Unit 1 Flashcards
Accounting Principles, Assumptions & Concepts
Accounting Principles Assumptions & Concepts- Chapter,HB?
Chapter 3
IFRS Preface: Conceptual Framework to Financial Reporting
ASPE: HB 1000, Financial Statement Concepts
What are the elements of a financial statement
Asset
Liability
Equity
Revenue - Increases economic resources
Expense - decreases economic resources
What is equity
It is an ownership interest in assets of a profit-oriented coy after deducting liabilities. Examples are capital, distribution surplus, and retained earnings
Analysis of GAAP vs Cash-based accounting ie
Cash vs Accrual-based accounting
Discuss :
Comparability
Understandability and
Timeliness of financial framework
The conceptual Framework
Handbook guide?
Chapter 4
IFRS Preface: Conceptual Framework to Financial Reporting
ASPE: HB 1000, Financial Statement Concepts
What is the purpose of the conceptual framework?
- To enable standard setters to develop standards based on consistent concepts
- To allow preparers to develop consistent policies where no standards exist
Qualitative Characteristics of Useful Financial Information (IFRS)
- Relevant
- Faithful representation
** Enhancing**
- Comparability
- Verifiable
- Timely
- Understandable
CUTV
Underlying assumptions of FR
- Economic entity
- Financial capital maintenance
- Proprietory
- Stable monetary unit
- Going-concern
- Time-period
Explain th underlying assumptions
Economic entity - Report only what belongs to the entity
Financial Capital Maintenance - A biz is maintained when the net assets at the end of the year exceeds the net assets at the beginning of yr
Propriety - If all assets are used o pay liabilities, the residual belongs to the owner/entity
Stable monetary unit - F/S prepared in a single currency
Going concern - Entity is expected to continue in business into the unforeseen future
Time period - The entity oerformance is reported in small periods - Mthly, qrtly, yearly
Attributes of relevance
- 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
Attributes of faithful representation
It should :
- Faithfully represent substance over form and be
- Complete
- Neutral (be prudent when uncertain)
- Free from material error
How are elements of F/S measured?
How are elements of F/S measured
1. Historical cost
2. Current value
- Fair Value
- Value in use & fulfillment
- Current cost
Qualitative Characteristics of Useful Financial Information (ASPE)
- Understandability
- Relevance
- Predictive & feedback value
- timeliness - Reliability
- Representational faithfulness
- Verifiability
- Neutralism
- Conversatism - Comparability
What are the key differences in FS elements btw IFRS and ASPE?
Asset & Liability - IFRS does not define future benefits. ASPE does not define economic benefits.
Income & Expense - Gains & losses are commonly used Canadian definitions in ASPE. IFRS does not define gains & losses
Why the need for Conceptual Framework
- To provide a solid foundation for Accounting Standards
- To approach emerging issues in a consistent manner
Recommend whether a private coy should adopt ASPE or IFRS
- 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 framework is simpler, less onerous and easier to apply
- ASPE is for smaller businesses with less complexities in their transactions than public coys
- Smaller coys have less users placing reliance on their F/S than public coys
Emerging trends on ASPE
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
What are Emerging trends on ASNPO
Annual improvement on
1501 - 1st time adoption
4449 - Combinations by NPOs (new WEF 2022)
Emerging trends on IFRS
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
What HB is Revenue Rec - ASPE
Chapter 17
ASPE: 3400, Revenue
What are the criteria to recognize revenue from
sale of goods
RCMP
Revenue from Sale of goods
1. Performance is achieved ( risks & rewards
transferred)
2. Measured reliably (revenue)
3. Collection is reasonably assured
What are the criteria to determine perfomance is achieved under revenue recognition
**RCMP PSS
Revenue from sale of goods
- Performance achieved
- Persuasive evidence of an arrangement
- Service rendered (delivery occured)
- Seller’s price is fixed/determinable
- Measured reliably
- Collection is reasonably assured
* Write about POC% or CC method
ASPE revenue recognition for services /contract
- 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 - Completed contract method (CC) - When it consists of a single act or the percentage of completion cannot be reliably measured
Revenue recognition criteria for
Interest, Royalties & Dividend
- Probable that economic benefits will flow to the entity
- It can be reliably measured
Interest : On a time proportion basis
Royalties : As they accrue
Dividend : Shareholders’ right to receive is established
Performance is achieved - What impacts persuasive evidence of an arrangement?
- Customary business practices
- Side arrangement
- Consignment arrangements
- Customer’s right of return
- Repurchase requirements
What impacts delivery or service being rendered?
Timing can affect:
* Bill n Hold arrangements
* Customer acceptance of goods
* Lay over arrangements
* No refundable fees
* Licensing arrangements
The legal terms may be
FOB shipping or
FOB destination
What impacts the price being fixed
Cancellable sales arrangement
Customer’s right of return
Price protection
Refundable fees
When are multiple deliveries recognized on stand alone basis in a Bundle sale?
- Performance on remaining deliverables is probable
- Deliverables have value on a stand-alone basis
Example: sale of an appliance and servicing component
How to allocate purchase price in a bundle sale
Seller uses relative stand-alone prices of each deliverable
Methods of estimating stand-alone selling prices
- Adjusted Market Assessment Approach
- Evaluate the market and estimate the price - Estimate Cost Plus a Margin Approach
- Estimate the cost of each deliverable and add a margin
Revenue - IFRS
Chapter 18
IFRS: 15, Revenue from Contracts with Customers
What are the 5 IFRS steps to recognize revenue from contracts with customers?
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
What are the criteria to confirm a contract exists
When ALL are met : IFRS 15.9 consider
- Approved by both parties
- Goods and services can be identified
- Payment terms identified
- Commercial substance exists
- Probable that consideration will be received for the G/S
What are the criteria to confirm that the POs are distinct
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
How do you treat a contract modification
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
What are the considerations that determine a transaction price
- Variable consideration (Price change per vol)
- Constraining estimates of variable consideration (long rights of return)
- Significant financing components (discount on financing)
- Non-cash consideration (trade-in)
- Consideration payable to a customer(Rebate)
What are the methods of allocating Revenue
IFRS 15.73
Use relative stand alone selling price (FV) OR
- Adjusted market assessment approach
- Expected cost plus margin
- Residual approach
Methods of allocating revenue based on stand alone selling prices
- Adjusted market assessment approach
- Expected cost plus margin
- 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
What are the 2 methods of recognizing revenue
- Point in time - when risk /rewards has been transferred
- Over time (based on any of 3 considerations)
Considerations for recognizing revenue for POs satisfied over time
- 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
For revenue recognized over time, what are the methods of measuring progress towards completion
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.
When to recognize Non Refundable deposit
Paragraphs B48-49
1. Entity must establsh whether it relates to the transfer of a promised goods/service (PO)
2. When it is not related to a PO or what the entity should undertake at the start of the contract, then, it is considered advance pymnt for future goods/service
Definition of variable consideration
IFRS 15.50
- When there is a consideration receivable that is not a fixed amount
IFRS 15.53
- At the stat of the contract, the seller must estiamte the amount of consideation iyt is entitled to using the weighted average OR most likely probability
IFRS 15.53
- The variable consideration should be reasssessed at the end of each reporting period
How to evaluate Right of Return
Step 1 - Define entitlement
IFRS 15.B21
Step 2 - Assess the 5 factors constraining the variable
IFRS 15.57
What are the GL accounts for construction?
- Contract Asset Account
- Costs & profits are debited
- 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
In the absence of a reliable measure of the outcome of a perf obligation, how is revenue recognized?
Cost recovery /zero profit method
- recognize revenue to the extent of the cost incurred
What are the steps to recognize revenue and COG in a fixed term contract?
- Estimate P/L on the contract
- Determine the stage of completion using the input/output method
- Calculate revenue for the period
- Ascertain COGS
Who and when is income recognized in a consignment arrangement
At sale:
- Consignor recognizes sales income
- Consignee recognizes commission
Revenue- Specific Application
Chapter 19
IFRS : 16
Summary of long term construction contracts
- 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
Long term construction contracts can be Cost-plus or Fixed. How are fixed construction contracts measured
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)
Income recognition - Returns, rebates & volume discount
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
When is revenue recognized in a Bill n Hold sale
- 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
Principal / Agent relationship- Factors that point to an agency
- 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
Inventory
Chapter 26
IAS:2, Inventories
ASPE: 3031, Inventories
What are inventories
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)
Itemize inventory costs
- 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
Itemize cost of purchase
- Cost of item
- Shipping to receive
- Import duties
- Non recoverable tax
- Transportation in
(-) - Trade discounts
- Subsidies
Itemize cost of conversion
- Direct labour cost
- Allocated fixed & variable manufacturing overhead
How are overhead costs allocated
IFRS requires using the Cost Absorption method:
1. When production is less than normal capacity:
- allocate overhead 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
What are the methods of tracking inventory
- Periodic
Inventory value is determined only when a physical count is carried out - Perpetual
Inventory value is maintained on a continual basis. Cost is determined after each transaction (sale or purchase)
What are the cost flow methods
- FIFO
- Weight average
Net Realizable Value is ..?
Estimated selling price in ordinary course of business
(-)
Estimated cost of completion
(-)
Estimated cost to make the sale
How is the cost of merchandise subsequently measured
The lower of cost and NRV
* cost is not replacement cost
* NRV = expected selling price - expected selling cost (as above)
What are the methods of writing down inventory (impairment)
- 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*
Difference btw IFRS & ASPE
- IAS 23 requires capitalization of borrowing costs(for custom inventories)
- ASPE 3031gives a choice to capitalize or expense
**Property, Plant & Equipment
Chapter 29
IAS: 16, Property, Plant and Equipment
ASPE: HB 3061, Property, Plant and Equipment
**What are PPEs
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)
Criteria to recognize PPE as an asset.
(IAS 16, ASPE3061)
When both conditions are met:
* Probable that future economic benefits will flow to the entity
* Cost of PPE can be reliably measured
What are the 3 items of cost that can be capitalized for PPE?
- Purchase cost plus
Import duties + unrecoverable taxes - discounts/rebate - Cost to bring it to its location & condition of use
- Inspection cost
- Spare part cost
- Standy / Servicing equipment - Cost of dismantling, removal, and restoring
For land & building, it includes commission, legal fees, and other costs to make them usable.
Cost included for purchased assets.
- Delivery & handling of asset
- Site preparation cost
- Professional fees
- Installation cost
- Testing that the asset is functional
- Decommissioning cost
What are the subsequent methods of measurement
- Cost model or
- Revaluation model
What does the cost model of subsequent measurement entail
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
What does the revaluation model of subsequent measurement entail
Assets are measured at fair value amounts with depreciation taken. The revalued assets are subsequently reported at their depreciated cost less accumulated impairment losses.
What are the differences in PPE between IAS 16 and ASPE 3061
- Interest Capitalization
IFRS - Must capitalize for self-constructed assets.
ASPE - Not necessary - Componentization
IFRS - Required, gives guidance
ASPE - Required, less guidance - Measurement basis
IFRS - Cost or Revaluation method
ASPE - Cost alone - Derecognition
IFRS - Required when replaced
ASPE - Not required if future cashflow from the new asset will cover the value - 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
What are the steps to calculate the capitalized borrowing cost of PPE?
- Calculate the weighted average investment
(Get avg of all amt spent throughout the yr) 2. Consider first interest cost on asset-
specific borrowings (If a specific loan
applies to the PPE, put that aside before
calculating avg rate for other general loans) - Calculate Cap rate to be applied to general borrowing. Interest
paid during the period / by weighted avg general borrowing - General borrowing rate (3) is applied to the diff between weighted avg investment and asset-specific borrowing
- Borrowing cost = int on asset-sp + gen borrowing.
* It should not exceed the total interest cost
Steps with example to calculate borrowing cost to be capitalized
- Calculate the weighted avg investment
Amounts spent on PPE during the year b4 its ready for intended use
Took - Jan 80k, Mar 70k and Jul 105k
Calculate average amount for the yr
- Given the following loans taken by the entity
Note 150k @ 6.5% specific for the PPE throughout the year
Bond 8m @ 8% throughout the year
Bank loan 12m @ 6% throughout the year - Remove specific borrowing from avg investment above. Balance is general borrowed amount
Weighted avg inv (- )150k Notes (=) General borrowing - Calculate interest on avg specific loan
- since its taken thru yr, it is 150k x 6.5% - Calculate avg general borrowing rate
(8m/20m)x8% + (12m/20m)x6% - Apply the rate in No4 to the gen avg in No1 to get gen interest
- Add specific int (no3) to general int (no5) to get interest to be capitalized
What are bearer plants
- 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
In ASPE 3061 what is the definition of Betterment
Betterments are costs incurred to improve the service potential of capital assets.
Under what criteria are Betterment costs capitalized
They include:
- Quantity of physical output or service
capacity increased - Life extended
- Operating cost lowered
- Quality of output improved
Investment Property
Chapt 56
IAS 40
No ASPE
How are investment properties recognized
Criteria :
1. Meets definition
2. Probable that future economic benefits will flow to the entity
3. Cost can be reliably measured
Definition
They are land and buildings held to earn rental income or capital appreciation
5 distinct examples of investment properties
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
Initial measurement
Purchase price and
cost to bring it to its intended location and condition of use
Subsequent measurement
- 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
- Depreciation is stated as amortization for investment properties - Cost Model
Same as IAS 16
*Must stick to one model for all investments
How are impairments treated
- FV Model
Nothing is done. Fair value already recognizes impairment - Cost Model
Dr Impairment loss
Cr Accumulated Impairment loss - Land
How are investment properties treated under ASPE
Guidance under ASPE3061:
It uses only cost model even for subsequent measurement.
Assurance & Audit Defined
Chapt 1
CAS
What are the elements of an Assurance engagament
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
What is an Audit Risk
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
What is a misstatement
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
What is a F/S audit and the responsibiities of an auditor
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
What are the components of an audit report
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
Client Acceptance/Continuance
APER
Chapt 5
Steps to be carried out at this stage
- Identify and assess the engagement risk
- Acceptance risk for new clients
- Continuance risk for existing clients - Establish engagement preconditions
- Obtain a signed engagement letter
What to look out for in engagement risk
- Integrity of client
- Competence and resources of the engagement team
- Ethical standards - Independence
- Other significant matters
What to include as engagement preconditions
- Determine if the accounting framework is appropriate
- Document Management responsibilities
- Consider the limitation of scope
Content of an engagement letter
- Objective and scope of audit
- Management responsibilities
- Auditor’s responsibilities
- Identification of the financial reporting framework
- Expected form and content of the audit report
Reviews & Compilations
Chapt 27
Audit Engagement - Features
- Users - Public coys, SHolders, potential investors,
Lenders/ creditors, BOD - Assurance - Reasonable
- Opinion - Yes
- Procedures Reqd - CIIROAR
- Type of report - Independent Auditor’s Report
- Timing - Most time consuming
- Cost - Most expensive
- Independence - Required
- Practitioners objective - to determine if the FS are presented fairly in all material respect
Review Engagement - features
- Users - Public private coys,ext investors, lenders, creditors, mgmt
- Assurance - Limited
- Opinion - Conclusion
- Procedures Reqd - I A Inquiry, Analytical procedure
- Type of report - Review Engagement Report
- Timing - Somewhat time consuming
- Cost - Moderately expensive
- Independence - Required
- Practitioners objective - to determine if the FS are plausible
Compilation Engagement
- Users - Private coys, Mgmgt for tax purposes, Small business that dont have to be audited. Reqd by CRA
- Assurance - None
- Opinion - None
- Procedures Reqd - None. Performance is to compile FS + note describing basis of accounting applied
- Type of report - Compilation Engagement Report
- Timing - Least time consuming
- Cost - Least expensive
- Independence - Not required
- Practitioners objective - Help mgmt in the preparation of the compiled fin info in line with the basis of accounting they have selected
Audit Planning - Introduction
Chapt 6 - 13
CAS 300
An audit plan is prepared in the form of an audit planning memo that includes 4 parts
R isk assessment
A pproach
M ateriality
P rocedures
What is the difference between Audit Planning and Audit Strategy
- 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.
Risk Assessment
RAMP
Chapt 7
What is Audit Risk
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
What is a misstatement
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
Audit Risk Model
Audit risk = Risk of Mistatement x Detection Risk
Audit Risk = (Inherent Risk + Control Risk) x Detection Risk
How to assess a RMM
- 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.
What is the spectrum of an IR
It is the likelihood x magnitude of a mistatement
Planning - Materiality
Chapt 11
What are the 8 step approach to calculating materiality
- 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)
