Unit 2 Flashcards
Ethics and Financial Reporting
Chapt 7
How to address ethical issue questions
A. Asssess the situation
- Identify the ethical issue
- Plan work on the ethical issue and any other issue
- Identify alternatives
B. Analyze ethical issue
- Assess ethical criteria
- Analyze impact on stakeholders
- Provide remedies for underlying causes
- Weigh pros & cons of viable alternatives
C. Conclude and advise
What are the ethical criteria that could be violated
- Rules of professional conduct
- Laws & Regulations
- Societal norms
- Organizational policies
- Personal ethics
Cash and Cash Equivalent
Chapt 26
IAS 7
What is the difference btw IFRS & ASPE
Under IFRS, redeemable preferred shares with a maturity less than 90 days from the date of acquisition are classified as cash equivalent. But not so under ASPE
Trade Receivables (AR)
Chapt 22
IFRS 9
ASPE 3856
How are trade receivables recognized
They are short-term and unsecured financial instruments. They are usually classified as Amortized costs if these 2 criteria are met
- The financial asset is held in a business model whose objective is to collect contractual cashflows
- The contractual terms of the FA give rise to specific dates of cashflow which are solely payment of principal and interest
Initial recognition and measurement
Initial measurement - FV
Initial recognition
When terms of payment are for 1yr and below - FV (transaction price)
Payment discount
1 Gross Method
Adjustments made when the discount is taken
2. Net Method
Adjustment to AR on sale
Pymt period above 1 yr - future CF are discounted at the effective interest rate based on customer’s credit risk and recorded as long term assets
Subsequent measurement
- Pv of all cashflows over the life of the receivable
- Allowance for doubtful account contra reflects adjustment to receivables for impairment
- Changes in loss allowance are recognized in p&l (eg using the aging of accounts method)
AR is initially recognized at its transaction price less loss allowance for expected credit losses. What is the guidance on recording expected credit losses.
A. A range of possible outcomes should be evaluated which result in an unbiased and probability weighted amount.
B. Time value of money is reflected
C. Reasonable and supportable information should be used to determine credit losses
Notes Receivable
Chapt 23
IFRS 9. IFRS , ASPE 3856
Initial measurement
- FV + Transaction cost
- FV = PV of the future cashflows discounted using the market interest rate (imputed interest rate) of similar asset
- Discount rate from borrower’s perspective is the more clearly determinable of:
a. Rate implied when the cash price of the sale is known OR
b. The borrower’s incremental borrowing rate IBR
- When the imputed interest rate = market interest rate;
Fair value is then = Face value - When the imputed interest rate is NOT = market interest rate OR it is non-interest bearing;
Record Note at PV + transaction cost
Subsequent measurement
Measured at amortized cost. That is,
- Amount it was originally measured Plus
- interest calculated to date using effective interest rate deduct
- payment received on obligation
Difference between IFRS and ASPE
IFRS
Interest revenue is calculated using the effective interest rate method
ASPE
An option between effective interest rate and the straight-line method
Passive investment in Financial assets
Chapt 28
IFRS 9
ASPE 3856
What are passive investments
They are investments made for the purpose of earning a ROI until cash is needed at a future date
What are the categories of Passive investment
They fall under 3 categories of financial assets :
* FVPL- Fair value through profit or loss
* FVOCI- Fair value through other comprehensive income
* Amortized cost
The primary considerations for classification of FAs are :
- The entity’s business model for managing such assets and
- The contractual cashflow characteristic of the asset
Measurement of FI at FVPL
- Assets not classified as amortized cost or FVOCI
- Assets held for trade
* Acquired principally to resell in the future
* On initial recognition, it is part of a portfolio of identified FI that are managed together
* it is a derivative - Assets, on initial recognition are designated as FVPL
Measurement of FI at amortized cost
Investment in debt securities is measured at amortized cost if :
1. The objective of the biz model is to collect contractual cash flows.
2. The contractual terms of the FA must give rise on specified dates to cash flows that are solely for the payment of principal or interest outstanding.
Examples of assets accounted for at amortized cost include
- AR balances
- Bank deposits
- Redeemable preference shares
- Bonds the company intends to hold till they mature
Measurement of FI at FVOCI
FAs are measured at FVOCI if the entity’s biz model is to sell investments prior to its maturity to realize profit. Difference with Amortized cost is that there must be intention to sell with FVOCI. Dividend income from FVOCI FI is recorded through P/L
They include :
- Equity investment designated as FVOCI
- Debt instruments that are solely for payment of principal & interest
Snapshot
- Inititial Measurement - All - FV
- Transaction cost
FVPL - Expense
FVOCI $ Amortised cost - Add to carrying value - Subsequent measurement
FVPL & FVOCI - FV
Amortized cost - Amortised cost @ effective int rate method
Government Grants
Chapt 33
IAS 20
ASPE 3800
Recognition criteria
When there is reasonable assurance that :
- The company will adhere to the conditions of the grant
- The grant will be received
If 1st condition is met but not the 2nd yet, it is recognized as
Deferred Grant Receivable
If condition 2 is met but not 1yet, it is recognized as Deferred liability
Initial and Subsequent measurement
Initial
FV = Cash received or receivable
Subsequently
At historical cost - Original grant amt- amt recognized in SCI
How are grants related to income presented
Gross method - separately as ‘other income’
Net Method - Deducted from related expense
Related Party Transactions
Chapter 65
IAS: 24, Related Party Disclosure
ASPE: HB 3840, Related Party Transaction
What is a Related Party Transaction according to ASPE 3840
An RPT occurs when economic resources are transferred between parties subject to significant influence, common control or joint control .
OR
Provision of services by a party to a related party regardless of whether consideration is transferred.
What are the 2 possible amounts to measure an RPT
Carrying amount - the amount by which it was recorded by the transferor (NBV)
Exchange amount - Amount of consideration paid or received
How are RPTs measured at carrying amounts treated
(by the buyer)
The difference between the carrying amounts of the items exchanged is included as a charge to equity
Gains —— Contribution Surplus
Losses —- Existing Contr Surplus. Balance – Retained Earnings
How are RPTs measured at exchange amounts treated
Gain / Loss —- Income for the period
- Asset cannot be recorded more than the FSV
- A value significantly below NBV is an indication of impairment
What are the steps in measuring an RPT?
- Did an RPT occur
- Was it in the normal course of operations YES 5
- Is change in ownership interest substantive NO Car Amt
- Is amt supported by independent evidence NO Car Amt
- Is transaction monetary or non-monetary - Monetary Exch Amt
a. Is it exch of items held in the normal course of ops YES Car Amt
b. Does the item have commercial substance
NO - Carrying amount
YES - Exchange amount
Differences between IFRS and ASPE
Measurement - IFRS records at the exchange amount
Disclosure - IFRS has more requirements including :
. Nature of all related party relationships regardless.
. Name of entity’s parent coy and ultimate controlling power
. Key mgmt compensation in total and for various categories
What is considered a change in ownership interest in an asset
It is seen from the unrelated party’s (in coy receiving benefit) point of view. that is, if their interest is above 20%, then, any transaction done by company A with coy B it is considered significant change in interest
Execution - Substantive Approach
Chapt 16
CAS 330
CAS 315
CAS 520
What are the types of audit procedures
- Test of controls
- Substantive testing
- Substantive Analytical Procedures
- Test of details
Evidence Gathering Techniques
C - Confirmation
I - Inspection
I - Inquiry
R - Recalculation
O - Observation
A - Analytical procedures
R - Reperformance
Test of controls - IIROR
Test of details - CIIROR
SAP - Analytical procedure and inquiry
What are the steps for SAP
- Develop an independent expectation
- Define significant diff/ threshold for the expectation
- Calculate difference actual with expectation
- Investigate significant differences and conclude
What are the Sub analytical procedures
- Horizotal/ trend analysis
- vertical
- Ratio
- Reasonableness tests
- Large/unusual item review
