CFE Flashcards

Question

What is the maximum amount that can be claimed for boarding school/overnight camps?

Answer 1

$200/week if under 7 $275/week if child with prolonged/sevre disability and eligible for the disability tax credit $125/week other eligible children

Answer 2

an existing conditions with uncertainty regarding a potential loss/gain to a company that will be resolved when a future event occurs/does not occur. Case: TankCo

Answer 3

* number and frequency of transactions * period of ownership * knowledge of market * relationship to taxpayer's business * time spent * advertising * nature of asset

Answer 4

Under "other income

Answer 5

Provisions, Contingent Liabilities, Contingent Assets (IFRS) Provisions- a liability of uncertain timing or amount. May be recognized when: • The entity has a present legal or constructive obligation as a result of a past event, • It is probable that an outflow of economic benefits will be required to settle the obligation; and • A reliable estimate can be made of the amount of the obligation Contingent losses  NOT recognized: • A possible obligation that arises from past events, whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly in the control of the entity; • A present obligation that arises from past events is not recognised when an outflow of future economic benefits is not probable or the amount of the obligation cannot be measured reliably. Contingent gains NOT recognized: • – possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. Case: Solar Panel Solutions, Elcar Reference: IAS 37

Answer 6

Goodwill and intangible assets – Amortization (ASPE) • 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: ASPE 3064.56, .57, .61

Answer 7

Lesser of 38.33% of taxable dividends paid in the year and RDTOH balance at end of year

Answer 8

Price variance • Price variance is the difference between the actual cost and standard cost of materials or labour. • Price variance = actual quantity × (actual price − standard price) • Using the above formula, positive result is unfavourable; negative result is favourable. Case: Elcar

Answer 9

the actual capital gain | proceeds/deemed proceeds not reinvested

Answer 10

When a particular amount within such a range appears to be a better estimate than any other, the amount would be accrued; however, if there is no amount within the range is indicated as a better estimated than any other, then the minimum amount would be accrued.

Answer 11

Common business expenses DISALLOWED (Tax) • 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) Case: Culinary Crawl, TankCo, Elder Care Centre and Spa, Roxanne Kalpert, Solar Panel Solutions, Elcar Reference: ITA 20(1), 18(1)

Answer 12

Audit approach (Assurance) • If Control Risk assessed at Maximum, then no reliance may be placed on controls, resulting in no Tests of Controls, and a Substantive approach must be followed • If Control Risk assessed at less than Maximum, then some reliance may be placed on controls, based on results of Tests of Controls, which could lower the amount of substantive work to be done at year-end. Such an approach is generally referred to as a Combined approach Case: Dogani, TankCo, Solar Panel Solutions, Elcar

Answer 13

General assurance standards (Assurance) Standards for assurance engagements OTHER THAN audits of financial statements and other historical financial information. • Attestation engagements (CSAE 3000): a party other than the practitioner measures or evaluates the underlying subject matter against the criteria • Direct engagements (CSAE 3001): the practitioner measures or evaluates the underlying subject matter against the criteria General standards: • Before undertaking an assurance engagement, the practitioner should have a reasonable basis for believing the engagement can be completed in accordance with the relevant standards. • The practitioner should seek management's acknowledgment of responsibility for the subject matter as it relates to the objective of the engagement. • The assurance engagement should be performed with due care and with an objective state of mind. • The practitioner and any other persons performing the assurance engagement should have adequate proficiency in such engagements and collectively possess adequate knowledge of the subject matter. Reference: CSAE 3000/CSAE 3001

Answer 14

Discounted vs. Undiscounted Cash Flows (Finance) • Incremental cash flows (excluding financing elements) should be discounted to recognize the time value of money for the purposes of making a decision regarding accepting or rejecting a project • Incremental cash flows (including financing elements) should be analyzed year over year, without discounting, to determine if a certain cash position would be met by a certain time Case: TankCo, Ferguson Real Estate, Elder Care Centre and Spa, Solar Panel Solutions, Elcar, StillGood Food

Answer 15

Carry back = 3 years Carry forward = 30 years Apply against any source of income

Answer 16

Investments – Equity method (IFRS) • IAS 28: an entity with significant influence over an investee shall treat the investee as an associate and account for its investment in the associate using the equity method • Significant influence can be demonstrated by owning (directly or indirectly) 20% or more of the voting power of the investee • The entity may be able to demonstrate influence, even with less than 20% ownership. Evidence of influence can include: o Representation on the board of directors o Participation in policy-making processes o Material transactions between the entity and its investee o Provision of essential technical information • Under the equity method, the investment is initially recognized at cost, and is adjusted for the post-acquisition change in the investor’s share of the investee’s net assets Reference: IAS 28

Answer 17

Under 7 years with no disability-$8,000 7-16 years of age with no disability -$5,000 15 years + with disability and not qualifying for disability tax credit-$5,000 Any age- with disability that qualified for disability tax credit- $11,000

Answer 18

Moving expenses In order for any moving costs to be deductible for tax purposes, the move must be an “eligible relocation” and the costs incurred must be deductible moving expenses. • Eligible relocation is: o Occurring as a result of a new work location within Canada, and o One in which the new residence is at least 40 kilometres closer to the new work location than the old residence • Deductible moving expenses include: o Selling costs related to the old residence (i.e. commissions) o Costs to transport household goods (i.e. moving company costs, etc.) o Legal fees associated with the purchase of a new residence o Disconnecting and connecting utilities, revising legal documents to reflect a new address, replacing driver’s licenses o Travelling costs o Meals and lodging (not exceeding 15 days, not including travel days) o Costs of cancelling a lease on the old residence o Up to $5,000 of interest, property taxes, insurance, heating and utilities costs on the old resident, subsequent to the time when the taxpayer has moved out, during which reasonable efforts are made to sell the property • Examples of costs that are not deductible include: o Home renovations for the old property in advance of the sale (these are capital in nature and would be added to the capital cost of the old property) o Travel expenses for a house-hunting trip Case: Play Canada Inc., TinyCo Reference: ITA 248(1); 62

Answer 19

ASPE 3064.78 For assigning goodwill to a reporting unit the acquired assets and liabilities at acquistion date shall be assigned to the reporting unit when: a) the assets are used or the liability relates to the operations of the unit b) the asset/liability is considered in determining the FV of the unit Case: TankCo

Answer 20

Revenue recognition – Effect of uncertainties (returns) (ASPE) Recognition of revenue requires that the revenue is measurable and that ultimate collection is reasonably assured. • If significant and unpredictable amounts of goods being returned, do not recognize revenue • If the amount of returns can be reasonably estimated based upon experience, it may be possible to provide for an allowance for a returns expense. Reference: ASPE 3400.19-.21

Answer 21

- Actual recapture | Recapture not reinvested

Answer 22

Capital Cost Allowance (CCA) (Tax) • 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. Case: Culinary Crawl, TankCo, Elder Care Centre and Spa, Roxanne Kalpert, Ferguson Real Estate, Solar Panel Solutions, Veza Eye Centre Reference: ITA 20(1)(a)

Answer 23

Non-monetary transactions (IFRS) • Asset exchanged in a non-monetary transaction should be measured at the more reliably measurable of the fair value of the asset given up and the fair value of the asset received, unless the transaction lacks commercial substance or neither the fair value of the asset received nor the fair value of the asset given up is reliably measurable, in which case, it should be measured at the carrying value of the asset given up • A non-monetary transaction has commercial substance when the entity's future cash flows are expected to change significantly as a result of the transaction, i.e. o the risk, timing and amount of the future cash flows of the asset received differ significantly from the risk, timing and amount of the cash flows of the asset given up; or o the entity-specific value of the asset received differs from the entity-specific value of the asset given up, and the difference is significant relative to the fair value of the assets exchanged Case: Dogani Reference: IAS 16.24-.26

Answer 24

* rent * supplies * repairs and maintenance * property tax * home insurance * rented equipment

Answer 25

Business investment loss (Tax) • For tax purposes, in the year a corporation declares bankruptcy, or is insolvent (subject to certain conditions), its shareholder(s) may file an election to deem the shares to have been disposed of for proceeds equal to nil o Generally, this will yield a capital loss equal to the ACB of the shares • A capital loss of small business corporations is given special treatment and is deemed to be a business investment loss o Half of the business investment loss is determined to be an “allowable business investment loss” (ABIL) and can be applied immediately against income from any source o The ABIL can be carried back up to three years or forward up to 10 years o If the ABIL is not used by the end of the 10 years, it will become a capital loss Reference: ITA 50(1), ITA 39(1)(c), ITA 111(1)(a), ITA 111(8)

Answer 26

Employment – Non-taxable benefits (Tax) • Uniforms and special clothing required to be worn • Transportation to job site • Moving expenses reimbursed, excluding housing loss reimbursement • Recreational facilities at place of work • Premiums paid under private health services plans • Professional membership fees when primarily for benefit of the employer Case: Perkins Packing Reference: ITA 6(1)

Answer 27

Break-even analysis (Management Accounting) • Break-even is the determination of sales volumes necessary to generate a zero-profit. • Break-even can be expressed in number of units, total revenues, or a percentage of expected revenues. • To determine, calculate the fixed costs per period, and divide them by the contribution margin (CM) per unit, to determine the necessary sales volumes to generate zero-profit. • Break-even is A / B where:  A is the total fixed costs;  B is the CM per unit. Case: Lake Country Camping

Answer 28

Property, Plant and Equipment (IFRS) Initial recognition if: • The future economic benefits associated with the asset will flow to the entity, and • The cost of the asset can be reliably measured. Initial measure- recorded at cost. Subsequent measurement • Carried at cost less accumulated depreciation, and impairment losses, OR • Carried at revalued amount, i.e. FV, less subsequent depreciation if FV can be reliably measured o An increase in value is credited to OCI, unless it is a reversal of a revaluation decrease previously recognized as an expense Significant components are required to be depreciated over their estimated useful life. Reference: IAS 16

Answer 29

1. Evidence that an arrangement exists 2. Services have been rendered 3. Seller's price is fixed/determinable

Answer 30

Efficiency variance • Efficiency variance is the difference between the actual unit usage of something and the expected amount of usage. The expected amount is usually the standard quantity of direct materials, direct labour, machine usage time, and so forth that is assigned to a product. • Efficiency variance = standard price × (actual quantity − standard quantity) • Using the above formula, positive result is unfavourable; negative result is favourable. Case: Elcar

Answer 31

Intangible assets – Definition and recognition (IFRS) • To meet the definition of an intangible asset the item must be: identifiable, the entity must have control over the future benefit and the item must meet the recognition criteria • The asset is identifiable if it either: o It can be separated from the entity o Arises from contractual, legal right that allow it to be transferrable or separable • The entity controls the asset if it has the power to obtain future economic benefits • Recognition criteria: o Probable that the expected future economic benefits will flow to the entity o Cost of the asset can be measured reliably Reference: IAS 38.12, .13,.17 .21

Answer 32

Reporting alternatives – Specific Items (Assurance) CAS 805 Report – Audit of a Single Financial Statement 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 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

Answer 33

Refundable dividend tax on hand (RDTOH) For tax years beginning on or after January 1, 2019, there are two types of RDTOH balances: • Non-eligible RDTOH: Includes refundable taxes on investment income and Part IV tax on non-eligible portfolio dividends. o Only the payment of a non-eligible dividend can trigger a refund from this account. • Eligible RDTOH: This tracks refundable taxes paid on eligible dividends received by the corporation. o Any type of dividend (either eligible or non-eligible) can trigger a refund out of this account; however, when non-eligible dividends are paid, the refund must come out of non-eligible RDTOH first. At the date of transition, the eligible RDTOH balance will be calculated as the lesser of: • The existing RDTOH balance; and • 38 1/3 % of the General Rate Income Pool (GRIP) balance. Case: Solar Panel Solutions, Lake Country Camping, TankCo Reference: ITA 123.3, 129(3), 186, 187

Answer 34

Foreign currency transactions (IFRS) • Initial measurement: o At the functional currency, by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction. • Subsequent measurement: o Monetary items should be translated at the closing rate on the financial reporting date. o Non-monetary items measured at historical cost should be translated using the exchange rate on the date of the transaction. o Non-monetary items measured at fair value should be translated using the exchange rate on the date when the fair value was measured. Case: Elcar Reference: IAS 21.21-23

Answer 35

Assets held for sale (IFRS) • Non-current assets (or disposal group) to be disposed of other than by sale should continue to be classified as held and used until they are disposed of • Non-current assets (or disposal group) to be sold should be classified as held for sale when all of the following are met: o Management commits to a plan to sell o Steps to locate a buyer and complete the sale have started o It is being actively marketed at a reasonable price o It is available for immediate sale in its present condition o The sale is probable and expected to occur within a year o Actions required to complete the sale indicate it’s unlikely significant changes to the plan will be made or that the plan will be withdrawn • Non-current assets (or disposal group) held for sale should be measured at lower of carrying amount and fair value less costs to sell, and should not be amortized Reference: IFRS 5.06 - .15, .25

Answer 36

Assets held for sale (ASPE) • Long-lived assets to be disposed of other than by sale should continue to be classified as held and used until they are disposed of • Long-lived assets to be sold should be classified as held for sale when all of the following are met: o Management commits to a plan to sell o It’s available for immediate sale in its present condition o Steps to locate a buyer and complete the sale have started o The sale is probable and expected to occur within a year o It’s being actively marketed at a reasonable price o Actions required to complete the sale indicate it’s unlikely significant changes to the plan will be made or that the plan will be withdrawn • Asset held for sale should be measured at lower of carrying amount or fair value less cost to sell, and should not be amortized Reference: ASPE 3475.04, .08, .13

Answer 37

Include property that is for the use of the individuals use and enjoyment (not used for producing income), depreciates over time

Answer 38

``` Control Deficiencies (Assurance) • The most effective format to address controls weaknesses consists of a short statement of the problem (deficiency), its potential effect(s) on the financial statements or operations (implication) and suggestions to address the matter (recommendation) o Deficiency (D) – this is generally a case fact outlining something that might be deficient with the current controls o Implication (I) – here, we go beyond case facts to explain the effects of the noted deficiency either on the financial statements or on operations. To the extent possible, effects on the financial statements must be tied to assertions or at least the affected accounts must be outlined along with a discussion of how they might be affected by the deficiency o Recommendation (R) – this involves suggesting a solution to rectify the noted deficiency that is specific and practical given the case facts and circumstances. Case: Culinary Crawl, TankCo, Ferguson Real Estate, Solar Panel Solutions, Veza Eye Centre ```

Answer 39

38% | Case: Rechic bags

Answer 40

Child care deduction are the lesser of : a) Annual limits b) actual amount paid + overnight camp maximum c) 2/3 of taxpayers earned income

Answer 41

Incremental Cash Flows (Finance) • Incremental cash flows comprise the additional cash flows from taking on a new project, incorporating the tax-affected initial outlay, annual revenues & expenses and terminal value (or cost) associated with the project, in accordance with the scale and timing of the project • When determining incremental cash flows from a new project, consider: o Sunk Costs – These are the initial outlays that cannot be recovered even if a project is accepted. As such, these costs will not affect the future cash flows of the project and are not considered incremental o Opportunity Costs – These represent any potential loss of current cash flows due to accepting a new project and are considered incremental o Cannibalization – This is the opportunity cost where a new project takes sales away from an existing product o Working Capital Changes – These represent changes in receivables, payables and inventory due to accepting a new project and are therefore considered incremental Case: TankCo, Solar Panel Solutions, King Street Theatre

Answer 42

Use of an expert (Assurance) • Evaluate the competence, capabilities and objectivity of the expert • Obtain an understanding of the expert’s work • Evaluate the appropriateness of the expert’s work as audit evidence for the relevant assertion Case: Solar Panel Solutions Reference: CAS 500.A35 - .A58

Answer 43

``` Accounting for subsidiaries (ASPE) An enterprise can make an accounting policy choice to account for its subsidiaries using one of the following methods: • Cost method • Equity method • Consolidation method ``` ** Once a method has been selected, it must be applied consistently (i.e. all subsidiaries must be accounted for using the same method) Reference: ASPE 1591, ASPE 3051

Answer 44

Reporting alternatives – Specific items (Assurance) • CAS 805 Report – Audit of a Single Financial Statement and Specific Elements, Accounts or Items of a Financial Statement o A report providing audit level assurance on individual financial statements or accounts, rather than financial statements on the whole o May not be a practical alternative if the financial statements on the whole are not being audited Case: TankCo Reference: CAS 805

Answer 45

Retiring allowance rollover to RRSP (Tax) 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)

Answer 46

* rent * supplies * repairs and maintneance

Answer 47

Materiality (Assurance) • A misstatement in financial statements is considered to be material if, in the light of surrounding circumstances, it is probable that the decision of a person who is relying on the financial statements, and who has a reasonable knowledge of business and economic activities (the user), would be changed or influenced • Common base = 5% of Normalized Net Income before Taxes (NIBT) for profit-oriented entities • Materiality is not purely quantitative; qualitative factors must be considered • Factors that may indicate the existence of one or more particular classes of transactions, account balances or disclosures for which misstatements of lesser amounts than materiality for the financial statements as a whole could reasonably be expected to influence the economic decisions of users- i.e. “specific” materiality • Performance materiality (generally 60% to 75% of materiality) means the amount less than materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality Case: Dogani, TankCo, Ferguson Real Estate, Solar Panel Solutions, Elcar Reference: CAS 320

Answer 48

Inventory measurement – Cost formulas (specific identification) (ASPE) • The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects shall be assigned by using specific identification of their individual costs. Reference: ASPE 3031.22

Answer 49

- Deduction benefit of 50% only if: a) the FMV of shares when option granted does not exceed the option exercise price b) For CCPC, the shares were held for at least two years subsequent to the option exercise

Answer 50

Business income vs. property income (Tax) • It is a question of fact whether income is from business or property. • Capital property is property that provides a long term or enduring benefit • Disposition of capital property gives rise to capital gains or losses • Business income will arise from an “adventure or concern in the nature of trade”, determined as follows: o Conduct  How long was the asset held? Have there been similar transactions? o Nature of the asset  Is the asset capable of producing income? Is the asset related to the taxpayer’s ordinary business? o Intent  Did the taxpayer originally acquire the asset with the intention to sell? • For an individual, business income is generally taxed at a higher rate than capital gain, as only 50% of capital gains are taxable. • For a CCPC earning less than the SB Limit, capital gain is generally taxed at a higher rate than business income, as the SBD doesn’t apply to capital gains Case: TankCo, Elcar Reference: ITA 9, ITA 248(1), IT-218R

Answer 51

Lease Accounting – Land & Building (ASPE) When a lease contains both land and building, it must first be determined whether the terms allow ownership to pass or provide for a bargain purchase option. o If yes, the lessee will capitalize the land separately from the building, based upon fair values. o If no, is the FV of the land at the inception of the lease significant in relation to the total FV of the leased property?  If yes, the land and building(s) are considered separately for purposes of classification. The lessee and lessor allocate the minimum lease payments between the land and building(s) in proportion to their fair values. Both parties classify the portion of the lease applicable to land as an operating lease.  If no, the land and building are considered a single unit, and the economic life of the building is considered the economic life of the unit.

Answer 52

Change in use Gift Death Cessation of Canadian Residency

Answer 53

Revenue recognition – collectability criteria (ASPE) • Recognition of revenue requires that the revenue is measurable and that ultimate collection is reasonably assured • When there is reasonable assurance of ultimate collection, revenue is recognized even though cash receipts are deferred • When there is uncertainty as to ultimate collection, recognize revenue only as cash is received Case: Ferguson Real Estate Reference: ASPE 3400.19

Answer 54

Earnings per share (EPS) (IFRS) • Basic EPS: Net earnings available to common shareholders / weighted average common shares outstanding (WACSO) during the year • Diluted EPS: Hypothetical measure of company earnings attributable to each common shareholder assuming all dilutive securities have been converted to common shares; dilutive elements must be ranked from most to least dilutive in completing the diluted EPS calculation. o Stock options: the difference between the number of ordinary shares issued from exercising the options and the number of ordinary shares that would have been issued at the average market price during the period — difference is treated as an issue of ordinary shares for no consideration (no impact on the earnings in the EPS calculation). o Convertible bonds: dilutive impact if the after-tax interest per share that would be issued is less than the basic EPS — the after-tax interest on the bond increase earnings and the number of shares issued on conversion is added to the WACSO. Case: Solar Panel Solutions Reference: IAS 33

Answer 55

Carry back 3 years Carry Forward 7 Years Apply against Net LLP gains

Answer 56

Flexible budget variance • A flexible budget variance is the difference between the actual costs and standard costs based on the actual production levels. • Flexible budget variance = actual costs − flexible budget costs (that is, standard quantity of an item for actual units produced × standard price) • Using the above formula, positive result is unfavourable; negative result is favourable. Case: Elcar

Answer 57

15.02% of gross up dividend

Answer 58

- ASPE 1000 - gains are increases in equity from peripheral or incidental transactions and events affecting an entity and from all other transactions, events and circumstances affecting the entity except those that result from revenues or equity contributions. - are recognized when received - Case: Elder Care Center and Spa

Answer 59

Financial statement assertions (Assurance) • Assertions about classes of transactions and events for the period under audit: o Occurrence – transactions and events that have been recorded have occurred and pertain to the entity o Completeness – all transactions and events that should have been recorded have been recorded o Accuracy – amounts and other data relating to recorded transactions and events have been recorded appropriately o Cut-off – transactions and events have been recorded in the correct accounting period o Classification – transactions and events have been recorded in the proper accounts o Presentation – transactions and events are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable • Assertions about account balances at the period end: o Existence – assets, liabilities, and equity interests exist o Rights and obligations – the entity holds or controls the rights to assets, and liabilities are the obligations of the entity o Completeness – all assets, liabilities and equity interests that should have been recorded have been recorded o Accuracy, valuation, and allocation – assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded o Classification – assets, liabilities, and equity interests have been recorded in the proper accounts o Presentation – assets, liabilities, and equity are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable Case: TankCo, Ferguson Real Estate, Roxanne Kalpert, Solar Panel Solutions, Elcar Reference: CAS 315.A129

Answer 60

Replacement property rules (Tax) • In an arm’s length transaction, when one property is exchanged for another property, it is deemed to be disposed of for proceeds equal to the fair market value, and any excess of proceeds over adjusted cost base is a capital gain • If replacement property criteria are met, then an election is available to fully defer any recapture/capital gain arising on the deemed disposition, by reducing the UCC/cost base of the acquired property by the amount of the recapture/capital gain, respectively. • To be eligible to defer the gain, the replacement property rules must apply: o It is reasonable to conclude that the property was acquired by the taxpayer to replace the former property (and put to the same or similar use) o Where the former property was used by the taxpayer or a person related to the taxpayer for the purpose of gaining or producing income from a business, the particular capital property was acquired for the purpose of gaining or producing income from that or a similar business or for use by a person related to the taxpayer for such a purpose o Where the former property was a taxable Canadian property of the taxpayer, the particular capital property is a taxable Canadian property of the taxpayer Case: Dogani; Reference: ITA 13(4), 44(1), 44(5)

Answer 61

Revenue recognition criteria – Percentage-of-completion method (ASPE) The percentage-of-completion method is appropriate when: • performance consists of the execution of more than one act, and • revenue would be recognized proportionately by reference to the performance of each act. For practical purposes, when services are provided by an indeterminate number of acts over a specific period of time, revenue would be recognized on a straight line basis over the period unless there is evidence that some other method better reflects the pattern of performance. The amount of work accomplished would be assessed by reference to measures of performance that are reasonably determinable and relate as directly as possible to the activities critical to the completion of the contract. Case: TankCo, Ferguson Real Estate Reference: ASPE 3400.17

Answer 62

Employer provided automobile – Tax planning (Tax) • Consider employee purchasing the car and charging a reasonable per-km allowance (may be more tax effective since the standby charge is based on original cost) • Consider employee including allowance in income and claiming business portion of actual car expenses if they exceed the allowance • Consider sale and leaseback for employer-provided cars (leasing may lower tax benefits because otherwise the standby charge is based on original cost) • Maintain log to justify business vs. personal km • Lower standby charge by reducing number of days vehicle available for personal use • Increase business use by visiting clients on the way to and from work Case: Ferguson Real Estate, Elcar Reference: IT-63R5

Answer 63

Impairment of long-lived assets (ASPE) • Steps: 1. Determine if factors indicating impairment exist 2. Group asset with other assets/liabilities to form group at the lowest level that generates cash flow (i.e. cash generating unit) 3. Determine if there is impairment by comparing net book value to recoverable amount (i.e. undiscounted future cash flows) 4. Calculate impairment by comparing carrying amount to fair value) • Cannot reverse write-downs Case: TankCo, Ferguson Real Estate Reference: ASPE 3063.04-.09, .12, .18

Answer 64

* Control of work * Ownership of tools and equipment * Subcontracting work or hiring assistants * Financial Risk * Responsibility for investment and management * Opportunity for profit

Answer 65

Types of capital leases – Lessor (ASPE) • Sales-type lease o Arise when a dealer uses leasing as a way to sell their products o Record as sale • Direct financing lease o At inception, FV of the leased property is equal to its carrying value o Usually arises when a lessor acts as intermediary between manufacturer and lessee o Record as lease receivable (payments to be received and guaranteed residual value, if any) o Difference between lease receivable and carrying value should be recorded as unearned finance income o Finance income will be recognized each year Reference: ASPE 3065.29, .30, .37

Answer 66

No- not allowed to claim a capital loss on depreciable property. May be able to claim a terminal loss

Answer 67

Carry back 3 years Carry forward 10 years Any Source (if unused after 10 years; they become a net capital loss and can be carried forward indefinitely and applied against net taxable capital gains)

Answer 68

Filing and payment deadlines • Income taxes o Filing deadline is six months after year end. o Tax balances owing are due two months after year end (three months for CCPCs eligible for small business deduction). • GST/HST filing deadline o Annual taxable supplies of:  $1.5 million or less = annual reporting  More than $1.5 million up to $6 million = quarterly reporting  More than $6 million = monthly reporting o Annual or quarterly filers have the option to report more frequently. o Quarterly and monthly filers must file and remit the balance owing within one month after the end of the reporting period. o Annual filers must file and remit the balance owing within three months after the fiscal year end. o Annual filers are required to pay quarterly instalments if net GST owing in the previous year was more than $3,000. Case: King Street Theatre

Answer 69

Bad Debts Undelivered goods and services Unpaid amounts

Answer 70

Owner- manager compensation – salary vs. dividends (Tax) • Corporations are separate legal entities therefore, to extract funds, an owner manager must either receive a dividend or be paid a salary • The Canadian tax system is meant to charge the same level of tax on income regardless of whether it is earned directly as an individual (i.e. salary) or flowed through a corporation (i.e. dividend); this is referred to as integration • Salary payments are deductible to the corporation whereas dividends are not • Dividend payments will be paid out of after-tax profits and be eligible for a dividend tax credit which offsets the higher corporate rate of tax paid • Salary is considered earned income for the purpose of generating RRSP contribution room and pensionable earnings for CPP • Salary payment may result in reduced net cash flow available to an owner-manager, as there are CPP costs associated with this type of compensation; these remittances are not required for dividend payments • Dividend payments will reduce an individual’s cumulative net investment loss (CNIL) Case: Ferguson Real Estate

Answer 71

Revenue Recognition – Identification of the performance obligations (IFRS) Performance obligations are identified as each promise to transfer to the customer either: • a good or service (or bundle of goods or services) that is distinct; or • a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer A good or service that is promised to a customer is distinct if: • the customer can benefit from the good or service on its own or together with other resources readily available to the customer; and • the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract Two or more promises are not separately identifiable if the nature of the promise, within the context of the contract, is to transfer a combined item in which the promised goods or services are inputs. If a promised good or service is not distinct, it is combined with other promised goods or services until the entity identifies a bundle of goods or services that is distinct. Case: Solar Panel Solutions Reference: IFRS 15.22-.30

Answer 72

Impairment of assets (IFRS) • An entity is required to assess whether there are any indicators of impairment at the end of each reporting period. If an indication of impairment exists, the asset will need to be tested for impairment. • To test for impairment, compare the asset’s recoverable amount to the carrying value. The extent to which the carrying value exceeds the recoverable amount (if any) is the impairment loss. • Recoverable amount: Higher of the fair value less costs to sell and value in use o Fair value less costs to sell: price that would be received to sell an asset or paid to transfer a liability between market participants, less incremental costs directly attributable to the disposal of the asset (excluding finance cost and income tax expense) o Value in use: Present value of the future cash flows from the continuing use of the asset and its ultimate disposal • Impairment can be reversed if the asset subsequently recovers in value, but not to more than the “would be” value had the impairment not been recognized. Reference: IAS 36

Answer 73

Carry back = 3 years Carry forward = indefinite Apply against net taxable capital gains

Answer 74

- ASPE 3400 | - recognizes revenue proportionately with the degree of completion of goods or services under a contract

Answer 75

No- losses are denied on personal use property

Answer 76

Revenue recognition criteria (ASPE) Revenue from sales and service transactions shall be recognized when: • Performance is complete (risks and rewards transferred, significant acts performed, no continuing managerial involvement) • Consideration is measurable • Collection reasonably assured Case: TankCo, Ferguson Real Estate, Elder Care Centre and Spa Reference: ASPE 3400.04 - .06

Answer 77

Inventory measurement – Allocation of overhead (ASPE) • The allocation of fixed production overheads to the costs of conversion is based on the normal capacity of the production facilities. • The actual level of production may be used if it approximates normal capacity. • Unallocated overheads are recognized as an expense in the period in which they are incurred. Reference: ASPE 3031.14

Answer 78

Common business expenses ALLOWED (Tax) • 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 Case: Culinary Crawl, TankCo, Elder Care Centre and Spa, Roxanne Kalpert, Solar Panel Solutions, Elcar, Veza Eye Centre, StillGood Food Reference: ITA 20(1)

Answer 79

``` Asset criteria (ASPE) Definition of an asset: • Future benefit • Entity can control the benefit • Event that caused benefit already occurred ``` Reference: ASPE 1000.25

Answer 80

Common audit risk factors (Assurance) * New or additional users * Management bias * Going concern * Debt covenants * Cash flow issues * Control issues * New problems or issues * Significant growth in revenues or assets * Legal claims * High risk industry * Complex systems * Changes in operating environment * New personnel * Changes to information systems * New technologies * Changes in products or activities * Corporate restructuring * Expanded foreign operations * New accounting pronouncements Case: Dogani, TankCo, Ferguson Real Estate, Solar Panel Solutions, Elcar Reference: CAS 315, Appendix 2

Answer 81

Revenue recognition criteria – Completed contract method (ASPE) • The completed contract method would only be appropriate when performance consists of the execution of a single act or when the enterprise cannot reasonably estimate the extent of progress toward completion. • NOTE: There is no equivalent recognition criteria under IFRS. Case: TankCo, Ferguson Real Estate Reference: ASPE 3400.18

Answer 82

Principal residence exemption (PRE) The PRE enables the capital gains arising on the disposition of a principal residence to be received tax-free. • The formula for determining the PRE is (A x (1 + B) /C), where A = the capital gain on the disposition of the property, B = number of years the property is being designated as the principal residence, and C = number of the years the property was owned by the taxpayer. • Only 1 property can be designated as a principal residence for a taxpayer and his/her family in any given year • A principal residence is an accommodation that is ordinarily inhabited by the taxpayer/taxpayer’s family in the year o To be ordinarily inhabited, the property needs to have been lived in at some point during the year by the taxpayer/taxpayer’s family • If more a taxpayer/taxpayer’s family own more than 1 principal residence in a year, they will have to choose 1 to designate as the principal residence • To minimize taxes, it is most advantageous to designate the residence with the highest average capital gain per year as the principal residence Case: Play Canada Inc. Reference: ITA 54; 40(2)(b)

Answer 83

Revenue recognition – Consignment sales (ASPE) • 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: ASPE 3400.13 - .15

Answer 84

Accounting Policies, Changes, Errors (IFRS) Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. Changes in accounting estimates result from new information or new developments and, accordingly, are not corrections of errors. Only change a policy if: • Standard/interpretation requires it, or • Change will provide more relevant and reliable information to users Apply changes to policy retrospectively unless it is impractical. Changes to accounting estimates should be applied prospectively. Corrections to errors should be applied retrospectively unless it is impractical Reference: IAS 8

Answer 85

No benefit at date of grant

Answer 86

Capital Budgeting – Buy vs. Lease (Finance) • Calculate NPV of each option and compare to determine which option is cheapest • NPV of buy option – consider: o Cost of asset o PV of tax shield o Maintenance costs • NPV of lease option – consider: o PV of after tax lease payments • Other factors to consider: o Impact on covenants o Cash flows (leasing lessens the current cash burden) o Leasing may be easier to come by if company has trouble obtaining financing o Purchasing the asset might provide more flexibility (ownership of asset) o Leasing might insulate company from severe declines in asset value o Possible tax advantages (no capital leases for tax purposes – CRA sees all leases the same so cash payments would be deductible, however no CCA)

Answer 87

Opening balances (Assurance) • Sufficient and appropriate evidence regarding opening balances being free of material misstatement must be obtained in order to issue an opinion • Evidence may be obtained by reviewing the previous auditor’s working papers, if the client has been audited before, or by performing specified audit procedures on the opening balances, if the client is being audited for the first time • If the opening balances cannot be verified, it may be necessary to issue a qualified opinion or denial / disclaimer of opinion due to the scope limitation • Generally, the opening balance scope limitation would not apply to a review engagement as there’s no requirement to send out A/R confirmations or attend inventory counts, which are time-sensitive and generally only required for audit level assurance Case: TankCo Reference: CAS 510, paragraph 6(c)

Answer 88

Accounting changes – change in estimate (ASPE) • The use of reasonable estimates is an essential part of the preparation of financial statements and does not undermine their reliability • An estimate may need revision if changes occur in the circumstances on which the estimate was based or as a result of new information or more experience • By its nature, the revision of an estimate does not relate to prior periods and is not the correction of an error. • The effect of a change in an accounting estimate is recognized prospectively by including it in net income in: o the period of the change, if the change affects that period only; or o the period of the change and future periods, if the change affects both. Reference: ASPE 1506.20 - .23

Answer 89

Financial instruments – Impairment (ASPE) • 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: ASPE 3856.16 - .19

Answer 90

Deductibility of expenses (Tax) • 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 Case: Dogani, Roxanne Kalpert, Solar Panel Solutions, Elcar Reference: ITA 18(1)(a)

Answer 91

Part 1 refundable tax (30.67% of aggregate investment income) Part IV tax on dividends (38.33% of portfolio dividend or recipients share of dividend x their ownership %

Answer 92

When the lower income earner: a) is in full time/part time post secondary b) infirm and incapable of caring for children (minimum of 2 weeks) 3) in prison for 2 weeks 4) living apart at least 3 months due to a marriage breakdown

Answer 93

Employer provided automobile – Operating cost benefit (Tax) • Taxable employment benefit, calculated as: o $0.26 (for 2018) or $0.28 (for 2019) per km of personal use; or o 50% of the standby charge (only when vehicle used at least 50% for business) • Operating costs include gas, insurance and maintenance, but not parking Case: Ferguson Real Estate Reference: IT-63R5

Answer 94

Using the work of internal auditors • The external auditor shall determine whether the work of the internal audit function can be used for purposes of the audit by evaluating the following: o The extent to which the internal audit function's organizational status and relevant policies and procedures support the objectivity of the internal auditors; o The level of competence of the internal audit function; and o Whether the internal audit function applies a systematic and disciplined approach, including quality control. • In determining the nature and extent of work that may be assigned to internal auditors the external auditor shall consider: o The amount of judgment involved in planning/performing audit procedures, and evaluating the audit evidence o The assessed risk of material misstatement o The existence of significant threats to objectivity and competence of the internal auditor Reference: CAS 610.15, 610.29

Answer 95

Shareholder loan (Tax) • 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, 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)) • 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 Case: Ferguson Real Estate Reference: ITA 15(2), ITA 80.4

Answer 96

- ASPE 3400 - recognizes revenue only when the sale of goods or the rendering of services under a contract is completed or substantially completed.

Answer 97

Revenue recognition – performance criteria (ASPE) Performance would be regarded as being achieved when all of the following criteria have been met: • Persuasive evidence of an arrangement exists • Delivery has occurred or services rendered • Price to the buyer is fixed or determinable In determining if the seller's price to the buyer is fixed or determinable, an entity would consider the impact of the following factors: • Cancellable sales arrangements; • Right of return arrangements; • Price protections and/or inventory credit arrangements; and • Refundable fee for service arrangements. Case: TankCo, Ferguson Real Estate, Elder Care Centre and Spa Reference: ASPE 3400.07, .10

Answer 98

Intangible assets (ASPE) • In order to meet the definition of an intangible asset, assets must meet the identifiability, control, and future economic benefits tests. • An asset meets the identifiability criterion in the definition of an intangible asset when it: o is separable, or o arises from contractual or other legal rights • An entity controls an asset if the entity has the power to obtain the future economic benefits flowing from the underlying resource and to restrict the access of others to those benefits. • An intangible asset shall be recognized if, and only if: o it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and o the cost of the asset can be measured reliably. Case: TankCo Reference: ASPE 3064

Answer 99

Subsequent Events (ASPE) • In general, there are two types of subsequent events: o those that provide further evidence of conditions that existed at the financial statement date; and o those that are indicative of conditions that arose subsequent to the financial statement date. • Financial statements shall be adjusted when events occurring between the date of the financial statements and the date of their completion provide additional evidence relating to conditions that existed at the date of the financial statements. • Disclosure shall be made of those events occurring between the date of the financial statements and the date of their completion that do not relate to conditions that existed at the date of the financial statements but: o cause significant changes to assets or liabilities in the subsequent period; or o will, or may, have a significant effect on the future operations. Reference: ASPE 3820

Answer 100

Accounts receivable (ASPE) • 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: ASPE 3856.05(h), .16, .17

Answer 101

Employee vs. Contractor (Tax) • No single test is decisive. Must consider: o Intention of the parties o Control of work (hours, location, how job is completed) o Ownership of tools (who supplies) o Chance of profit and risk of loss o Ability to subcontract work or hire assistants o Integration • Issues: o Contractors can deduct all reasonable expenses whereas employment deductions are limited o Employees can receive EI benefits, contractors can opt in with restrictions o Employers are required to withhold source deductions for employees o Employer may be responsible for both employee and employer contributions of EI and CPP if an individual is incorrectly classified as a contractor Case: Solar Panel Solutions

Answer 102

50% of BIL | able to be applied against all other income (not just taxable capital gains)

Answer 103

``` Discontinued operation (ASPE) • A discontinued operation is a component of an entity where its operations and cash flows can be clearly distinguished from the rest of the entity and it has been disposed of or classified as held for sale • Report results of discontinued operations on I/S for current and prior periods, net of tax ``` Reference: ASPE 3475.03, .30

Answer 104

Investments (ASPE) • 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: ASPE 3051 and 3856.11 - .15

Answer 105

Internally generated intangible assets – R&D (ASPE) • 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 Case: TankCo Reference: ASPE 3064.37, .40, .41

Answer 106

* incurred for the purpose of earning income * Reasonable * Not of capital nature

Answer 107

Tax Implications of Going Public • Company status will change from CCPC to Public company. • Deemed year end on date of change in status. • Possible acquisition of control • Tax balances that are no longer available  CDA, RDTOH • Small business deduction only available to CCPC  public company will be taxed at “high rate”, creating General Rate income pool (“GRIP”) and eligible dividends. • Any undistributed Small Business earnings in the Low Rate income pool must be paid out first as other than eligible dividends. • SRED – public company qualifies for lower rate of ITC, and they are not refundable (only refundable for CCPC) • Public company shares do not qualify for Capital Gains exemption

Answer 108

Capital lease criteria – Lessee (ASPE) • Must meet one of the criteria: o Transfer of ownership or bargain purchase option at the end of the lease term o Lease term at least 75% of economic life of asset o PV of minimum lease payments at least 90% of FV of leased asset  Discount rate = lower of lessee’s incremental borrowing rate and implicit rate in the lease Case: TankCo, King Street Theatre, StillGood Food Reference: ASPE 3065.06

Answer 109

Review engagements (Assurance) • The objective of a review engagement is to obtain limited assurance about whether the financial statements as a whole are free from material misstatement • A conclusion is formed on whether anything has come to the practitioner’s attention to cause them to believe the financial statements are not prepared, in all material respects, in accordance with an applicable financial reporting framework, i.e. ASPE, IFRS • Limited assurance about the results of the examination is provided, with an explicit statement that an audit opinion is not expressed • Report expresses negative assurance – “nothing has come to our attention…” • Similar to an audit, independence is required as it is an assurance engagement • Materiality must be determined • Typical procedures include: o Obtaining knowledge of the client’s business o Making inquiries of management and client personnel o Performing analytical procedures Case: Elder Care Centre and Spa, King Street Theatre Reference: CSRE 2400

Answer 110

Intangible assets – Amortization (IFRS) • 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, but they must be tested for impairment annually • Assets with definite lives can be reported following either the cost model or the revaluation model • Amortization method and useful life should be reviewed annually • Consider expected use, life of related assets, contractual provisions, product life cycles and other economic factors Reference: IAS 38.72, .88, .97, .104, .107, .109

Answer 111

Methods of collecting audit evidence (Assurance) • Inspection – thorough examination of an item by the auditor • Observation – use of the senses to assess certain activities • Inquiry – obtain written or oral information from the client in response to questions • Confirmation – receipt of a written or oral response from an independent third party verifying the accuracy of information • Recalculation – recheck the computations and mathematical work completed by the client • Reperformance – redo other non-mathematical procedures such as internal controls • Analytical procedures – use comparisons and relationships between financial and non-financial information to determine whether account balances appear reasonable Case: TankCo, Ferguson Real Estate, Roxanne Kalpert, Solar Panel Solutions, King Street Theatre, Lake Country Camping, Elcar Reference: CAS 500.A14-A25

Answer 112

ordinary income -52% eligible dividends - 37% non-eligible dividends - 46%

Answer 113

Contingencies (ASPE) • Existing condition involving uncertainty as to a possible gain or loss • Uncertainty will result in a range of probabilities o likely o unlikely o not determinable • Contingent losses o must be accrued if the future event is likely and a reasonable estimate of the loss can be made o disclosed if the future event is likely but a reasonable estimate of the loss CANNOT be made o disclosed if the future event is not determinable • Contingent gains o must NOT be accrued o disclosed if the future event is likely Case: TankCo, Ferguson Real Estate Reference: ASPE 3290

Answer 114

Inventory valuation (ASPE) • 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: ASPE 3031.07, .10-12, .29

Answer 115

``` Discontinued operations (IFRS) • A component of an entity where its operations and cash flows can be clearly distinguished operationally and for financial reporting purposes, from the rest of the entity and it has been disposed of or classified as held for sale • Report results of discontinued operations on the statement of comprehensive income for current and prior periods, net of tax, segregated as follows: o the post-tax profit or loss of discontinued operations o the post-tax gain or loss recognized on the measurement to fair value less costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operation. ``` Reference: IFRS 5.03, .31 - .33

Answer 116

Business use of home expenses (Tax) A taxpayer can deduct expenses for the business use of a workspace in the home, as long as they meet one of the following conditions: • The home is the principal place of business. • They use the space only to earn business income, and the taxpayer uses it on a regular and ongoing basis to meet clients, customers, or patients. Eligible costs include: heat, home insurance, electricity, property taxes, repairs and maintenance, mortgage interest or rent (if tenant). • Expenses are pro-rated using a reasonable basis such as the area of the work space divided by the total area of the home. • Home office expenses are also pro-rated for a short business year. • Losses cannot be created by home office expenses. Unused expenses are carried forward for use in a later year. • Do not claim CCA on a principal residence, as it may negatively impact the ability to use the principle residence exemption. Case: Culinary Crawl, Roxanne Kalpert, Solar Panel Solutions, StillGood Food Reference: ITA 18(12), IT-514

Answer 117

Employment – Taxable benefits (Tax) • Board and lodging (unless at remote location) • Most rent-free and low-rent housing • Trips of a non-business nature • Gifts greater than $500 (that are not cash or near-cash) • Cash and near-cash gifts • Cost of tools where employee is not required to have tools to work • Forgiveness of debt • Employer-paid education costs when primarily for the benefit of employee Case: Perkins Packing Reference: ITA 6(1)

Answer 118

Internally generated intangible assets (IFRS) • Research is defined as original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding • Development is defined as the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems, or services before the start of commercial production or use • Research costs are always expensed • Development costs must be capitalized if all of the following exist: o Technically feasible o Intention to complete it o Ability to use or sell it o Probable future economic benefits will be generated o Availability of adequate technical, financial and other resources o Ability to reliably measure the expenditures attributed • Costs meeting the tangible asset criteria should not be capitalized as intangible Reference: IAS 38.4, .8, .54, .57

Answer 119

Activity based costing (Management Accounting) • Costs are allocated to activity cost pools and activity rates are calculated • Costs that are not driven by activities are not allocated to cost pools Case: Veza Eye Centre

Answer 120

Financing Options – Debt vs. Equity (Finance) • Debt financing options: o Loan- consider loan term, and security/collateral required o Lease o Government assistance • Equity financing options: o Angel investors- can be friends or family looking for a return on investment; generally passive investors o Venture capitalists- professional investment funds, looking for superior returns (>30%); active participants in management, with a clear exit strategy o Private equity- tends to participate later in business lifecycle, hence lower risk o Public markets Case: Ferguson Real Estate, World Wide Windows, Elcar

Answer 121

Business combinations (IFRS) • For a business combination to occur, there must be: o an acquirer who has gained control, and o a business that has been purchased  A business is defined as “an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants.  “Determining whether a particular set of assets and activities is a business should be based on whether the integrated set is capable of being conducted and managed as a business by a market participant.” Case: Solar Panel Solutions Reference: IFRS 3

Answer 122

Warranties (IFRS) • Two types of warranties: o those that provide a customer with assurance that the related product will function as the parties intended because it complies with agreed-upon specifications o those that provide the customer with a service in addition to the assurance that the product complies with agreed-upon specifications • Warranty shall be accounted for in accordance with IAS 37 (Provisions, Contingent Liabilities and Contingent Assets) if: o The customer does not have the option to purchase a warranty separately, and o The warranty does not provide the customer with a service in addition to the assurance that the product complies with agreed-upon specifications. Case: Solar Panel Solutions Reference: IFRS 15.B28 – B31

Answer 123

Government assistance (ASPE) • Assistance for non-capital items: o Include in net income for period when incurred o When government assistance relates to expenses of future accounting periods, the appropriate amounts shall be deferred and amortized to income as related expenses are incurred. • Assistance for capital items: o Reduce cost of capital item with any depreciation computed on the net amount; or o Defer and amortize on the same basis of depreciation • Provided there is reasonable assurance that the enterprise has complied and will continue to comply with the conditions for receipt of the government assistance, the accrual basis of accounting for the assistance is appropriate Case: TinyCo Reference: ASPE 3800

Answer 124

ACB is the greater of the original cost and $1000 | Proceeds are the greater of actual proceeds and $1000

Answer 125

Share-based compensation (IFRS) • For equity-settled share-based payment transactions, the entity shall measure the goods or services received, and the corresponding increase in equity, directly, at the fair value of the goods or services received, unless that fair value cannot be estimated reliably, in which case fair value of the equity instruments granted is used • Transactions with employees and others providing similar services require use of the fair value of the equity instruments granted measured at grant date, because typically it is not possible to estimate reliably the fair value of the services received Reference: IFRS 2.10, .11

Answer 126

Eligible versus non-eligible dividends • Individuals must include the actual dividend plus a gross-up in their net income for tax purposes. The grossed-up dividend is referred to as the taxable dividend. Dividends received by individuals will have been designated as either eligible or non-eligible by the corporation paying the dividend. • Non-eligible dividends are paid by Canadian-controlled private corporations (CCPCs) out of after-tax active business income eligible for the small business deduction or from after-tax aggregate investment income subject to RDTOH. o Since both of these types of income are taxed at preferential rates inside the corporation, the gross-up and dividend tax credit rates on non-eligible dividends are lower than the gross-up and dividend tax credit rates on eligible dividends. • Eligible dividends are paid by: Canadian public companies out of after-tax income taxed at the general corporate tax rate, or CCPCs out of the general rate income pool (GRIP). • A CCPC’s GRIP balance comprises eligible dividends received and 72% of active business income not eligible for the small business deduction. Case: Solar Panel Solutions Reference: ITA 82(1)(b)

Answer 127

ACB is the greater of the original cost and $1000 | Proceeds is the greater of the actual proceeds and $1000

Answer 128

``` Borrowing costs (IFRS) • Interest and financing costs that an entity incurs in connection with the borrowing of funds • Capitalize borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset • Possible qualifying assets: o Inventories o Manufacturing plants o Intangible assets o Investment properties ``` Reference: IAS 23.05, .07, .08

Answer 129

Net Present Value (NPV) vs. Internal Rate of Return (IRR) (Finance) • The NPV rule states that you invest in any project which has a positive NPV when its cash flows are discounted at the opportunity cost of capital, also known as the discount rate (usually the cost of raising the capital to fund the project) • The IRR rule states that you invest in any project offering a rate of return which exceeds the opportunity cost of capital • A project’s rate of return is calculated as the discount rate at which the NPV of the project would be zero • Therefore, the NPV and IRR rules should give the same accept/reject answer about a project, in most circumstances • A project’s cash flows should include incremental elements only (i.e. additional sales, associated expenses, lost margin on cannibalization, investment & associated tax-shield, etc., but no financing elements, as discounting of the cash flows already addresses financing)

Answer 130

Related Party Transactions (ASPE) • For transactions carried out in the normal course of operations o monetary related party transactions, or non-monetary RPT with commercial substance should be recorded at their exchange amount, unless  it is a non-monetary RPT that is an exchange of a product/property to be resold in the same line of business. This type of RPT will be recorded at carrying amount, adjusted for any additional consideration/ • For transaction NOT in the normal course of business o monetary RPT, or non-monetary RPT with commercial substance should be recorded at their exchange amount, IF  the change in ownership interest in item transferred/service provided is substantive, and  the exchange amount is supported by independent evidence • When the RPT has been measured at carrying amount, any difference between the carrying amounts of items exchanged, together with any related tax amounts, shall be booked to equity. Reference: ASPE 3840.08-.09, .18, .22, .29

Answer 131

Revenue Recognition (IFRS) In a transaction involving the sale of goods or provision of services, the amount of revenue to recognize and how it is measured is determined by applying the following five steps: • identify the contract with the customer • identify separate performance obligations in the contract • determine the overall transaction price • allocate the transaction price to the separate performance obligations in the contract • determine when the performance obligation(s) is satisfied, as revenue is recognized when (or as) the entity satisfies the performance obligation o revenue is recognized as control is passed, either over time or at a point in time Case: Solar Panel Solutions, Elcar Reference: IFRS 15

Answer 132

Agriculture (IFRS) This standard is intended to apply to the following which relates to agricultural activity • Biological assets • Agricultural produce at the point of harvest • Government grants related to biological assets Initial recognition if: • The entity controls the asset as a result of a past event. • The future economic benefits associated with the asset will flow to the entity, and • The cost of the asset can be reliably measured. Initial measurement at: • FV, less estimated point of sale costs • Cost, if no reliable measurement of FV is available. Subsequent measurement • FV, less estimated point of sale costs • Cost, less accumulated depreciation if no reliable measurement of FV is available. Reference: IAS 41

Answer 133

Inventory costs (ASPE) • 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: ASPE 3031.11, .12, .17

Answer 134

ABI qualifing for SBD - 12% other ABI- 27% Investment income- 50%

Answer 135

Reporting alternatives – Compliance reporting (Assurance) • CSAE 3530 Report: Attestation engagement — A reasonable assurance or limited assurance engagement to report on management's statement of an entity's compliance with agreements, specified authorities, or a provision thereof o A report concluding on whether management’s stated compliance with the terms of the agreement is fairly stated • CSAE 3531 Report: Direct engagement — A reasonable assurance or limited assurance engagement to report on an entity's compliance with agreements, specified authorities, or a provision thereof o A report stating compliance with the terms of the agreement • Section 9100 Report – Results of Applying Specified Auditing Procedures o A report providing the factual results of the specific procedures that can be chosen to be performed o No assurance provided but is the most flexible of all alternatives Case: TankCo, Ferguson Real Estate Reference: CSAE 3530, 3531, Section 9100

Answer 136

Residency (Taxation) • CRA considers both significant and secondary residential ties in assessing whether a taxpayer is a resident of Canada • Significant residential ties – factors that make a strong case, in and of themselves, that residential ties exist: o a home in Canada o a spouse or common-law partner in Canada o dependents in Canada • Secondary residential ties – factors that may contribute to whether residential ties exist (including, but not limited to): o personal property in Canada (car, furniture, etc.) o social ties in Canada (memberships in Canadian recreational groups, etc.) o economic ties in Canada (Canadian bank account or credit cards, etc.) o Canadian driver’s licence, Canadian passport, or Canadian health insurance • If a taxpayer is determined to be a resident of Canada, they are taxed on all of their worldwide income; non-residents of Canada are taxed only on income tied to Canadian sources Case: Roxanne Kalpert, Elcar

Answer 137

* reasonable reserve based on amount not due until after the end of the year and * 1/5 of gain x (4- number of preceding years)

Answer 138

Building and up to one half hectare of land (additional land may qualify if necessary for use and enjoyment)

Answer 139

Responsibility of the Auditor for Assessment of Going Concern • The external auditor should obtain sufficient appropriate audit evidence about management’s use of the going concern assumption in preparation of the financial statements • Conclude if a material uncertainty exists that the entity cannot continue as a going concern • Determine the implications on the auditor’s report • Communicate with those charged with governance if events or conditions cast doubt on the going concern Additional Audit Procedures When Conditions or Events Are Identified • If no assessment has been made by management, request one • Evaluate management’s plan for future actions • Where there is a cash flow forecast and the forecast is a significant factor: o Evaluate the reliability of underlying data o Assess adequate support for assumptions • Consider additional information • Request written representations from management regarding future plans and feasibility Impact on the Auditor’s Report if Material Uncertainty exists • If adequate disclosures are made in the financial statements, unmodified option but include an emphasis of matter in the auditor’s report • If adequate disclosures are not made, qualified or adverse opinion Reference: CAS 570

Answer 140

Revenue recognition – multiple deliverables (ASPE) • Evaluate all deliverables to determine whether they represent separate deliverables • If you can identify separate deliverables, revenue recognition criteria should be assessed for each deliverable separately • If two or more transactions are linked together in such a way the commercial effect can’t be understood without reference to the series of transactions as a whole, then the recognition criteria will be applied to the series of transactions as one Case: Elder Care Centre and Spa Reference: ASPE 3400.11

Answer 141

Employer paid automobile expenses – Taxable benefit (Tax) • A taxable benefit arises when an employee is given something that is personal in nature or if something that is personal in nature is paid for by the company • A benefit may include an allowance or a reimbursement of an employee’s personal expense (e.g. personal fuel is reimbursed) • The value of the benefit is generally its FMV • If an employee is provided with a taxable benefit, the amount must be included in their income Case: Solar Panel Solutions

Answer 142

- Replacement cost less capital gain and recapture deferred.

Answer 143

PPE – Costs (ASPE) • PPE costs represent the amount of consideration given up to acquire, construct, develop, or better a PPE and comprise of all costs directly attributable to the acquisition, construction, development or betterment, including installing it at the location and in the condition necessary for its intended use • PPE costs include direct construction or development costs (such as materials and labour) and overhead / carrying costs directly attributable to the construction or development activity • The cost of each item of PPE acquired as part of a basket purchase (i.e. when a group of assets is acquired for a single amount) is determined by allocating the price paid for the basket to each item on the basis of its relative fair value at the time of acquisition Reference: ASPE 3061.03, .06, .08

Answer 144

Fair Market Value

Answer 145

Payback Period (Finance) • Payback period is the time in which the initial cash outflow of an investment is expected to be recovered from the cash inflows generated by the investment • In general, investments with lower payback period are preferred • To determine, calculate the cumulative net cash flow for each period and then use the following formula for payback period: Payback Period = A + B / C, where: o A is the last period with a negative cumulative cash flow; o B is the absolute value of cumulative cash flow at the end of the period A; and o C is the total cash flow during the period after A. Case: Elcar

Answer 146

``` prints, etchings, drawings, paintings, scupltures, etc jewellery rare folios, rare manuscripts/books stamps coin ```

Answer 147

Deduction is permitted if workplace is: a) place where individual principally (greater than 50% of time) performs employment duties b) used exclusively for purpose of earning employment income and used on regular/continuous basis for meeting customers

Answer 148

IFRS 33. 44 | options and warrants first as there is no impact on the numerator

Answer 149

When the average marekt price of ordinary shares exceeds exercise price of options IFRS 33.47

Answer 150

Must take into account the after tax impact of the interest that was paid on the convertible bonds.

Answer 151

If the EPS for the convertible bond is less than the EPS then the convertible bonds are dilutive

Answer 152

when two or more products are produced from common inputs or processes

Answer 153

Restoration costs should be included in the initial cost of the asset rather than being expended initially

Answer 154

risk free rate of return+Beta x (expected return on market -risk free rate of return).

Answer 155

a) the entity will comply with the conditions attached to them b) grants will be received

Answer 156

- deduction from the cost of the capital assets or set up as deferred income on B/S - amortize on the same basis as depreciation