setting the price
    • Consideration is in form of commission
    • Not exposed to credit risk
58
Q

Property, Plant & Equipment

A

Chapter 29
IAS: 16, Property, Plant and Equipment
ASPE: HB 3061, Property, Plant and Equipment

59
Q

What are PPEs

A

They are tangible assets held for use in production or supply of goods and services (rental is investment asset)
They are expected to be used for more than one period ( less is office supplies/inventory)

60
Q

Criteria to recognize PPE as an asset.
(IFRS 16, ASPE3061)

A

When both conditions are met:
* Probable that future economic benefits will flow to the entity
* Cost of PPE can be reliably measured

61
Q

Net Realizable Value is ..?

A

Estimated cost of completion
+
Estimated cost to make the sale

62
Q

What are the 3 items of cost that can be capitalized for PPE?

A
  1. Purchase cost plus
    Import duties + unrecoverable taxes - discounts/rebate
  2. Cost to bring it to its location & condition of use
    - Inspection cost
    - Spare part cost
    - Standy / Servicing equipment
  3. Cost of dismantling, removal, and restoring

For land & building, it includes commission, legal fees, and other costs to make them usable.

63
Q

Cost included for purchased assets.

A
  • Delivery & handling of asset
  • Site preparation cost
  • Professional fees
  • Installation cost
  • Testing that the asset is functional
  • Decommissioning cost
64
Q

What are the subsequent methods of measurement

A
  • Cost model or
  • Revaluation model
65
Q

What does the cost model of subsequent measurement entail

A

Assets are recorded at historical cost with accumulated depreciation and impairment loss taken. Depreciation methods:
* Straight line = (cost-residual value)\ useful life
* Declining balance = Carrying value x rate of depreciation
* Unit of production = (cost-residual value)\units of production

66
Q

What does the revaluation model of subsequent measurement entail

A

Assets are measured at fair value amounts with depreciation taken. The revalued assets are subsequently reported at their depreciated cost less accumulated impairment losses.

67
Q

What are the differences in PPE between IAS 16 and ASPE 3061

A
  1. Interest Capitalization
    IFRS - Must capitalize for self-constructed assets.
    ASPE - Not necessary
  2. Componentization
    IFRS - Required, gives guidance
    ASPE - Required, less guidance
  3. Measurement basis
    IFRS - Cost or Revaluation method
    ASPE - Cost alone
  4. Derecognition
    IFRS - Required when replaced
    ASPE - Not required if future cashflow from the new asset will cover the value
  5. Straight-line basis of depreciation
    IFRS - Cost less residual value over useful life (A)
    ASPE - Greater of (A) above and

Cost less salvage value over asset life

68
Q

What are the steps to calculate the capitalized borrowing cost of PPE?

A
  1. Calculate the weighted average investment
  2. Consider first interest cost on asset-specific borrowings
  3. Calculate Cap rate to be applied to general borrowing. Interest
    paid during the period / by weighted avg general borrowing
  4. General borrowing rate (3) is applied to the diff between
    weighted avg investment and asset-specific borrowing
  5. Borrowing cost = int on asset-sp + gen borrowing.
    * It should not exceed the total interest cost
69
Q

What are bearer plants

A

They are living plants

Used in the production and supply of agricultural produce
Have the probability of being used for more than one period
There is a remote likelihood of them being sold as agricultural produce

70
Q

In ASPE 3061 what are the criteria for Betterment costs to be capitalized

A

Betterments are costs incurred to improve the service potential of capital assets. they include:

  1. Quantity of physical output or service
    capacity increased
  2. Life extended
  3. Operating cost lowered
  4. Quality of output improved
71
Q

Investment Property

A

Chapt 56
IAS 40
No ASPE

72
Q

How are investment properties recognized

A

Criteria :
1. Meets definition
2. Probable that future economic benefits will flow to the entity
3. Cost can be reliably measured

73
Q

Definition

A

They are land and buildings held to earn rental income or capital appreciation

74
Q

5 distinct examples of investment properties

A

They are :
1. Land held for long-term capital appreciation
2. Land with undetermined future use
2. Building owned by the entity and leased as an operating lease
4. Vacant building to be leased as an operating lease
5. Property being constructed to be leased as an investment property

75
Q

Initial measurement

A

Purchase price and
cost to bring it to its intended location and condition of use

76
Q

Subsequent measurement

A
  1. Fair Value Model
    - FV at each reporting date
    - Gains/losses from valuation is passed through P&L
    - No depreciation recorded
    - If FV cannot be ascertained, use the cost model
  2. Cost Model
    Same as IAS 16
    *Must stick to one model for all investments
77
Q

How are impairments treated

A
  • FV Model
    Nothing is done. Fair value already recognizes impairment
  • Cost Model
    Dr Impairment loss
    Cr Accumulated Impairment loss - Land
78
Q

How are investment properties treated under ASPE

A

Use guidance under ASPE3061:
It uses only cost model even for subsequent measurement. Note the depreciation should be stated as amortization

79
Q

Assurance & Audit Defined

A

Chapt 1
CAS

80
Q

How do you distinguish between Audit & Review engagements

A

An Assurance engagement has 5 elements. All should be confirmed as MET before it can be considered an Assurance engagement
1. Three-party relationship
2. Subject matter
3. Criteria
4. Evidence
5. conclusion

81
Q

What is an Audit Risk

A

According to CAS 200, Audit risk is the risk that an auditor will express an inappropriate opinion when the FSs are materially misstated

It is a function of Risk of material misstament + Detection risk

82
Q

What is a misstatement

A

It is the difference between a classification(C), Amount(A), Presentation (P) and Disclosure (D) reported in the financial statement and the CAPD required in the applicable framework

83
Q

What is a F/S audit and the responsibiities of an auditor

A

An audit of a F/S is when the financial statement of an entity is assessed to be fairly presented in line with applicable accounting framework and an opinion is expressed on same.

The responsibilities of an auditor include:
1. Follow ethical requirements including independence, competence and due care
2. Assess the risks of material misstatement in the F/Ss
3. Collect sufficient appropriate evidence relating to the existence of risks of material misstatement in the F/Ss
4. Express an opinion whether the F/Ss present fairly in material respect the financial condition of the entity in relation to the applicable framework

84
Q

What are the components of an audit report

A

They are 11
1. Report title
2. Addressee
3. Audit Opinion (UQAD)
4. Basis of opinion
5. Key audit matters
6. Opinion on other matters - Legal & regulatory req.
7. Management responsibilities
8. Auditor’s responsibilities
9. Auditor’s signature
10. Auditor’s office location
11. Date of audit report

85
Q

Client Acceptance/Continuance
APER

A

Chapt 5

86
Q

Steps to be carried out

A
  1. Identify and assess the engagement risk
    - Acceptance risk for new clients
    - Continuance risk for existing clients
  2. Establish engagement preconditions
    3.
87
Q

What to look out for in engagement risk

A
  • Integrity of client
  • Competence and resources of the engagement team
  • Ethical standards - Independence
  • Other significant matters
88
Q

What to include as engagement preconditions

A
  • Determine if the accounting framework is appropriate
  • Document Management responsibilities
  • Consider the limitation of scope
89
Q

Content of an engagement letter

A
  • Objective and scope of audit
  • Management responsibilities
  • Auditor’s responsibilities
  • Identification of the financial reporting framework
  • Expected form and content of the audit report
90
Q

Audit Planning - Introduction

A

Chapt 6 - 13
CAS 300

91
Q

An audit plan is prepared in the form of an audit planning memo that includes 4 parts

A

R isk assessment
A pproach
M ateriality
P rocedures

92
Q

What is the difference between Audit Planning and Audit Strategy

A
  • Audit planning (AP) includes developing an overall audit strategy (AS) and a detailed audit plan
  • AS is an overview whereas AP is a response to the issues identified in the AS
  • AS identitifies the characteristics of an engagement that defines the - Its scope
  • Ascertain reporting objectives to plan the timing of the audit and
  • Considers factors that are significant in the direction of the engagement team’s efforts
  • Also determines if preliminary efforts are necessary
  • Ascertains the nature, timing and extent of resources to needed perform the engagement

*AP is deisgned to provide detailed response to the matters in the AS which in the nature, timing and extent of audit procedures to be performed to obtain adequate evidence to reduce audit risk to acceptable level.
- In developing the AP, auditor will develop audit procedures such as test of controls or substantive test of details.

93
Q

Risk Assessment
RAMP

A

Chapt 7

94
Q

What is Audit Risk

A

According to CAS 200, Audit risk is the risk that an auditor will express an inappropriate opinion when the FSs are materially misstated

It is a function of Risk of material misstament + Detection risk

95
Q

What is a misstatement

A

It is the difference between a classification(C), Amount(A), Presentation (P) and Disclosure (D) reported in the financial statement and the CAPD required in the applicable framework

96
Q

Audit Risk Model

A

Audit risk = Risk of Mistatement x Detection Risk

Audit Risk = (Inherent Risk + Control Risk) x Detection Risk

97
Q

How to assess a RMM

A
  • Auditor should gain understanding of the entity, its environment and its internal controls
  • After gaining understanding, the risk is assessed at the OFSL. This is pervasive and covers the whole FS
  • Then at the Assertion level. This is specific to balances , classes of transactions, presentations or disclosures.
98
Q

What is the spectrum of an IR

A

It is the likelihood x magnitude of a mistatement

99
Q

Planning - Materiality

A

Chapt 11

100
Q

What are the 8 step approach to calculating materiality

A
  • identify the users of the financial statement
  • identify users’ objectives
  • Determine the base for materiality
  • Identify the percentage threshold for materiality
  • Calculate overall materiality
  • Calculate performance materiality
  • Calculate specific materiality (if needed)
  • Calculate specific performance materiality (if needed)

Core 1 (5 decks)

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