Financial Reporting Technical

Question 1

Decommissioning provision

Answer 1

IAS 37 and ASPE 3110

Recognition criteria:
-present obligation
-probable outflow to settle
-reliable estimate can be made

Initial measurement:
Present value of best estimate required to settle
Dr asset and Cr decommissioning provision

Subsequent measurement:
Accretion expense for systematic increase of obligation over time.
Dr interest expense and Cr decommissioning provision
Asset is depreciated

Question 2

Onerous contract - IFRS

Answer 2

IAS 37.66
Unavoidable costs of meeting obligations under contract exceed the economic benefits expected to be received

Provision recognized at lower of net cost of fulfilling the contract and cost of cancelling.

Loss in the amount of the provision is recognized.

Question 3

General Revenue recognition criteria (ASPE)

Answer 3

1. Collection is reasonably assured
2. Performance has been achieved
3. Reasonable assurance regarding measurement of revenue

Question 4

Revenue recognition steps - IFRS

Answer 4

1. Identify the contract
2. Identify separate performance obligations
   - consider evaluation of distinct and/or same pattern criteria
3. Determine transaction price
4. Allocate transaction price to separate performance obligations
5. Determine when performance obligations have been satisfied.
   - input vs output method for measurement

Question 5

Investment without significant influence (ASPE)

Answer 5

First show that there isn’t significant influence. ASPE 3051

Account for using section on financial instruments ASPE 3856

Initial measurement: FV
Costs of acquisition included in initial measurement when subsequent measurement is at cost. Costs of acquisition are expenses in period they occur when subsequent measurement is FV.

Subsequent measurement:
Investments not quoted in active market: choice to measure at cost or fair value but need to consider if fair value of instrument will be obtainable.

Investment quotes in active market: measured at fair value with gains/losses recognized in period they occurred

Question 6

Intangible asset criteria - IFRS

Answer 6

Identifiable (separable or from contractual rights)
Control
Future benefits

Question 7

Performance criteria (ASPE)

Answer 7

1) persuasive evidence of an arrangement exists
2) delivery has occurred or service have been rendered
3) price is fixed/determinable

Question 8

Stock Options

Answer 8

Accounting is same under IFRS and ASPE

Initial measurement: FV estimated based on stock price o grant date but nothing recorded to books.

As each year of vesting period passes - proportional amount of initial measurement is recorded as:
DR Compensation expense
CR Contributed Surplus - share options
Employee compensation should be adjusted for expected number of shares options to vest.

No subsequent measurement change for change in value of underlying shares.

Derecognition when option redeemed:
DR Cash
DR contributed surplus - share options
CR common shares

Derecognition when option expires:
DR contributed surplus - share options
CR contributed surplus - expired share options

Question 9

SARs

Answer 9

Measurement
IFRS: FV using option-pricing model (not required to know how)
ASPE: intrinsic value: market price minus exercise price set on grant date

Nothing recorded on grant date but instead recorded over vesting period.

As each year of vesting period passes - proportional amount of initial measurement is recorded as:
DR compensation expense
CR SAR liability
Employee compensation should be adjusted for expected number of shares options to vest and any changes in fair value of shares.

If SAR expires and no payout occurs the entry is reversed

When paid out:
DR SAR liability
CR cash

Question 10

Impairment of long-lived asset IFRS

Answer 10

Test for impairment required when there are indicators of impairment or annually for select assets

select assets = intangible assets with indefinite useful life, intangible assets not available for use, CGUs that goodwill has been allocated to.

Indicators of impairment:
- evidence of obsolescence or physical damage
- significant changes in use of asset
- declining asset performance
- significant decline in market value
- significant change in tech, market, economic or legal environment in which entity operates that adversely affects use of asset
- increase in market rates

If there are indicators for impairment - calculated recoverable amount.
Recoverable amount is higher of:
1. fair value less cost of disposal
2. value in use: estimate future cash flows from continuing to use and ultimate disposal of asset and apply appropriate discount rate.

Asset is impaired if recoverable amount < carrying amount
Loss = recoverable amount - carrying amount

Question 11

Impairment of long-lived assets - ASPE

Answer 11

Test for impairment required when events or changes in circumstances indicates that the carrying amount may not be recoverable

Indicators of impairment:
- significant decline in market value
- significant adverse change in extent and manner of use of asset
- significant change in legal factors or in the business climate that could affect assets value
- accumulation of costs significantly in excess of the amount originally expected for its acquisition
- current period operating or cash flow loss combined with history of operating or cash flow losses
- current expectation that more likely than not the asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.

If there are indicators for impairment:
1. compare carrying amount to undiscounted cash flows from asset:
impairment exists if undiscounted cash flows < carrying amount
2. Determine fair value of asset: loss = fair value - carrying amount.

Question 12

Capital vs Operating lease - lessee point of view (ASPE)

Answer 12

If any one of the following criteria are met then lease is capital:
1. reasonable assurance that ownership of asset will transfer to lessee. Indicated by either transfer of title at end of lease or existence of bargain purchase option
2. lease term is long enough that lessee will receive substantially all economic benefits of the leased property. (lease term => 75% of expected useful life of asset)
3. PV of minimum lease payments amounts to substantially all (usually => 90%) of FV of leased asset.
PV is calculated using lower of implicit rate for the lease and entity’s borrowing rate.

Operating lease - lease payments expensed as incurred.

Capital lease:
Initial measurement - leased asset and lease liability are recognized using PV of lease payments.
PV of lease payments calculation does not include executory costs

Subsequent measurement:
depreciation recorded for leased asset on straight line basis over the lease term
Interest accrues to lease liability each period and lease payments reduce lease liability.

executory costs = costs related to operation of leased property

Guaranteed residual value only included in PV calculation when it is expected to be paid.

Question 13

Lease - lessee point of view (IFRS)

Answer 13

No distinction between capital or operating lease

Initial measurement:
Lease liability: PV of all future payments using rate implicit in lease if readily determinable (incremental borrowing rate if not)
ROU (right of use) asset = lease liability + payments made at or before lease commencement, less lease incentives + initial direct costs incurred + estimate of costs to be incurred by lessee upon termination of the lease

Subsequent measurement:
depreciation recorded for ROU asset on straight line basis over the lesser of lease term and asset’s useful life
Interest accrues to lease liability each period and lease payments reduce lease liability.

Guaranteed residual value only included in PV calculation when it is expected to be paid.

Question 14

Compound Financial Instrument (ASPE)

Answer 14

When debt can be converted to a fixed number of shares, indicates there is a resulting interest in net assets, thus conversion feature meets definition of equity.

Choice to record:
1. equity component measured at zero.
2. the less easily measurable component is allocated the residual amount after deducting from proceeds the component that is more easily measurable.

Question 15

Finance Lease - Lessor treatment

Answer 15

IFRS:
Lease receivable = PV of (lease payments & BPO or guaranteed residual value or residual value) + initial direct costs
Interest revenue recorded with each passing period.

Initial JE:
DR lease receivable
CR Asset
CR/DR Gain/Loss on sale of asset

Initial JE when manufacturer or dealer:
DR lease receivable
DR COGS
CR Revenue
CR Asset

Revenue = PV of (lease payments & BPO or guaranteed residual value)
If there is a regular residual value: COGS = Revenue - PV of residual value

ASPE: same treatment but called capital lease

Question 16

Joint ventures - IFRS

Answer 16

Individual parties have rights to net assets of the arrangement

Recorded using equity method.
Initial recognition = FV of asset given up
DR investment in Joint venture
CR carrying value of asset contributed
CR Gain on disposal (others interest % of difference btn FV and CV)
CR Unrealized gain on disposal (your interest % of difference btn FV and CV)

Question 17

Consolidated FS on acquisition

Answer 17

Acquisition differential = Consideration paid + NCI - BV of investees net assets

Goodwill = Acquisition differential +/- FV differentials

FV differential = BV - FV

Deferred income tax (DIT) on FV differential = (-1 x FV differential) x tax rate

Consolidated BS:
Make excel with following columns:
- Company A
- Company B (subsidiary)
- Elimination entries (Debit and credit column)
- Consolidated (Company A + Company B +/- elimination entries)

Elimination entries include:
- FV differentials
- goodwill
- investment in company B
- DIT
- Common stock of company B
- NCI in company B
- Company B retained earnings at purchase date

Question 18

Non-controlling interest (NCI) - consolidated FS

Answer 18

Identifiable net assets (INA) approach: (partial goodwill approach)
NCI = % x (FV of subsidiary assets - FV of subsidiary liabilities - DIT)
Goodwill calculated from this method is just Parent companies portion of goodwill, must then calculate full goodwill and add difference to NCI.
Full goodwill = goodwill attributed to parent/% of parent ownership

Fair value enterprise (FVE) method: (full goodwill approach)
NCI = FV of shares
Goodwill calculated from this method is full goodwill. No adjustment needed to NCI

Goodwill used for elimination entry should be full goodwill and NCI interest will include allocation of their portion of goodwill.

Question 19

Significant influence considerations

Answer 19

IAS 28 & ASPE 3051

• 20% to 50% of voting power
• representation on the board of directors
• participation in policy-making processes (includes decisions about dividends or other distributions)
• material transactions between the investor and associate
• interchange of managerial personnel
• provision of essential technical info

Question 20

Method to account for investment with joint control or significant influence

Answer 20

IFRS: Equity method only

ASPE: choice between equity and cost method (for cost method: FV will be used if quoted in active market)

Question 21

Accounting for subsidiaries

Answer 21

IFRS:
Purchase of net assets - assets & liabilities of subsidiary are recorded in balance sheet of parent .
DR Assets acquired
CR Liabilities acquired
CR consideration paid

Purchase of shares - must use acquisition/consolidation method, separate books maintained for parent and subsidiary and then their are combined outside of the books with elimination entries to report the consolidated FS together

ASPE: choice between acquisition/consolidation, equity and cost method

Question 22

BV of net assets

Answer 22

Assets minus Liabilities

OR

Equity (common shares + preferred shares + retained earnings + contributed surplus)

Question 23

Consolidated Income statement after acquisition

Answer 23

FV differentials are amortized:
- Inventory, land and non-depreciable assets: amortized when sold (costs of sales or gain/loss on sale)
- Depreciable capital assets: amortized over remaining useful life (depreciation expense or impairment loss)
- long-term debt: over remaining term of debt (interest expense)

Intercompany transactions:
Downstream - sale by parent to subsidiary, impact 100% eliminated against the parent
Upstream - sale by subsidiary to parent, impact eliminated against the parent & NCI base on % of ownership
Must adjust and record unrealized profit until inventory/non-depreciable asset is sold outside the two entities or over time for depreciable assets as used

Steps to consolidate:
1. adding together revenue and expenses of parent & subsidiary
2. adjust income statement accounts of amortization of FV differentials (think about direction original FV differential affected the BS accounts. Will need to reverse affect on balance sheet account and those expense or revenue account will either decrease or increase based on direction of BS adjustment)
3. Adjust for current-period unrealized profit/losses & current period profit/loss realizations from intercompany sales
4. eliminate parent’s share of subsidiary dividends declared
5. deduct consolidated net income attributable to the NCI

Question 24

Net income attributable to NCI

Answer 24

(Subsidiary net income +/- impact of upstream intercompany transactions +/- amortization of FV differentials) x NCI % ownership

Question 25

Affect of upstream intercompany transactions on NCI

Answer 25

Add Profit in opening inventory realized in the year
Deduct unrealized profit in closing inventory
Deduct gain on current-period intercompany capital asset sales
Add loss on current-period intercompany capital asset sales
Add/Deduct current-period gain/loss realization from previous intercompany capital asset sales

Question 26

Intercompany transaction elimination in consolidated statements

Answer 26

Intercompany sale price must be eliminated from company that sold asset to the other company.
Final COGS should be equal to original company’s COGS. Amount of intercompany sale price in purchasing company inventory/COGS needs to be eliminated.

Revenue should be final sales to outside organization. Inventory & COGS should be original cost for the parent/subsidiary.

DIT would also be recognized for adjustments (decreasing profit or expense)

Question 27

Consolidated R/E

Answer 27

Parents opening R/E - unrealized downstream profits in opening inventory = parent’s adjusted opening R/E

Subsidiary’s opening R/E - subsidiary’s R/E at acquisition = Increase/decrease in subsidiary’s R/E since acquisition
+/- FV differential accumulated amortization, beginning of period
- Goodwill impairment incurred up to beginning of period
- unrealized profits in opening inventory
= Subsidiary’s adjust R/E
- NCI portion (multiply above by NIC % ownership)
= parents share of subsidiary’s adjusted R/E
+ parent’s adjusted opening R/E
= Consolidated opening R/E

Question 28

Operating lease - lessor treatment

Answer 28

Treatment is same for IFRS & ASPE

Lease revenue recorded over the course of the lease. lease should be recognized over straight line basis over the lease term, timing of cash flows may differ. Therefor, if there are any sort of lease inducements (months free for example) it would be recognized as a reduction of rental income over the period of the lease

Lease inducement initial recognition:
DR prepaid lease inducement (asset)
CR Lease inducement liability

lease inducement asset is amortized over lease period and lease inducement liability is reversed when lease inducement is used (during month of free rent)

Question 29

Hedge accounting criteria - IFRS

Answer 29

IFRS 9

All of the following criteria must be met:
1. hedging relationship must consist of eligible hedged item & eligible hedging instrument
2. Documentation must exist & include: hedging relationship, objective for undertaking the hedge, hedged item & hedging instrument, how hedged effectiveness will be assessed
3. Three effectiveness requirements are met:
- economic relationship exists between the hedged item and the hedging instrument
- credit risk does not dominate the change in value
- hedge ratio is same for both: hedging relationship & quantity of hedged item that the entity actually hedges & quantity of hedging instrument

Eligible hedged item includes:
- existing asset or liability (AR or AP)
- unrecognized firm commitment (goods ordered but not yet received)
- highly probably future transaction (future revenue stream)
- net investment in foreign operations (foreign subsidiary)

Eligible hedging instruments:
- derivatives such as forward contracts (agreement to purchase or sell foreign currency at some time in future)
- non-derivatives such as monetary assets or liabilities (term deposit or debt in foreign currency)

Question 30

Forward contract - FV hedge accounting

Answer 30

Cash flows are fixed in terms of the foreign currency - FV of hedged item fluctuates with changes in the FX rate. contract is entered into after or at the same time as the purchase or sale.

Exchange rate specified in a contract for a predetermined future date.
Hedge of receivable: due from broker account is fixed
Hedge of payable: due to broker account is fixed

Using hedge of payable as example:
Initiation date: (dates for hedged item and hedging instrument may differ)
Record FV of hedged item:
DR asset (inventory or AR)
CR liability (AP) or sales
Record FV of hedging instrument:
DR Due from broker
CR Due to broker

Reporting dates:
Update hedged item to Spot rate:
DR/CR AP
DR/CR FX loss/gain
Update variable side of future contract to the forward rate on the reporting date:
DR/CR FX loss/gain
DR/CR Due from broker

Settlement date:
Update hedged item to spot rate
Update variable side of future contract to spot rate
Record settlement of hedged item: DR AP & CR Cash
Record settlement of hedging instrument:
DR Due to Broker (original amount recorded)
CR Cash
DR Cash
CR Due from Broker (original amount and subsequent adjustments)

Question 31

Forward contract - Cash flow hedge

Answer 31

Hedge to exposure in variability of cash flows resulting from an asset or liability. Used for future transactions, hedged instrument is entered into before hedged item.

Initiation dates: (dates may differ)
- record FV of hedging instrument: DR Due from broker, CR Due to broker
- record FV of hedged item

Reporting dates:
updated hedged item and hedging instrument to FV & record any gain or loss in OCI
update accrued interest (for foreign debt and loans only)

Derecognition:
- update hedging instrument to FV & record gain/loss in OCI
- derecognize hedging instrument
- update accrued interest & translate interest revenue using average rate for the period & translate interest receivable at spot rate (for foreign debt and loans only)
- derecognize hedged item if previously recorded or record if not already done so
- move any gain or loss in OCI to net income by adjusting the hedged item

Question 32

Hedge accounting - ASPE

Answer 32

ASPE 3856

All criteria must be met:
1. entity must designate & document hedging relationship
2. hedging instrument & hedged item must have the same critical terms
3. for anticipated transactions - expected transaction must be probable.

Only allows hedge accounting for:
- forward contract used to hedge anticipated foreign currency cash flows
- forward contract used to hedge anticipated purchase or sale of commodity
- interest rate swap used to hedge interest rate risk in interest-bearing loan receivable or payable

Can’t be used to hedge foreign debt (allowed under IFRS)

Question 33

PP&E componentization

Answer 33

IAS 16.43
If a part of an item of PP&E has a cost that is significant in relation to the total cost of the item it should be depreciated separately based on the parts useful life. May choose to depreciate separately parts of an item that do not have a cost that is significant tin relation to the total cost of the item.

ASPE 3061.18
When cost of PP&E is made up of significant separable component parts, cost should be allocated to component parts when practicable & when estimates can be made of the lives of the separate components

Question 34

Intercompany transactions - equity method

Answer 34

Unrealized profits in ending inventory must be eliminated by reducing equity income:

Sales in ending inventory x Gross profit % x Investor % ownership

When the inventory is sold to a third party (usually the following year) the profit is realized and added to equity income for the period.

Question 35

Business Combination definition

Answer 35

IFRS 3 Appendix A defined terms:
A transaction where an acquirer obtains control of one or more businesses.
- need to identify the acquirer and ensure the business that control is obtained of meets business definition
Paragraph B5: Acquirer obtaining control
Paragraph B7: definition of a business

ASPE 1582
Paragraph .03 has definition: same definition as above
Paragraph A1: Acquirer obtaining control
Paragraph A3: definition of a business

Question 36

Identifiable asset definition

Answer 36

either must apply:
1. Asset is separable - capable of being separated or divided from the entity and sold
2. arises from contractual or other legal rights

Question 37

Basic EPS

Answer 37

net earnings available to common shareholders/WACSO

net earnings available to common shareholders = net income less dividends on preferred shares
This is net income NOT comprehensive income

Cumulative preferred shares -> deduct dividends that are owed in a year
Non-cumulative preferred shares -> deduct dividends declared

Question 38

WACSO - weighted average common shares outstanding

Answer 38

shares are adjusted for the fraction of the year that amount of shares were outstanding for.
adjustment factor has to be included when there is a stock split to give the shares the same weight.

Question 39

Incremental EPS for convertible preferred shares

Answer 39

dividends = income impact

non-cumulative preferred shares - dividends only used for income impact if declared

Should be pro-rated if issued part way through the year.

Question 40

Incremental EPS for convertible bonds

Answer 40

Income impact = bond carrying value x effective interest rate x (1 - tax rate)

Share impact is based on bond face value

Should be pro-rated if issued part way through the year.

Question 41

Incremental EPS for share options & warrants

Answer 41

No income impact

Share impact = # of options x (market price - exercise price)/market price

Only options with exercise price < market price are dilutive

Question 42

Calculating Diluted EPS steps

Answer 42

1. Calculate basic EPS
2. Identify all possible common shares
3. Calculate incremental EPS for each class of possible common shares
4. order the incremental EPS
5. Re-compute provisional EPS until diluted EPS is determined (stop when provision EPS is less than the incremental EPS of the next most dilutive instrument)