Revenue Recognition, IFRS 15, and Intangible Assets: Key Concepts and Criteria

What are the revenue recognition criteria for the sale of goods?

Revenue on the sale of goods can be recognized when: - Risks and rewards have been transferred - Amount of revenue and extent of returns can be measured - Collection is reasonably assured

What are the revenue recognition criteria for the sale of services?

Revenue on the sale of services can be recognized when: - Performance is achieved - Use either the percentage of completion method or the completed contract method to measure performance, whichever relates the revenue to the work accomplished - Amount of revenue is measurable - Collection is reasonably assured

How is revenue recognized on long-term contracts?

- Revenue on long-term contracts is recognized using either: - percentage of completion method - completed contract method - Use the method that best relates the revenue to the work accomplished

What are some examples of situations where the performance criteria may not have been satisfied?

- Consignment sales - Customer acceptance provisions - Upfront fees - Bill and hold arrangements - Unpredictable/unusual rights of return - Bundled sales

What are some of the ways in which progress can be measured when applying the percentage of completion method?

- Surveys of work performed - Services performed to date as a percentage of total services to be performed - Costs incurred as a percentage of the total estimated cost - Milestones reached - Passage of time (when services are performed by an indeterminate number of acts over a specified period of time) - In any given circumstance the method that best reflects the work performed should be used

How are the revenue recognition criteria applied to bundled goods or services?

- When a single transaction has multiple components (e.g., machine sold with a service contract) the revenue recognition criteria are applied to the components separately if it better reflects the substance of the transaction - Otherwise, the criteria are applied to the transaction as a whole (usually this would result in later revenue recognition as the criteria would need to be met for all components before revenue can be recognized)

How should the revenue be allocated between separate components of a single transaction?

- Should reasonably reflect selling prices that would be received in a standalone transaction - Consider using relative fair values (usually the best approximation of prices that would be achieved in a standalone transaction) or the residual method (if the fair value of one of the components is not determinable)

What are the factors to be considered in determining whether revenue should be recorded gross or net (also applies to IFRS 15)?

- Factors that indicate the entity is the principal (supports recording gross revenue): - Entity has primary responsibility for providing the good or service being purchased - Entity has inventory risk - Entity has latitude in establishing prices - Entity bears credit risk - Factors that indicate the entity is the agent (supports recording net revenue): - Amount that entity earns is predetermined (commission) being either a fixed fee per transaction or a fixed percentage of the sale amount

What are the five steps in the IFRS 15 approach to revenue recognition?

1. Identify the contract(s) with a customer 2. Identify the performance obligation(s) in the contract 3. Determine the transaction price 4. Allocate the transaction price to the performance obligations in the contract 5. Recognize revenue when (or as) the entity satisfies a performance obligation

IFRS 15: Step 1 What are the criteria to determine whether IFRS should be applied to a contract with a customer?

IFRS should be applied to contract when: - The contract has been approved in writing, orally, or in accordance with other customary business practices - Each party's rights regarding the goods or services to be transferred can be identified - The payment terms for the goods or services to be transferred can be identified - The contract has commercial substance (i.e., the risk, timing or amount of the vendor's future cash flows is expected to change as a result of the contract) - It is probable that the consideration for the exchange of the goods or services that the vendor is entitled to will be collected

IFRS 15: Step 1 If a contract does not meet the criteria for application of IFRS 15, how is it accounted for?

Any consideration received would be recognized as revenue only when: - The vendor has no remaining contractual obligations to transfer goods or services and all, or substantially all, of the consideration has been received and is non-refundable OR - The contract has been terminated and the consideration received is non-refundable

IFRS 15: Step 1 When two or more contracts are entered into at (or near) the same time with the same customer, when should they be accounted for as a single contract i.e., combined?

The contracts are accounted for as if they were a single contract i.e. combined if at least one of the following criteria is met: - The contracts are negotiated as a package with a single commercial objective - The amount of consideration in one contract depends on the price or performance of the other contract - The goods or services that are promised in the contracts (or some of the goods or services) represent a single performance obligation

IFRS 15: Step 1 A contract modification relates to a change in the scope and/or price of a contract. When does the change require an adjustment to revenue recognized and when is the modification treated as separate contract?

- Adjustments to revenue are only made when there is a change in the contract rights or obligations as a result of the modification - A contract modification is accounted for as a separate (and additional) contract only if both of the following criteria are met: - The scope of the contract changes due to the addition of promised goods or services that are distinct - The price of the contract increases by an amount of consideration that reflects the vendor's stand-alone selling price of the additional promised goods or services

IFRS 15: Step 1 A contract modification relates to a change in the scope and/or price of a contract. If the modification is NOT treated as a separate contract, how it is accounted for?

- Treated as a termination of the existing contract and the creation of a new contract, if the remaining goods or services are distinct from the goods or services already provided - The consideration to be allocated to the remaining performance obligations is the sum of: - The consideration promised by the customer (including amounts already received) that was included in the estimate of the transaction price and that had not yet been recognized as revenue - The consideration promised as part of the contract modification - Treated as if it were a part of the existing contract, if the remaining goods or services are not distinct and, therefore, form part of a single performance obligation that is partially satisfied at the date of the contract modification. - The effect that the contract modification has on the transaction price, and on the measure of progress towards completion is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) at the date of the contract modification (i.e., the adjustment to revenue is made on a cumulative catch-up basis).

IFRS 15: Step 2 The second step is to identify one or more distinct performance obligations in the contract. What is a performance obligation, and when are promises to deliver multiple goods or services considered distinct performance obligations?

- A performance obligation is a promise to transfer to the customer either: - a good or service (or a bundle of goods or services) that is distinct; or - a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer - A good or service that is promised to a customer is distinct if both of the following criteria are met: - The customer can benefit from the good or service (i.e., it can be used, consumed, or sold) either on its own or together with other resources that are readily available to the customer - The entity's promise to transfer the good or service to the customer is separately identifiable from other promises in the contract i.e. it is not highly interrelated or integrated with other goods and services in the contract

IFRS 15: Step 3 The transaction price is often a fixed amount specified in the contract. What are situations that could complicate the determination of the transaction price?

- Variable consideration including discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties, etc. - Existence of a significant financing component i.e., the consideration is received more than one year before or after the goods or services are provided - Non-cash consideration (e.g., non-monetary transaction) - Consideration payable to a customer including rebates, coupons, etc.

IFRS 15: Step 3 In determining the transaction price, how is variable compensation estimated?

- The amount is estimated using the method that provides the best prediction of the consideration. The possible methods are: - Expected value method - The sum of probability weighted amounts in a range of possible outcomes. This may be an appropriate approach if the vendor has a large number of contracts which have similar characteristics. - Most likely amount - The most likely outcome from the contract. This may be an appropriate approach if a contract has two possible outcomes, such as a performance bonus which will or will not be received. - To avoid overly optimistic estimates of variable consideration there is an overall constraint that it cannot be highly probable that there will be a subsequent significant reversal of revenue once the uncertainty over the amount of variable consideration is resolved e.g., at the end of a return period.

IFRS 15: Step 3 In determining the transaction price, what is meant by a significant financing component and how is it treated?

- If the timing of payments provides the customer (where the payments received after goods and services are provided) or the vendor (where payment received before goods and services are provided) with a significant benefit of financing, the transaction price is adjusted to reflect this financing component - If consideration is received more than one year after the goods or services are provided, the consideration should be discounted. The present value should be recognized as revenue for the goods or services and the remainder recognized as interest revenue over the period between provision of the good or services and receipt of payment - If payment is received more than one year before the goods or services are provided an interest expense should be recognized on the consideration being held, with an offsetting credit to deferred revenue. When the goods or services are provided the deferred revenue should be debited and revenue credited.

IFRS 15: Step 3 In determining the transaction price, how is non-cash consideration treated?

- When determining the transaction price, the starting point is that the vendor should measure the non-cash consideration at its fair value i.e., the fair value of the goods or services received - If it is not possible to measure the fair value of the non-cash consideration, then the vendor is required to estimate this by using the stand-alone selling prices of the goods or services subject to the contract i.e., the fair value of the goods or services given up

IFRS 15: Step 3 In determining the transaction price, how is consideration payable to a customer e.g., rebates treated?

- Accounted for as a reduction of the transaction price (and hence, a reduction of revenue), unless the payment to the customer is in exchange for a distinct good or service that the customer transfers to the vendor.

IFRS 15: Step 4 How is the transaction price allocated to the distinct performance obligations (when there is more than one)?

- The starting point for the allocation is the relative standalone selling prices of each obligation - If standalone selling prices are not available, they are estimated - If there is a discount i.e., the total contract price is less than the sum of the standalone selling prices, it is allocated proportionately unless there is observable evidence that the discount relates only to certain component(s) - Variable consideration is generally allocated to the specific performance obligations to which it relates, if it is related to a specific obligation and not to the contract as a whole

IFRS 15: Step 5 It must be determined for each performance obligation whether it is satisfied over time, or at a point in time. How is this determined?

- A performance obligation is satisfied over time if one of the following criteria is met: - The customer simultaneously receives and consumes the economic benefits provided by the vendor's performance (this is usually the case for services) - The vendor creates or enhances an asset controlled by the customer - The vendor's performance does not create an asset for which the vendor has an alternative use, the vendor has an enforceable right to payment for performance completed to date - If none of the above criteria are met, the performance obligation is considered to be satisfied at a point in time

IFRS 15: Step 5 How is revenue recognized on a performance obligation that is satisfied over time?

- When a performance obligation is satisfied over time, revenue is recognized by measuring the progress toward completion based on either: - Input methods (e.g., expenses incurred, labour hours used, etc.) - Output methods (e.g., milestones achieved, units delivered, etc.)

IFRS 15: Step 5 When is revenue recognized on a performance obligation that is satisfied at a point in time?

- If a performance obligation is satisfied at a point in time revenue is recognized when control is transferred. In assessing transfer of control, the following indicators are considered: - The vendor has a present right to payment for the asset - The customer has legal title to the asset - The customer has physical possession of an asset - Physical possession may not coincide with control of an asset e.g. consignment stock or bill and hold arrangements may result in physical possession but not control) - Significant risks and rewards of ownership - Acceptance of the asset

How are upfront fees dealt with under IFRS 15?

- Apply the IFRS 5 step framework - The question is whether the fee relates to the transfer of a separate good or service, in applying Step 2 of the IFRS 15 framework (identifying the performance obligations) - If the fee is not related to a separate performance obligation, it is accounted for as advance payment for future goods or services i.e., deferred. The fee would be recognized along with the other contract revenue in accordance with step 5.

How does a right of return factor into the five steps in IFRS 15?

- Under IFRS 15 revenue is only recorded to the extent that the vendor expects to be entitled to it (in other words revenue is recorded net of any expected returns) - To determine the amount of revenue to be recorded the guidance on variable consideration should be applied in Step 3 of the IFRS 15 framework, considering case facts about the nature of the products to be returned - A refund liability is recognized (credited) for the amount of the expected returns

What are the indicators of a consignment sale and how are they treated under IFRS 15?

- Apply the five-step framework - In applying Step 5 revenue is recognized when control is transferred. IFRS 15 states that a vendor does not recognize revenue on consignment sales because control has not transferred - IFRS 15 lists the following indicators of a consignment sale: - The product is controlled by the entity until a specified event occurs, such as the sale of the product to a customer of the dealer or until a specified period expires - The entity is able to require the return of the product or transfer the product to a third party (such as another dealer) - The dealer does not have an unconditional obligation to pay for the product (although it might be required to pay a deposit)

How are customer acceptance provisions dealt with under IFRS 15?

- Apply the five-step framework - In applying Step 5 revenue is recognized when control is transferred - IFRS 15 states that if it can be demonstrated that the asset meets the specifications, then customer acceptance is considered to be a formality that is not taken into account when determining whether control over the asset has passed to the customer. - For example, if there are size and weight specifications; the vendor would be able to confirm whether these had been met before formal acceptance by the customer - On the other hand, If the vendor is unable to determine that specifications have been met, then control over the asset does not transfer to the customer until the vendor has received the customer's acceptance and revenue could be recognized until that time

What additional criteria must be met in order for revenue on bill and hold sales to be recognized under IFRS 15?

- In applying Step 5 IFRS 15 provides the following additional criteria that must be met the case of a bill and hold sale in order for revenue to be recognized: - The reason for the bill and hold arrangement must be substantive (for example, the arrangement might be requested by the customer because of a lack of physical space to store the goods) - The product must be identified separately as belonging to the customer (that is, it cannot be used by the supplier to satisfy other orders) - The product must currently be ready for physical transfer to the customer - The vendor cannot have the ability to use the product, or to direct it to another customer

When is a warranty accounted for under IFRS 15 (as a separate performance obligation) vs. IAS 37 (as a provision)?

- If the customer has the option to purchase the warranty separately, it is accounted for under IFRS 15 - If a customer does not have the option to purchase the warranty separately, it is accounted for under IAS 37 unless it provides the customer with a service in addition to the assurance that the product complies with agreed-upon specifications. In making this assessment consider factors such as: - Whether the warranty is required by law — supports that it is not a performance obligation - The length of the warranty coverage period — the longer the coverage period, the more likely it is that the promised warranty is a performance obligation because it is more likely to provide a service in addition to the assurance that the product complies with agreed-upon specification - The nature of the tasks that the entity promises to perform

What is the definition of an intangible asset?

ASPE 3064 and IAS 38 Non-monetary asset without physical substance that meets the following criteria: - Identifiability - Capable of being separated and divided from the entity and sold, rented, licensed etc. OR - Arises from contractual or legal rights (regardless if they can be separated from the entity) - Control - Ability to obtain access to benefits and restrict others to benefits - normally stems from legal right e.g., copy writes, patents, employment contracts - Future economic benefit

What are the recognition criteria for intangible assets?

- An intangible asset can be recognized (recorded on the balance sheet) if it meets: - definition of intangible assets (see previous Q&A) - Recognition criteria: - Probable that future benefits will flow to the entity - The cost of the asset can be measured reliably

What specific expenditures cannot be capitalized as intangible assets?

- Start-up costs - Training activities - Advertising and promotion - Relocating or reorganizing part or all of an entity

How are internally generated intangible assets (research and development costs) accounted for?

ASPE 3064 - Costs incurred in research phase must be expensed - Entity must make an accounting policy choice to either expense or capitalize costs incurred in the development stage. The policy must be applied to all internally generated assets (can't pick and choose) - Costs can only be capitalized if the entity can demonstrate the following: 1. Technical feasibility 2. Intention to complete 3. Ability to use or sell 4. How the intangible asset will generate probable future economic benefits 5. Availability of adequate resources to complete the development 6. Ability to measure reliably the expenditures IAS 38 - Same except that the entity must capitalize costs incurred in the development stage if the criteria are met (no choice)

Which expenditures can/can't be included (capitalized) in the cost of an internally generated intangible asset?

- Costs include all directly attributable costs to create, produce and prepare the asset to be capable of operating as intended e.g. - materials and services - employee salaries, wages and benefits - fees to register a legal right - amortization of patents and licenses that are used to generate the intangible asset; and - interest costs (when the entity's accounting policy is to capitalize interest costs) - Examples of expenditures NOT included in the cost: - selling, administrative and other general overhead expenditure (unless directly attributed to preparing the asset for use) - identified inefficiencies and initial operating losses - Training staff to operate the asset

How are website development costs accounted for?

ASPE 3064 - Subject to the general criteria for capitalization of intangible asset i.e., identifiability, control, future benefit and can be reliably measured - Subject to the criteria for recognition of internally generated intangible assets (see previous Q&A) SIC 32 - Website development costs can be capitalized only if: - It meets general requirements for intangible recognition i.e., identifiability, control, future benefit and can be reliably measured - Key issue is demonstrating future benefit - can do this when website is capable of taking orders but not if website is solely for promoting products - Look to IAS 38 to assess which specific costs can be capitalized e.g., planning phase is similar to research phase and therefore costs incurred in planning phase are expensed - Best estimate of useful life should be short

How are intangible assets accounted for subsequent to initial recognition?

ASPE 3064 - Historical cost model (historical cost less amortization for finite life intangibles) - See Q&A below for discussion of impairment testing IAS 38 - Choice between the cost model and the revaluation model (must use same method for all assets in a particular class) - In order for the revaluation method to be used an active market must exist which is uncommon for intangibles therefore the revaluation method is rarely used (may apply to certain types of licenses such as taxi or fishing that are frequently bought and sold)

What factors are considered in determining the useful life of an intangible asset (including whether it is finite or indefinite)?

- the expected usage of the asset by the entity - typical product life cycles for the asset - public information on estimates of useful lives of similar assets that are used in a similar way - technical, technological, commercial or other types of obsolescence - the stability of the industry in which the asset operates and changes in the market demand for the products or services output from the asset - expected actions by competitors or potential competitors - the level of maintenance expenditure required to obtain the expected future economic benefits from the asset and the entity's ability and intention to reach such a level - the period of control over the asset and legal or similar limits on the use of the asset, such as the expiry dates of related leases - whether the useful life of the asset is dependent on the useful life of other assets of the entity

When should a long-lived asset be tested for impairment?

ASPE 3063/3064 - Test whenever events or changes in circumstances indicate that the carrying amount may not be recoverable including (but not limited to): - Decrease in market price - Change in use or physical condition - Change in legal factors or in the business climate including adverse regulatory actions - Significant acquisition or construction cost overruns - A current-period operating or cash flow loss combined historic or projected losses - More likely than not that it will be sold or disposed of significantly before the end of its previously estimated useful life IAS 36 - Must assess at the end of each reporting period whether there is any indication that an asset may be impaired. If any such indication exists, must test for recoverability - Regardless of whether there is any indication of impairment must also test for recoverability: - Annually for intangible assets with an indefinite useful life or an intangible asset not ready for use - Annually for goodwill acquired in a business combination

How do you determine if an asset is impaired?

ASPE 3063 - Asset is impaired if carrying value is greater than undiscounted future cash flows from use and eventual disposition IAS 36 - Asset is impaired if carrying value exceeds the recoverable amount which is defined as greater of: - FV less cost to sell - Value in use - Value in use is based on discounted cash flows from use and eventual disposition of asset

What value is an impaired asset written down to (how is the impairment loss measured)?

ASPE 3063 - Asset is written down to Fair value measured either by quoted market prices (preferable if they exist) or discounted* future cash flows to be realized (from use and eventual disposition) - Remember that undiscounted future cash flows are used to assess IF the asset is impaired, but discounted cash flows are used to calculate the AMOUNT of the impairment IAS 36 - Asset is written down to Recoverable amount defined as the higher of: - fair value less costs to sell - value in use (PV of future cash flows from use and eventual disposition)

It is sometimes not possible to determine the recoverable amount of an individual asset. In this case, how are assets grouped for purposes impairment testing and how would the loss be allocated to the assets in the group?

ASPE 3063 - Grouped with other assets and liabilities to form an "asset group" at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities - Loss is allocated on a pro rata basis using the relative carrying amounts of the assets in the group - Loss allocated to an individual asset of the group should not reduce the carrying amount of that asset below its fair value (whenever the fair value is determinable without undue cost and effort) - Goodwill is tested separately at the reporting unit level IAS 36 - Similar to ASPE - Assets are combined into cash-generating unit (CGU) - the smallest group of assets that includes the asset and generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets - Goodwill is allocated to CGU's - Loss is allocated first to any goodwill allocated to the CGU (until goodwill is reduced to zero) and then to other assets on a pro-rata basis using relative carrying values

Can an impairment loss be reversed?

ASPE 3063 - No IAS 36 - Yes - For all assets except goodwill - When there has been a change in the estimates used to determine the recoverable amount i.e., based on new estimates the recoverable amount has increased

What are the six conditions for treating an asset/division as held for sale (HFS)?

1. Management has committed to a plan to sell 2. Asset/division is available for immediate sale in present condition 3. Management has initiated active program to locate buyer 4. Sale is probable and expected to be complete within 1 year 5. Asset/Division is being actively marketed at reasonable price 6. Unlikely plan will be significantly changed or withdrawn * Note that an asset to be abandoned would NOT be classified as held for sale

What is the financial statement impact of treating an asset as held for sale (HFS)?

- Measure at lower of: 1. Carrying Value and 2. Fair Value less cost to sell (commissions, legal fees, etc.) - No amortization of asset while classified HFS - Presented separately on the balance sheet

What happens when an asset is written down to fair value less cost to sell and the fair value subsequently increases?

ASPE 3475 - The value of the asset is increased and a gain recognized - Gain cannot exceed the amount of the loss that was recognized when the asset was written down to fair value less cost to sell under this section i.e., any impairment losses recognized before the asset was classified as held for sale cannot be reversed IFRS 5 - The value of the asset is increased and a gain recognized - Gain cannot exceed the amount of the loss that was recognized when the asset was written down to fair value less cost to sell under IFRS 5 plus any impairment losses previously recognized under IAS 36 i.e., any impairment losses recognized before the asset was classified as held for sale can be reversed

What is the definition of a "component"?

- Cash flows and results of operations that can be clearly distinguished from rest of entity e.g., division, branch, product line

What is the definition of a discontinued operation?

- A component that has been disposed of or is classified as held for sale and either (one of the following): - Represents a separate major line of business or geographic area of operations - Is part of a single coordinated plan to dispose of a separate major line of business or geographic area of operations - Is a subsidiary acquired exclusively with a view to resale

What is the financial statement impact of treating an operation as discontinued?

ASPE 3475 - Report results of discontinued ops (net of tax) as a separate element of income/loss - Includes any loss on write-down of assets held for sale - Does not include accrual of future operating losses of discontinued operation IFRS 5 - Same with some additional disclosures

What happens when there are changes to the plan of sale and an asset or group no longer meets the criteria to classified as held for sale?

ASPE 3475 - Assets are reclassified as held and used and measured individually at the lower of: - Carrying amount before it was classified as held for sale adjusted for depreciation that would have been taken if the asset had not been classified as held for sale - Fair value at the date of the decision not to sell IFRS 5 - Assets are reclassified as held and used and measured individually at the lower of: - Carrying amount before it was classified as held for sale adjusted for depreciation that would have been taken if the asset had not been classified as held for sale - Recoverable amount at the date of the decision not to sell (higher of fair value less costs to sell and value in use, where value in use would be PV of future cash flows)

How is government assistance toward current expenses accounted for?

- Included in income for period - can be shown as revenue or netted against the related expense

How is government assistance toward future expenses accounted for?

- Defer and amortize into income as related expenses occur - can either be shown as revenue or netted against related expense

What are the two alternatives for accounting for government assistance towards the purchase of fixed assets?

- Choice to either: -Deduct from related fixed asset and calculate amortization on the net amount -Defer and amortize into income on same basis that the capital asset is depreciated

What condition must be met in order to accrue a grant receivable (amounts promised but not yet received) at year-end?

- Reasonable assurance that the entity has complied and will continue to comply with all the conditions of the grant

When should a forgivable loan be recognized into income?

- Treated same a grant with conditions attached i.e., recognized in period entity becomes entitled to receive it if there is reasonable assurance that the entity will meet the conditions - If circumstances indicate that repayment will be required i.e., that the conditions for forgiveness will not be met, a liability would be recorded (same as a grant with conditions attached)

How should the requirement to repay government assistance (including forgivable loans) be accounted for?

ASPE 3800 - Accounted for prospectively when circumstances arise that indicate repayment will be required e.g. - If it was originally recorded in income or netted against expenses - credit liability and debit expense in the period when circumstances indicate repayment will be required - If it was originally netted against the cost of a capital asset - increase the cost of the asset by the amount of assistance that is repayable and amortize revised cost over remaining life IAS 20 - If it was originally recorded in income or netted against expenses - credit a liability and debit an expense in the period when circumstances indicate repayment will be required - If it was originally netted against the cost of a capital asset - the cost of the asset is increased and the cumulative additional depreciation that would have been recognized in the absence of the grant is recognized in the current period (the net book value of the asset would be as if the grant had never been received)

What is the definition of significant influence and what are indicators of significant influence?

- Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies - Ownership of 20% or more of voting shares is assumed to give significant influence unless it can be proven otherwise - Other Indicators: - representation on the board of directors - participation in policy-making processes - material transactions between the entity and its investee - interchange of managerial personnel - provision of essential technical information such as patents, trademarks, etc.

How are significant influence investments accounted for?

ASPE 3051 - Choice of cost or equity method - unless investee shares are actively traded, in which case the choices are fair value or equity method IAS 28 - Equity method

How does the equity method work (high level)?

ASPE 3051 - On initial recognition the investment is recognized at cost - Investor recognizes their % share of investee income/loss as investment income - Unrealized intercompany gains and losses are eliminated - The investment account of the investor reflects: Cost of the investment adjusted for the cumulative: Investment income or loss Proportionate share of dividends paid by the investee Amortization of fair value increments (acquisition differential) Proportionate share of changes in an accounting policy, correction of an errors and capital transactions* IAS 28 - Same plus: - Investor picks up their share of comprehensive income and presents it separately (OCI does not exist under ASPE)

A Joint Arrangement exists when two or more parties have Joint Control. What factors indicate that Joint Control exists?

- In order for joint control to exist, decision making must require unanimous consent of the parties that have the joint control - Any party with joint control can prevent any of the other parties from making unilateral decisions without their consent - Can be evidenced by the percentage of voting rights each party has as compared to the minimum proportion of voting rights required to make decisions - Note that each party does not necessarily have to have the same percentage ownership

Joint Arrangements are sub-divided into types: Joint Operations and Joint Ventures for IFRS and Jointly Controlled Assets/Operation and Jointly Controlled Enterprises for ASPE. What is the definition of each?

- This can be complex, but generally, Joint Operations (IFRS) and Jointly Controlled Assets/Operations (ASPE) will not be structured as a separate vehicle (e.g., a separate corporation) - The venturers have the rights to the individual assets and obligations for the liabilities (as opposed to rights to the net assets/liabilities) - In these instances, a contract between the parties governs the arrangement over some jointly controlled operation or assets. Such arrangements are common in the oil and gas industry. - Joint Ventures (IFRS) and Jointly Controlled Enterprises (ASPE) will involve a separate jointly controlled entity such as a jointly controlled corporation - The venturers have rights to the net assets (for example through shares of a corporation) - This type of joint arrangement is the more common one outside of the oil and gas industry

How are the different types of Joint Arrangements accounted for?

ASPE 3056 - Jointly controlled operations - Include on B/S share of jointly controlled assets and liabilities; Include in I/S share of revenue and expenses from operation - Jointly controlled assets - Account for specific asset(s) it controls, any liabilities incurred, and its share of revenues and expenses from the arrangement - Jointly controlled enterprises - Can choose cost method or equity method (policy must be applied consistently) IFRS 11 - Joint Operations - Include on B/S share of jointly controlled assets and liabilities; Include in I/S share of revenue and expenses from operation - Joint Ventures - Equity method

Can a gain be recognized on a contribution/sale to a joint venture and over what period? How are losses on contribution to a joint venture recognized?

- Yes, but only to the extent of the other non-related venturers' interest (full profit can only be recognized once the joint venture sells the asset) e.g. If entity owns a 35% interest in a JV, only 65% of the gain can be recognized. - Losses on contributions to a joint venture are recognized in income immediately to the extent of other venturer's interest (entity's interest would also be written down if transaction provides evidence of impairment)

What is the definition of control and what factors are considered in determining if control exists?

ASPE 1591 - Control is the continuing power to determine its strategic operating, investing and financing policies without the co-operation of others. - Similar factors would be considered as for IFRS 10 below IFRS 10 - An investor has control when: - Power over the investee - Exposed to or has rights to variable returns from its involvement with the investee - Has the ability to affect those returns through its power over the investee - Factors to consider: - Ability to direct the relevant activities - Relative voting rights including options, conversion rights, etc. - Composition of the board or governing body - Ability to dominate the management - Contractual arrangements

How are controlled entities accounted for?

ASPE 1591 - Entities have policy choice to either prepare consolidated or non-consolidated financial statements - If not consolidated, entities that are controlled through voting equity can be accounted for using cost or equity method* (policy choice must be applied consistently) *When a subsidiaries equity securities are quoted in an active market, the investment must be accounted for using the equity method or at the quoted amount (changes recognized in P&L) IFRS 10 - Must be consolidated unless exemption criteria in IFRS 10 paragraph 4 are met (very limited circumstances)

What is the definition of a business combination?

Business Combinations refer to any event where one entity obtains control over another entity. Business combinations generally happen in two ways: - purchase of assets of another entity - purchase of shares of another entity

How is goodwill calculated?

Goodwill = [Consideration paid + NCI] - FV of 100% of identifiable assets & liabilities - NCI can be measured at: 1. FV i.e. [purchase price/acquirer % ownership] * NCI % or 2. NCI % share of FV of identifiable assets and liabilities - In calculating the FV of identifiable assets acquired, an intangible asset should be recognized separately from goodwill when: - They result from contractual or other legal rights e.g., operating lease with favorable terms, rights, patents, etc. - They are capable of being separated and sold, licensed, etc.

How is a bargain purchase (previously called negative goodwill) treated?

- First reassess whether acquirer has correctly identified/measured FV all of the assets/liabilities and consideration, which could lead to the elimination of goodwill - If the excess (i.e., negative goodwill) still exists following the reassessment, the acquirer would recognize the resulting gain in net income on the acquisition date

How is contingent consideration treated?

ASPE 1582 - Recorded at fair value and considered part of the consideration transferred - If it will be paid in cash it would be classified as a liability and if new shares will be issued to pay the contingent consideration, it would be treated as equity - Contingent consideration is not re-measured to its fair value at each subsequent reporting period IFRS 3 - Same, except contingent consideration is re-measured to its fair value at each subsequent reporting period

What costs must be included in (or allocated to) inventory?

- All costs incurred to bring inventory to present location and condition - Includes: - direct costs (e.g., labour and materials) - variable overhead - fixed overhead (overhead must be allocated - it is not optional)

What are examples of costs that are not included in inventory?

- Abnormal waste of materials, labour or other production costs - Storage costs, unless those costs are necessary in the production process before a further production stage; - Administrative overheads that do not contribute to bringing inventories to their present location and condition - Selling costs

On what basis must fixed overhead be allocated to inventory?

- Based on normal capacity (not actual production as this could lead to inflating the value of inventory if production is below normal capacity)

What inventory costing methods (LIFO, FIFO, weighted average cost) are acceptable?

- Must use FIFO or weighted average cost (LIFO not acceptable)

Inventory is recorded at the lower of cost and NRV. When can similar items/products be grouped together for purposes of applying the lower of cost and NRV comparison?

- Inventory can be grouped for purposes of determining a write-down only when it: - Relates to the same product line and has similar purposes or end uses - Is produced and marketed in the same geographical area - Cannot be practicably evaluated separately from other items in that product line - The issue with grouping of items is that an excess of cost over NRV on one item or group of items can offset a deficiency (which would otherwise require a write-down) on another - It is not appropriate to write inventories down on the basis of a classification of inventory (for example, finished goods, or all the inventories in a particular industry or geographical segment)

What is the definition of an Asset Retirement Obligation (ARO)?

ASPE 3110 - Legal or contractual obligation associated with the retirement of a tangible long-lived asset IAS 37 - No equivalent definition - apply general guidance on provisions which are recognized when: - There is present obligation (legal or constructive) as a result of a past event - It is probable that an outflow of resources will be required to settle the obligation - A reliable estimate can be made of the amount of the obligation

How is an ARO measured?

- Best estimate of the expenditure required to settle the present obligation at the end of the reporting period e.g., PV of expected future cash outflow - If a reasonable estimate can't be made - don't recognize until a reasonable estimate can be made

What is the balance sheet and income statement impact on initial recognition of the ARO and in subsequent years?

ASPE 3110 - Balance sheet impact is a liability equal to fair value of ARO (PV of future cash outflow) and offsetting entry to increase related asset by the same amount - Each period recognize amortization (which reduces the asset) and accretion expense (which increases the liability) - At the time the liability is due the asset will have been eliminated and the liability will be equal to the face value - Changes to estimated amount of the liability are treated as a change in estimate (prospective) IAS 37 - Same except that increase in the liability due to passage of time is charged to interest expense (not referred to as accretion expense) - Changes to liability are dealt with in IFRIC 1 (look up if required)

IFRS does not have a specific section dealing with Non-monetary transactions. When should IFRS 15 be applied vs. IAS 16?

- IFRS 15 applies to transactions with customers i.e., when inventory or services are exchanged for non-monetary consideration - IAS 16 applies when PP&E is exchanged for non-monetary consideration

How are non-monetary transactions accounted for?

ASPE 3831 - Measured at fair value unless any one of the following in which case carrying value is used: - Exchange lacks commercial substance - Neither fair value of asset given up or received is reliably measurable - Exchange of inventory for other inventory in same line of business - Spin off or other form of liquidation IAS 16 (PP&E) - Measured at fair value unless any one of the following in which case carrying value is used: - Exchange lacks commercial substance - Neither fair value of asset given up or received is reliably measurable IFRS 15 (Revenue) - Non-cash consideration is addressed as part of step 3, determining the transaction price - Non-cash consideration is measured at fair value

How is commercial substance defined?

ASPE 3831 A transaction has commercial substance if the entity's future cash flows are expected to change significantly as a result of the transaction, which happens when: a) the configuration of the future cash flows of the assets differs significantly; or b) The difference in the entity-specific value of the assets is significant relative to the fair value of the assets exchanged IAS 16 (PP&E) An exchange transaction has commercial substance if: a) the configuration (risk, timing and amount) of the cash flows of the assets exchanged differs; or b) the entity-specific value of the portion of the entity's operations affected by the transaction changes as a result of the exchange; and c) the difference in (a) or (b) is significant relative to the fair value of the assets exchanged *IFRS 16 is effectively the same as ASPE but with minor wording differences

When a non-monetary transaction is measured at fair value, how is the fair value determined?

ASPE 3831 and IAS 16 - More reliably measurable of fair value of asset given up or received - If equally reliable then use fair value of what is given up IFRS 15 - Non-cash consideration is measured at fair value (of what is received) - If it is not possible to measure the fair value of the non-cash consideration, it must be estimated by using the stand-alone selling prices of the goods or services (given up)

How are non-monetary transactions that are also related party transactions accounted for?

ASPE 3831 - In addition to non-monetary criteria, must also apply related party rules, so in order to record at fair value transaction must also be: - In normal course of operations OR - Not in normal course of operations but there is substantive change in ownership AND exchange amount supported by independent evidence IFRS - No difference if it is a related party transaction since IFRS has no specific guidance on recognition of related party transactions (only addresses disclosure)

What conditions must be met in order for a related party transaction to be recorded at exchange amount?

ASPE 3840 - Transaction must be: - In normal course of operations OR - Not in normal course of operations but there is substantive change in ownership AND exchange amount supported by independent evidence - If also non-monetary combine rules as explained above in NMT section (see flow chart in HB 3840) - If transaction doesn't meet the above conditions, it must be recorded at carrying value IAS 24 - No guidance on how to measure related party transactions (only guidance on disclosure) therefore they are recognized in the same way as non-related party transactions

How should employee stock options be accounted for on the financial statements (at what amount and what accounts are debited/credited)?

- Measured at fair value at date option is granted (not subsequently re-measured) - Equity is credited and expense debited for value of option when granted if no vesting period - Expense is recognized and equity credited over vesting period to match with services received if there is a vesting period Stock Options (HB 3870 and IFRS 2)

How is fair value measured for shares, options, and stock appreciation rights (SARs)?

- Non-restricted shares - Measured at market price (or estimated market price, if the stock is not publicly traded) of a share of the same stock as if it were vested and issued on the grant date. - Restricted shares (shares that carry restrictions after the employee has a vested right to it) - measured as the amount that a non-employee would pay for similarly restricted stock - Stock options - Fair value is estimated using an option pricing model (e.g., Black-Scholes) that takes into account as of the grant date the exercise price, the expected life of the option, the current price of the underlying stock, its expected volatility, expected dividends on the stock and the risk-free interest rate for the expected term of the option. - Not subsequently adjusted for changes in above variables - Stock appreciation rights (SARS) - Measure compensation cost as the amount by which the quoted market value of the shares exceeds the option price or value specified - Subsequently adjusted for changes in the quoted market value of the shares

How are expected forfeitures accounted for when there is a vesting period?

ASPE 3870 - Choice to accrue compensation cost either: 1. Based on an estimate of the number of instruments expected to vest and revise estimate to actual if necessary 2. As if all of the instruments granted will vest and then subsequently recognizing forfeitures as they occur IFRS 2 - No choice, must accrue compensation cost based on an estimate of the number of instruments expected to vest and revise estimate to actual if necessary (same as option 1 under ASPE)

Under what circumstances should liabilities that are contingent on future events be accrued/disclosed?

ASPE 3290 - Should be accrued if loss is likely (chance of occurrence is high) and can be estimated - Should be disclosed if loss is likely but can't be estimated or if the likelihood is not determinable IAS 37 - Should be accrued if probable (more likely than not) and can be reliably measured (IAS 37 says that only in very rare circumstances would it not be possible to measure) - Liabilities not meeting the above conditions are disclosed - Note: Term "contingent liability" under IFRS refers to liabilities that are not recognized due to not meeting the probability threshold or not being measurable. This is different than ASPE where it refers to "any liability whose resolution is dependent on a future event"

How are contingent gains treated?

ASPE 3290 - Can't recognize contingent gains - Disclose required if gain is likely but may also disclose where likelihood of gain is not determinable IAS 37 - Can't recognize contingent gains - Disclose only if gain probable (note that "likely" under ASPE is a higher threshold than "probable" under IFRS)

What are the two ways that an entity can enter into foreign transactions?

- It can enter directly into transactions denominated in a foreign currency - It can have foreign operations (subsidiaries)

How are transactions entered into directly (not through a subsidiary) in a foreign currency recorded at the time of the transaction and how are the related foreign currency denominated balances treated at year-end?

- Transactions entered into directly are recorded at the rate in effect on the date of the transaction (may use an appropriate weighted average if it produces a reasonable approximation if it is impractical to record each transaction at the rate in effect on the actual date) - At balance sheet date translate all monetary assets/liabilities (and non- monetary assets/liabilities carried at FV) using the rate at the balance sheet date (all other items are left at the historical rate that was used on the date of the transaction) - Resulting gains/losses are recognized in income

When should the current rate method be used to translate the financial statements of a foreign operation?

ASPE 1651 - Current rate method used for self-sustaining subsidiaries IAS 21 - Current rate method used for operations with a functional currency different than the reporting currency

How does the Current Rate Method of translating financial statements of a foreign operation work?

ASPE 1651 - Translate all assets/liabilities at current rate - Translate revenues and expenses at rate in effect on date they occur (and average is usually used for practical reasons) - Gains or losses on translation recognized in separate component of shareholder's equity (there is no such thing as OCI under ASPE) IAS 21 - Same except that gains or losses on translation are recognized in OCI

When should the Temporal Method be used to translate the financial statements of a foreign operation?

ASPE 1651 - Temporal method used for integrated subsidiaries IAS 21 - Temporal method used when functional currency is the same as the reporting currency

How does the Temporal Method work?

- Translate monetary assets/liabilities at current rate - Translate non-monetary assets/liabilities at historical rate - Translate revenues and expenses at rate in effect on date they occur (and average is usually used for practical purposes) - Gain or losses on translation recognized in income

What are the factors to consider for classifying an operation as integrated or self-sustaining (ASPE)?

ASPE 1651 - Whether cash flows of the reporting enterprise are insulated from or are directly affected by the day-to- day activities of the foreign operation - Whether sales prices for the foreign operation's products are determined more by local competition/regulations or by worldwide competition/prices - Whether the sales market for the foreign operation's products is primarily outside the reporting enterprise's country or within it - Whether labour, materials and other costs are primarily local costs, or whether the foreign operation depends on products and services obtained primarily from the country of the reporting enterprise - Whether the day-to-day activities of the foreign operation are financed primarily from its own operations and local borrowings or primarily by the reporting enterprise or borrowings from the country of the reporting enterprise - Whether there is very little interrelationship between the day-to-day activities of the foreign operation and those of the reporting enterprise, or whether intercompany transactions with the reporting enterprise form a dominant part of the foreign operation's activities. - None of the above factors are listed as being of more importance than the others

What are the factors in determining an entity's functional currency (IFRS)?

- IFRS requires that both parent and Sub apply the factors below to determine their functional currency - Primary factors - Currency used for sales - Currency used in regulatory and competitive environment - Currency used for salaries and materials - Other factors - Currency for financing activities - Currency for operating activities

What are the criteria used by a lessee to classify a lease as operating or capital?

- Reasonable assurance of ownership transfer e.g., if there is a bargain purchase option (BPO) - Lease term is 75% or more of economic life of asset - PV of minimum lease payments (MLP) is 90% or more of fair value of property - MLP = minimum rental payments + guaranteed residual + BPO - Discount rate = lower of incremental borrowing rate and rate implicit in lease (PV of MLP cannot exceed FV of asset)

How are leases accounted for by the lessee (balance sheet and income statement impact)?

Capital lease (At inception) - Lessee records an asset and obligation at PV of minimum lease payments (discount rate = lower of rate implicit in lease and incremental borrowing rate) - Any initial direct costs are expensed Capital Lease (Subsequent) - Subsequently the lessee records amortization of the asset and interest (accretion) expense on the lease liability - The asset is amortized over the shorter of the lease term and the assets useful life - The cash payment are treated like loan payments split between liability reduction and interest expense Operating lease - Expense lease payments on straight-line or other rational basis over lease term

How are lease inducements e.g., free rent at beginning or end of an operating lease accounted for by the lessee?

- Inducements are recognized as an offset to rent expense evenly over the lease term i.e., same rental expense recognized each month - e.g., If free rent is at beginning the lessee would debit rent expense and credit a liability in months when no rent is paid. In months when rent is paid credit cash and debit rent expense and liability (rent expense will be lower than cash payment so difference reduces liability). Liability will be zero by end of lease term. - If free rent is at end, the lessee would debit rent expense and lease inducement asset and credit cash each month that rent is paid. By end of lease term asset will equal free rent and you can debit rent expense and credit the asset in the last month(s) when no rent is paid.

What are the criteria used by a lessor to classify a lease as operating or capital?

- A lease is classified by the lessor as a capital lease if: - It meets any one of the capital lease criteria used by the lessee and: - The credit risk is normal when compared to the risk of collection of similar receivables - Any un-reimbursable costs can be reasonably estimated