Part II: Accounting Standards for Private Enterprises Flashcards
CPA Handbook Key Areas (23 cards)
ASPE 3400 - Revenue Recognition Criteria
Simplified Summary: Under ASPE 3400, revenue is recognized when all of the following key criteria are met:
- Performance is Achieved: The significant risks and rewards of ownership have been transferred to the buyer (for goods) or the service has been rendered.
- The earnings process is substantially complete.
Reasonable Assurance of Collection: Collection of the consideration is reasonably assured.
Why This Matters (Briefly): Proper revenue recognition is fundamental to accurate financial reporting. ASPE 3400 provides the core principles to ensure revenue is recognized in the correct period, reflecting the economic substance of transactions for private enterprises.
ASPE 3400: Performance
Performance is Achieved: This is the critical point of “earning” the revenue.
Goods: Usually, this is when goods are shipped or delivered to the customer, and legal title and risks of ownership have passed.
Services: This is often when the service has been performed, or a specific stage of completion is reached if using percentage-of-completion method (allowed under ASPE in limited circumstances if certain criteria are met, although typically less common than under IFRS).
“Substantially complete” means the entity has done the major activities to generate the revenue. Minor, inconsequential tasks remaining don’t prevent revenue recognition.
ASPE 3400: Reasonable Assurance of Collectability
Reasonable Assurance of Collection: While collection doesn’t have to be guaranteed, there should be a reasonable expectation that the customer will pay. Factors to consider:
Customer’s creditworthiness and past payment history.
Existence of contracts and payment terms.
Industry norms.
ASPE 3031: Inventory - Measurement
Simplified Summary: ASPE 3031 dictates that inventory is measured at the lower of cost and net realizable value (NRV).
Cost includes all costs of purchase, costs of conversion, and other costs incurred to bring inventory to its present location and condition. Common cost formulas are FIFO and weighted average.
Net Realizable Value (NRV) is the estimated selling price in the ordinary course of business less estimated costs of completion and estimated costs necessary to make the sale.
Why This Matters (Briefly): ASPE 3031 ensures inventory is not overstated on the balance sheet. The lower of cost and NRV principle reflects the conservatism concept and provides a more realistic asset value. Accurate inventory measurement is crucial for correct cost of goods sold and profit determination.
ASPE 3031: Inventory Costs
Cost: Determining the “cost” of inventory is more than just the purchase price. It includes:
Purchase Costs: Purchase price, import duties and taxes, transportation, handling, and other costs directly attributable to acquisition. Less purchase discounts and rebates.
Conversion Costs: Costs of conversion from raw materials to finished goods (direct labor, production overhead - both fixed and variable).
Other Costs: Costs to bring inventory to its present location and condition. This can be more complex, but generally includes costs necessary to get the inventory ready for sale
ASPE 3031: NRV
Net Realizable Value (NRV): Represents the net amount an entity expects to realize from the sale of inventory in the ordinary course of business.
Estimated Selling Price: What the entity expects to sell the inventory for in its normal operations.
Estimated Costs of Completion: Costs to finish any incomplete inventory if further processing is needed before sale.
Estimated Costs Necessary to Make the Sale: Costs directly related to selling the inventory (e.g., selling expenses, commissions, transportation outward to the customer).
ASPE 3031: Lower of Cost & NRV Application
Lower of Cost and NRV Application:
Applied item-by-item in most cases for better accuracy.
If NRV is less than cost, inventory is written down to NRV, and a loss (inventory write-down) is recognized in the income statement in the period of the write-down.
If NRV recovers in a subsequent period, ASPE does not allow for a reversal of the write-down (unlike IFRS).
ASPE 3061: Property, Plant & Equipment (PP&E) - Key Concepts
Simplified Summary: ASPE 3061 outlines accounting for PP&E. Key aspects include:
Cost: Initially measured at cost, which includes purchase price and directly attributable costs to bring the asset to its intended location and condition for use.
Depreciation: Systematic allocation of cost over useful life. Various methods allowed (straight-line, declining balance, units of production - must be reasonable and systematic). Review method and useful life when needed.
Impairment: Assets are tested for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. Use a recoverability test (undiscounted future cash flows vs. carrying amount). If impaired, write down to fair value, or replacement cost if fair value is not reliably determinable. Reversals of impairment are prohibited under ASPE.
Derecognition: Remove PP&E from financial statements upon disposal or when no future economic benefits are expected. Gain or loss on disposal is recognized in income.
Why This Matters (Briefly): PP&E is often a significant asset on the balance sheet. ASPE 3061 ensures these assets are properly recorded, depreciated, and accounted for, impacting both the balance sheet and income statement. Understanding PP&E accounting is crucial for financial statement analysis.
ASPE 3061: PP&E Initial Measurement
Cost (Initial Measurement): Includes:
Purchase Price (including import duties, taxes, less discounts/rebates)
Directly Attributable Costs: Costs directly related to bringing the asset to the location and condition necessary for its intended use (e.g., delivery and handling costs, installation costs, professional fees).1
ASPE 3061: PP&E Depreciaiton
Depreciation:
Systematic Allocation: Depreciation is not about asset valuation, but about allocating the cost of the asset over its useful life to match revenues and expenses.
Useful Life: Estimate of the period over which the asset is expected to be available for use. Requires judgment and should be reviewed periodically.
Depreciation Methods: Choose a method that reflects the pattern in which the asset’s future economic benefits are expected to be consumed. ASPE allows flexibility but requires a reasonable and systematic approach.
No Salvage Value often in ASPE: ASPE often simplifies by not requiring salvage value to be explicitly considered unless it’s significant
ASPE 3061: PP&E Impairment
Indicator of Impairment: Events or changes in circumstances trigger an impairment review (e.g., significant decline in market value, adverse changes in technology/market, physical damage, etc.).
Recoverability Test: Compare the asset’s carrying amount to the sum of undiscounted future cash flows expected to be generated by the asset (from its continued use and eventual disposal).
Impairment Loss: If carrying amount > undiscounted cash flows, an impairment loss is recognized. The asset is then written down to fair value (if reliably determinable) or replacement cost (if fair value is not reliably determinable).
No Reversal: ASPE strictly prohibits the reversal of impairment losses in subsequent periods. This is a key difference from IFRS.
ASPE 3061: Derecognition (Disposal)
Derecognition (Disposal):
Disposal: Sale, exchange, abandonment, or other disposal.
Gain or Loss: Difference between the net disposal proceeds (if any) and the carrying amount of the asset is recognized as a gain or loss in income.
ASPE 3065: Leases
Simplified Summary: ASPE 3065 governs lease accounting for both lessees (renters) and lessors (owners). Key classifications and treatments under ASPE:
Lessee Accounting (Primarily Operating Leases): Most leases are classified as operating leases. Lessee expenses lease payments on a straight-line basis over the lease term. Generally, no asset or liability is recognized on the balance sheet (with some exceptions for inducements and onerous contracts).
Lessor Accounting (Classifications): Lessors classify leases as:
Operating Lease: Lessor retains ownership, recognizes lease revenue on a straight-line basis. Depreciates the leased asset as usual.
Sales-Type Lease: Essentially a sale of the asset. Profit/loss recognized at lease commencement, selling price is PV of lease payments. No depreciation, derecognize asset, recognize receivable.
Direct Financing Lease: Primarily financing transaction. Interest revenue recognized over the lease term. No profit/loss at commencement (usually). Derecognize asset, recognize receivable.
Classification is Key for Lessors: Classification depends on criteria related to transfer of risks and rewards of ownership (similar to finance lease criteria under IFRS, but applied differently under ASPE).
Why This Matters (Briefly): Lease accounting significantly impacts financial statements for both lessees and lessors. ASPE 3065 dictates how leases are classified and the resulting recognition of assets, liabilities, revenues, and expenses, affecting financial ratios and performance metrics. Understanding lease accounting is essential for analyzing financial statements.
ASPE 3065 - Lessee Accounting
Lessee Accounting (Operating Lease Dominance):
Operating Lease (Typical ASPE Lessee Model): Lessee essentially “rents” the asset. Lease payments are expensed as incurred, often on a straight-line basis. In most cases, ASPE does not require lessees to recognize a lease asset (Right-of-Use asset) or lease liability on the balance sheet for operating leases (unlike IFRS 16). This is a major difference from IFRS. Exceptions exist for items like lease inducements (which may create a deferred credit) and onerous leases (which may lead to a provision for losses).
ASPE 3065 - Lessor Accounting
Operating Lease (Lessor): Lessor retains asset ownership. Lease revenue is recognized on a straight-line basis. Lessor continues to depreciate the asset. Asset remains on lessor’s balance sheet.
Sales-Type Lease (Lessor): Treated much like a sale. Occurs when the lease effectively transfers substantially all the risks and rewards of ownership to the lessee. Lessor recognizes a profit or loss on the “sale” at lease commencement (selling price = PV of lease payments). Derecognizes the leased asset and recognizes a lease receivable. No depreciation is recorded after lease commencement. Interest revenue is earned over the lease term on the receivable.
Direct Financing Lease (Lessor): A financing arrangement where the lessor essentially provides financing to the lessee to acquire the asset. No profit or loss is typically recognized at lease commencement (unless the fair value differs from carrying value). Derecognizes the leased asset and recognizes a lease receivable. Interest revenue is earned over the lease term. Depreciation is not recorded after lease commencement.
ASPE 3065: Classification Criteria for Lessors
ASPE 3065 has criteria to determine if a lease transfers substantially all the benefits and risks of ownership. These are conceptually similar to finance lease criteria under IFRS, but their application and the overall model differ significantly. Criteria often involve:
- Transfer of ownership.
- Bargain purchase option.
- Lease term being a major part of the asset’s economic life.
- Present value of lease payments being substantially all of the fair value of the leased asset.
- Specialized nature of the leased asset.
ASPE 3831: Non-Monetary Transactions
Simplified Summary: ASPE 3831 governs accounting for exchanges of non-monetary assets. The key principle is:
Commercial Substance: If the transaction has commercial substance (i.e., future cash flows are expected to change significantly as a result of the exchange), it is accounted for at fair value. Gains and losses are recognized.
Lacks Commercial Substance: If it lacks commercial substance, the exchange is accounted for at carrying amount. No gain is recognized, and losses are recognized if there’s impairment.
Why This Matters (Briefly): ASPE 3831 ensures that non-monetary exchanges are accounted for in a way that reflects the economic reality of the transaction. The presence or absence of commercial substance significantly impacts whether gains can be recognized, affecting reported earnings and asset values.
ASPE 3831: Key Concepts
Non-Monetary Transactions: These are exchanges of goods or services primarily for other goods or services, rather than for monetary consideration (cash). Examples include:
- Exchange of inventory for similar inventory.
- Exchange of equipment for similar equipment.
- Exchange of advertising services for legal services.
Commercial Substance: This is the crucial concept for ASPE 3831. A transaction has commercial substance if both of these conditions are met:
- Significant Change in Risk, Timing, or Amount of Future Cash Flows: The future cash flows of the entity are expected to be significantly different as a result of the transaction. This means the entity’s economic position changes due to the exchange.
- Entity-Specific Value Changes: The change is significant to the entity’s operations.
Indicators of Commercial Substance: Often present when dissimilar assets are exchanged, or when the transaction facilitates a significant operational change for the entity.
ASPE 3831: Accounting Treatment
Accounting Treatment based on Commercial Substance:
Commercial Substance Exists (Fair Value Accounting):
- Assets exchanged are recorded at their fair values.
- Gains or Losses are recognized on the exchange. Gain or loss is the difference between the fair value of the asset given up and its carrying amount.
- Fair value must be reliably measurable. If fair value of either asset received or given up is reliably measurable, that fair value is used for both sides of the transaction, unless the fair value of the asset received is more clearly evident.
Commercial Substance Lacks (Carrying Amount Accounting):
- Assets received are recorded at the carrying amount of the asset given up.
- No Gain is Recognized. This reflects the idea that if the transaction doesn’t fundamentally change the entity’s economic position, earnings should not be recognized.
- Losses are Recognized if there is evidence of impairment (i.e., if the fair value of the asset received is less than the carrying amount of the asset given up).
Exceptions and Nuances:
- Exchange of Similar Inventory: Typically lacks commercial substance. Often accounted for at carrying amount.
- Exchanges with Related Parties: May require extra scrutiny to assess commercial substance and ensure transactions are at arm’s length.
ASPE: 3840: Related Party Transactions
Simplified Summary: ASPE 3840 focuses on the disclosure of related party transactions. Key points:
Identify Related Parties: Includes entities under common control, management, close family, significant influence, etc. (Defined broadly).
Disclose Transactions: Transactions with related parties must be disclosed, even if at fair value. Disclosure includes nature of relationship, transaction details, amounts due to/from, and terms.
Measurement: Transactions are generally measured at carrying amount unless commercial substance exists and fair value is reliably measurable (similar to ASPE 3831). However, disclosure is still required even if measured at fair value.
Emphasis on Transparency: The standard’s primary goal is to provide transparency to financial statement users about related party dealings due to the potential for non-arm’s length terms and influence.
Why This Matters (Briefly): Related party transactions are common but carry higher risk of manipulation or non-arm’s length terms. ASPE 3840’s disclosure requirements are crucial for financial statement users to understand these relationships and assess their potential impact on the entity’s financial position and performance. Transparency is paramount.
ASPE 3840: Key Concepts
Identifying Related Parties (Broad Definition): ASPE 3840 has a broad definition to capture various relationships that could influence transactions. Related parties include:
- Parent and Subsidiary companies (Control)
- Fellow subsidiaries (Common control)
- Entities under common control
- Management and their close family members
- Principal owners (significant influence)
- Joint ventures and associates
- Any other party that can exercise significant influence
ASPE 3840: Disclosure Requirments
What to Disclose: Even if a transaction is at fair value or at carrying amount, robust disclosure is required:
- Nature of the related party relationship.
- Description of the transaction(s).
- Dollar amount of transactions (in aggregate and potentially by type of related party).
- Amounts due to or from related parties at the balance sheet date, including terms and details of security.
- Terms and conditions of the transactions, including pricing policies.
- Any other information necessary for an understanding of the transactions.
ASPE 3840: Measurement
Measurement Principles - When Fair Value is Used (Limited):
ASPE generally favors carrying amount for related party transactions, especially those lacking commercial substance (similar to ASPE 3831). This is because often, in related party transactions, the terms are not necessarily arm’s length, and carrying amount may be more representative.
Fair value is used only in specific, limited circumstances: Primarily when commercial substance is present and fair value can be reliably measured. This is less common in related party situations under ASPE, as the focus is often on control/influence rather than purely market-driven exchange.
Even if measured at fair value, disclosure is still mandatory under ASPE 3840.
Emphasis on Disclosure (Transparency): The core of ASPE 3840 is about transparency. Because related party transactions are not necessarily at arm’s length, and influence might be exerted, users need to be aware of these dealings to properly assess the financial statements. Disclosure allows users to understand the extent of related party activities and judge their potential impact.
