Kieso 10th Ed.

_RAPID REVIEW 2_3rd pass_April 25, 2013 13-04-25 7:17 AM Page 1

INTERMEDIATE ACCOUNTING: RAPID REVIEW

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Tenth Canadian Edition, Volume 2: Chapters 13 – 23

CHAPTER 13 Non-Financial
can’t be made, and the extent of any exposure beyond the
amount accrued.
and Current Liabilities
Asset Retirement Obligations – Contingencies–ASPE
AROs
Loss can be reasonably estimated?
Recognize the obligation associated with the retirement Probability Yes No
of a long-lived asset in the period the obligation is
Likely Accrue. Report Report in Notes
incurred. Under IFRS, recognize costs of both legal and exposure to loss to Financial
constructive obligations; under ASPE, legal obligations in excess of amount Statements*
only. Discount the future costs of the obligation to deter- accrued in Notes
mine the present amount required. Debit the capital asset to Financial
Statements*
for the present value of the ARO and credit a liability in
the same amount. Amortize the ARO cost to expense Not likely Disclosure not Disclosure not
required required
over the related asset’s useful life and accrue interest on
Not Report in Notes Report in Notes
the liability each period.
determinable to Financial to Financial
Under IFRS, as the ARO and costs increase due to Statements* Statements*
further damage to the site from production activities,
increase the obligation and add the incremental costs *Disclose the nature of the contingency and either an estimate of the
amount or the fact that an estimate cannot be made. Note that IFRS
caused by production to inventory as production over-
requirements are similar, but use the term "probable" which is a
head costs. For ASPE, add these additional costs to both lower threshold than "likely" as used in ASPE.
the ARO and the capital asset account, adjusting the
future depreciation amounts.

Contingencies and Uncertain

CHAPTER 14 Long-Term
Commitments Financial Liabilities
Under IFRS, provisions are required for situations like Bonds
lawsuits if the amount can be reliably measured and if a
Bond Valuation ⫽ Present Value of Interest Payments ⫹
confirming future event is “more likely than not” to Present Value of Principal Payment
occur. Use expected values to measure the liability.
Disclose the financial effect of the uncertain amounts, Interest payments are based on stated rate and face value
the uncertainties related to the outflows, and whether of principal.
any reimbursement is possible.
Under ASPE, accrue a contingent loss only if it is Present value calculations are based on the market rate of
“likely” a future confirming event will occur and the loss interest, for example:
amount can be reasonably estimated. If there is a range of
possible loss amounts and no particular amount is better
than another, accrue the bottom of the range. If one Stated rate Market rate Bond issued at
amount is a better estimate than the others, accrue that 5% 4% Premium
amount. Disclose the nature of the contingency, esti- 5% 5% Par
mated amount of the contingent loss or that an estimate 5% 6% Discount

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Bond Discount and Premium

Amortization Calculation
Effective Interest Method

Interest Expense Interest Paid

Carrying value Effective Stated Amortization

of debt at ⫻ interest ⴚ Face amount
⫻ interest ⴝ amount
of debt
beginning of period rate rate

Straight Line Method Note Disclosure for Long-

Divide total discount/premium by the period to maturity Term Debt
and amortize equally for each interest payment.
Nature of the liability Restrictions imposed
Journal entry to record each interest payment for Bond Maturity dates Assets pledged as security
Payable: Interest rates Fair value if estimable
Call provisions Future payments for
DR Interest Expense sinking fund
DR Bond Payable (if bond issued at a premium) Conversion privileges Future payments for
CR Bond Payable (if bond issued at a discount)
five years
CR Cash

Debt-to-total-assets ⫽ Total debt

Calculation of Loss/Gain on Total assets
Early Redemption of Bonds
Reacquisition Price ⫺ Net carrying amount of bonds redeemed ⫽
Gain/loss on redemption
CHAPTER 15 Shareholders’
Net carrying amount of bonds redeemed ⫽ Face Value –
Unamortized discount ⫹ Unamortized premium ⫺ Unamortized Equity
issue costs

Note: Bring the amortization of any discount, premium, or discount

Retirement of Reacquired Shares
costs up to date before determining the net carrying amount of the
bonds.
Allocation of Acquisition Cost
Acquisition Cost Greater Acquisition Cost Less
Order than Original Cost than Original Cost
Troubled Debt Restructurings 1 To share capital, in an amount Same
equal to par, stated, or
If restructuring is determined to be a settlement (i.e., assigned value of the shares.
early repayment or refunding), remove old debt from 2 To contributed surplus, to To contributed
books, credit non-cash assets given up and record a gain. the extent that contributed surplus
If debt continues but with substantial modifications, surplus was created by a net
(i.e., if PV of debt under new term discounted using the excess of proceeds over cost
on cancellation or resale of
original effective rate is ⭓ 10% different from PV of
shares of the same class.
remaining cash flows under the old debt, or creditor
3 To contributed surplus in an n/a
changes or original debt is legally discharged), eliminate amount equal to the pro-rata
the old debt and record the new at the present value of share of the portion of
the revised cash flows using the market rate of interest. contributed surplus that
If debt continues but with non-substantial modifica- arose from transactions,
other than those above, in
tions, calculate a new effective interest rate by equating
the same class of shares.
the carrying amount of the original debt with the present
4 To retained earnings. n/a
value of the revised cash flows.

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Some Common Transactions Disclosure of Shareholders’

that Affect Retained Earnings Equity
• A Statement of Changes in Shareholders’ Equity
RETAINED EARNINGS
(IFRS)
Debits Credits • A Statement of Retained Earnings (ASPE)
1. Net loss 1. Net income
• Authorized number of shares, or statement that it is
2. Prior period adjustments 2. Prior period adjustments
(error corrections) (error corrections)
unlimited
and certain changes in and certain changes in • Existence of unique rights – dividend preferences,
accounting principle accounting principle
redemption privileges, conversion rights, etc.
3. Cash, property, and most 3. Adjustments due to
stock dividends financial reorganization • Number of shares issued and amount received
4. Some treasury share
transactions • Whether par value or no par value shares
• Amount of any dividends in arrears
• Details of changes during the year
Dividend Types
Cash or DR Dividends
• Restrictions on retained earnings
other assets CR Dividends Payable – when declared
DR Dividends Payable
CR Cash – when paid Net income ⫺
Note: Cash dividends are not paid on Treasury Rate of return on common Preferred dividends
⫽
Stock. shareholders’ equity Average common
Dividends Payable in corporate assets other than cash. shareholders’ equity
in kind Measure at the fair value of the asset that
is given up unless they are considered $36,720
⫽
to represent a spin-off or other form of $360,000 ⫺ $54,000
restructuring or liquidation, in which case they
⫽ 12%
should be recorded at the carrying value of the
non-monetary assets or liabilities transferred.
Stock Reallocates funds from retained earnings to
Dividend share capital
Cash dividends
DR Dividends Payout ratio ⫽
CR Common Shares Net income ⫺
Measured at fair value of the shares. Preferred dividends
Liquidating A distribution of the corporation’s capital $100,000
Dividend DR Dividends ⫽
$500,000
DR Contributed Surplus
CR Dividends Payable ⫽ 20%

Dividend Distribution Market price of share

Price earnings ratio ⫽
First Pay any dividends in arrears on cumulative Earnings per share
preferred shares.
⫽ $50/$4
Second Pay the current year dividend on preferred shares.
Third Pay the current year dividend on common shares. ⫽ 12.5
Fourth Pay any participating dividend by pro-rating the
amount available to the participating share
classes based on their relative carrying values.
Common Shareholders’
equity
Book value per share ⫽
Number of shares
Components of Shareholder Equity outstanding
1. Common and/or preferred shares $1,000,000
⫽
2. Contributed Surplus $100,000
3. Retained Earnings (deficit)
4. Accumulated other comprehensive income (IFRS) ⫽ $10 per share

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CHAPTER 16 Complex Derivatives: options, forwards,

and futures
Financial Instruments
Derivatives are reported in financial statements when an
Types of Risk entity becomes party to the contract. Derivatives are
measured at fair value with gains and losses going
through net income.
Risk Explanation
Options:
Credit The risk that one party to a financial instrument
will cause a financial loss for the other party by
failing to discharge (respect) an obligation.
Liquidity The risk that an entity will have difficulty Framework for options:
meeting obligations that are associated with Call option Put option
financial liabilities. (right to buy shares) (right to sell shares)
Market The risk that the fair value or future cash flows
Written Sell for $ Sell for $
of a financial instrument will fluctuate because
Transfer rights to Transfer rights to sell
of changes in market prices. The three types of
buy shares shares
market risk are as folllows:
• Currency The risk that the fair value or future cash flows Purchased Pay $ Pay $
of a financial instrument will fluctuate because Obtain rights to Obtain rights to
of changes in foreign exchange rates. buy shares sell shares
• Interest The risk that the fair value or future cash flows
rate of a financial instrument will fluctuate because
of changes in market interest rates.
Forwards: A forward contract is an agreement between
• Other The risk that the fair value or future cash flows
price of a financial instrument will fluctuate because two parties to buy or sell an asset at a future point in time
of changes in market prices (other than price at a price agreed on today. The contract terms are unique
changes arising from interest rate risk or to the two parties.
currency risk).
Futures: A future contract is like a forward contract
except the terms are standardized and it trades on a
future exchange and is settled through a clearing house.
Parties to the contract must put a percentage of the con-
tract value (margin) with the exchange/broker, with daily
change in the contract value settled against the margin
account.

STOCK OPTIONS

Issued by others, e.g.,

Issued by the company
financial institutions

CSOP ESOP Other Options/

Warrants

Not traded on exchange since Not traded on exchange since

Often exchange traded
holder must be employee rights usually not transferable

Used for motivating and Used as compensation in a Used for hedging, speculation,
remunerating employees buy or sell transaction and to access capital funds

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STOCK OPTION PLANS

CSOP Non-compensatory (ESOP)

Operating Transactions Capital Transactions

Income Statement Shareholders’ Equity

Complex Financial Instruments Contract Presentation

Economic substance dictates the accounting, even when Mandatorily redeemable Liability. The mandatory
it differs from legal form. preferred share. redemption imposes a contractual
Residual value method and fair value method can be obligation to deliver cash or other
used to allocate carrying value between debt and equity. assets. As an exception, high/low
preferred shares are presented as
IFRS requires use of the residual method with any debt equity under ASPE (see the
components being valued first. PE GAAP allows the chapter text below this
equity component to be valued at zero, or the residual illustration).
method to be used. Debt with detachable Liability and equity. Since the
Complex financial instrument examples: warrants. The warrants warrants are detachable, they are
are for a fixed number separate financial instruments
of shares. and are treated as written call
Contract Presentation options. The instruments allow for
a fixed number of shares to be
Convertible debt Part liability and part equity. The exchanged for a fixed amount of
(convertible at the option conversion option is essentially an cash. The debt carries with it a
of the holder into a fixed embedded written call option and contractual obligation to pay
number of common this part is equity since a fixed interest and principal.*
shares of the company). number of shares will be issued.
The debt carries with it a Preferred shares that Liability. Under IFRS, a liability
contractual obligation to pay must be repaid if certain exists since the contingent
interest and principal.* conditions are met (for settlement provision is based on
example, if the market an event outside the company’s
Puttable shares (holder Liability. This instrument contains price of the common control. Under ASPE, the
has the option to require a written put option that requires shares exceed a certain instrument would be accounted
the company to take the the entity to pay cash or other threshold). for as a liability only where the
instruments back and assets if the option is exercised. contingency is highly likely to
pay cash). The holder has the right to occur.23
exercise the option and therefore
this is beyond the entity’s control. Debt that will be settled Liability. The common shares are
The exception to this is noted in by issuing a variable used as currency to settle the
the next example below. number of common shares obligation, which is equal to the
equal to the face value of face value of the debt regardless
Shares that give the holder Equity. Although these are the debt (or where the of who has the option to choose.
the option to require the technically liabilities because of holder has the option to
company to surrender a the put option, they may be require settlement in cash
pro rata share of net presented as equity as long as or a variable number of
assets upon windup. they are “in-substance common shares).
shares.” (Recall these criteria from
Chapter 15.) (continued)

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2. Calculate the incremental number of new shares that

Contract Presentation
Perpetual debt. Liability. The economic value of
this instrument is determined by
discounting the interest payments
(which represent a contractual
obligation to pay cash).
*Note that ASPE allows the entity to measure the equity portion
at $0 as an accounting policy choice. This will be discussed
later in the chapter.
would have been issued if options were converted at
the beginning of the year.
a. Proceeds from exercise of options ⫽ # options ⫻
Exercise Price
b. Treasury shares purchasable with proceeds ⫽ Proceeds
from (a)/Average common share price.
c. Incremental new shares ⫽ (a) ⫺ (b)

Effect of Written Put Options

CHAPTER 17 Earnings on Diluted EPS – Use Reverse
Treasury Stock Method
Per Share
1. Determine if options are “in the money”; if not
The EPS Formula STOP—options are antidilutive
2. Calculate the incremental number of new shares that
Income available to common shareholders would have had to be issued at the beginning of the
EPS ⫽
Weighted average number of common shares year in order to be able to have the cash to purchase
shares under the put option.
a. Amount of cash needed to buy shares under put option
⫽ # options ⫻ Exercise Price
Income Statement Presentation b. Shares issued to obtain cash determined in (a) ⫽
amount (a)/Average common share price
of EPS Components
c. Incremental new shares ⫽ (b) ⫺ options from (a)
Earnings per share are shown on the income statement
for:
• Income from continuing operations Effect of Convertible Bonds or
• Loss from discontinued operations, net of tax Preferred shares on Diluted
• Net income EPS – Use If-Converted Method
1. Determine effect on Net Income available to com-
mon shareholders after tax: Bonds: Interest expense
Weighted Average Number of (1⫺ tax rate); Preferred Shares: Dividend amount on
Shares Outstanding this class of shares
2. Determine effect on WACS: Assume shares were
Shares outstanding ⫻ restatement for stock split or stock
issued on first day of year, or date of issue if convert-
dividend ⫻ fraction of year outstanding ⫽ weighted
ible bonds or preferred shares were issued during the
shares for a fraction of year
year.
Add each fraction until the entire year is accounted for.
3. Determine effect on EPS: Income effect/WACS
Remember: Total of numerators in fraction of year frac-
effect. If this amount is ⬍ basic EPS, the convertible
tions must equal 12.
bond is potentially dilutive, otherwise it is antidilu-
tive and can be disregarded.

Effect of Written Call Options REMEMBER: Always rank items from smallest to
largest dilutive effect per share before calculating diluted
on Diluted EPS – Treasury EPS. Options are always first, as they are always most
Stock Method dilutive.

1. Determine if options are “in the money”; if not,

STOP—options are antidilutive.

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CHAPTER 18 Income Taxes Description Examples Likely Result

Revenues or gains Instalment sales – accrual Deferred tax
are taxable AFTER for accounting, cash for tax. liability
Deferred/Future Tax they are recognized Contracts – % completion
Amounts in accounting for accounting, completed
income contract for tax

Expenses or losses Product warranty liabilities. Deferred tax

Deferred Tax Liability
Taxes that will become
payable in a future period as
a result of accumulated
temporary differences at the
end of the current period.
Deferred Tax Expense
Change in the deferred tax
asset or liability account
balance over the accounting
period.
Deferred Tax Asset
are deductible Estimated losses. asset
Deductions that will become AFTER they have Restructuring losses.
available on future tax returns, been recognized "Accounting depreciation
resulting in taxable income in accounting exceeds depreciation for
being less than accounting income tax for tax purposes."
income in the future.
These are recognized only to Revenues or gains Subscriptions, royalties, Deferred tax
the extent that it is more are taxable rentals received in advance asset
likely than not that the future BEFORE they are Sales and leasebacks
benefit will be realized. recognized in
accounting income
Deferred Tax Benefit
Expenses or losses “Depreciation for tax Deferred tax
Deferred tax expense with a are deductible purposes exceeds liability
credit balance. BEFORE they have accounting depreciation.”
been recognized in Pension funding in excess
accounting income of accounting expense.
Some prepaid expenses not
recognized for tax purposes

Permanent Non-tax deductible No deferred

Types of Tax/Accounting Differences expenses such as fines and tax con-
penalties, golf and social sequences
Differences club dues, and expenses
related to the earning of
non-taxable revenue.
Temporary The difference between the tax base of an asset
Non-taxable revenue such
difference or liability and its reported (carrying or book)
as dividends from taxable
amount in the statement of financial position.
Canadian corporations.
Reversing Accounting and tax treatment is the same, but
Proceeds on life insurance
difference it happens in different accounting periods and
policies carried by the
causes a change in the amount of the temporary
company on key officers
difference.
or employees. Non-taxable
Permanent Caused by items that enter into either the
half of capital gains.
difference accounting or taxable income calculation, but
not the other.

What Tax Rate to Use

Use the rate that is enacted at the balance sheet date,
unless a substantively enacted rate is more appropriate
(i.e., has been tabled in Parliament).
Use the rate that is enacted or substantively enacted
at the balance sheet date to apply at the time that the
deferred tax liability is expected to be settled, or the
deferred tax asset realized.
When a change in the tax rate is enacted (or substantively
enacted), immediately record the effect on any deferred
tax asset or liability amount. This is an adjustment to tax
expense in the period of the change.

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• A reconciliation of the actual tax rate to the statutory

Income Tax Loss Carryover Benefits rate.
Loss Carryback Loss Carryforward
Number of 3 years 20 years • The amounts of reserves to be included in taxable
years available income in each of the next five years; and the
amount of unused income tax credits and losses
Tax rate Rate paid in year Enacted or substantively
applicable loss carried back enacted rate in year carried forward.
the loss is expected to
Private enterprises choosing the future income taxes
be used.
method, disclose the following:
Entry to DR Income tax Benefit should be
record receivable recognized in the loss • Amount of current and future income tax expense or
CR Current year to the extent that benefit included in income before discontinued
tax benefit it is more likely than operations and any amounts recognized in equity.
not to be realized.
• Amount of unused income tax losses, income tax
NOT More n/a Entry in year of loss:
likely than None reductions, and deductible temporary differences for
not Entry in year of which no future tax asset is recognized.
realization:
DR Income tax Publicly accountable organizations reporting under
receivable IFRS, disclose the following:
CR Current income
tax benefit • The major components of income tax expense or ben-
efit, and the source of both current and deferred taxes.
More likely n/a Entry in year of loss:
than not DR Deferred tax asset • The amount of current and deferred tax recognized
CR Deferred tax benefit in equity in the period, and tax expense for each
Entry in year realized:
component of OCI.
DR Income tax
receivable • A reconciliation of the effective tax rate to the statu-
CR Deferred tax asset
tory rates for the period.
• Information about unrecognized deferred tax assets
and the underlying deductible temporary differences
Disclosure Issues and unused tax losses.
• Information on each type of temporary difference.
Private enterprises choosing the taxes payable accounting
policy (i.e., no future taxes), disclose the following:
• Income tax expense or benefit included in determin-
ing income (loss) before discontinued operations;
and any amounts recognized in equity.

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CHAPTER 19 Pensions and Other Employee

Future Benefits
Benefit Cost Components and Impact on Pension
Expense Under Immediate Recognition Approach
(IFRS and ASPE)

Component Explanation Effect ASPE IFRS

Current Service Cost
Past Service Cost
Interest on the Benefit
Obligation
Actual Return on Plan Assets
Actuarial Gains and Losses
Cost of benefits earned by ⫹ Pension expense Pension expense
employees in current period
Cost of benefits from employee ⫹ Pension expense Pension expense
service in prior periods
Increase in obligation during the ⫹ Pension expense Pension expense
period through accretion
Income generated on pension ⫺ Pension expense Allocated between pension
assets held by trustee expense and OCI
Gains (losses) on obligation from ⫹/⫺ Pension expense OCI
a change in actuarial assumptions
or an experience gain or loss

Defined Benefit Obligation (IFRS) Pension Reconciliation Schedule

Accrued Benefit Obligation (ASPE) Difference between: (DBO/ABO) (Credit) & Plan Assets
at fair value (Debit)
Defined benefit obligation (ABO for ASPE, DBO for
IFRS), at beginning of period Equals: Funded status net liability (Credit balance) or net
⫹ Current service cost asset (Debit balance)
⫹ Interest cost
⫺ Benefits paid to retirees
⫾ Past service costs of plan amendments during period
⫾ Actuarial gains (⫺) or losses (⫹) during period Deferral and Amortization
⫽ Defined/accrued benefit obligation (DBO/ABO), at end Approach to Accounting for
of period
Pension Expense Under ASPE
(Appendix 19B)*
Plan Assets
Component Deferral and Amortization

Plan assets, fair value at beginning of period Current service Recognize and include in pension cost in
cost and the same period as they are accrued.
⫹ Contributions from employer company, and employees,
interest cost
if applicable
⫾ Actual return Actual return Any experience gain on plan assets is
⫺ Benefits paid to retirees on plan deferred and amortized to expense using
assets the corridor approach.
⫽ Plan assets, fair value at end of period
Past service Defer and amortize over period to full
cost eligibility.
Actuarial Any gain or loss on plan liabilities is
gains and deferred and amortized to expense using
Pension Worksheet losses the corridor approach. ASPE also allows
choice of immediate recognition.
General Journal Entries Memo Record
Defined *Note: The deferral and amortization alternative under ASPE will likely be
OCI Annual Accrued (Accrued) eliminated in 2013 or 2014.
(IFRS Pension Pension Benefit Plan
Items only) Expense Cash Asset/Liability Obligation Assets

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CHAPTER 20 Leases Accounting for a Capital/

Finance Lease—Lessee
Tests for Capital/Finance
Asset and DR Asset under lease
Leases Liability CR Obligations under lease
Recorded Asset cost/liability balance at beginning of
lease ⫽ lesser of PVMLP, and fair value
GROUP ONE CRITERIA of asset at inception of lease
Lease must meet at least one criterion in order to be considered a
capital lease for lessee and lessor. Amortization If lease transfers ownership or contains a
Period and bargain purchase option, use normal method for
Transfer of If reasonable assurance lessee will obtain
Method similar assets and economic life of asset. If not,
Ownership ownership by transfer or bargain purchase
then use the lease term and any conventional
option.
amortization method.
Economic Life If lease term is long enough that the
Effective Used to allocate each lease payment between
lessee will receive substantially all of the
Interest principal and interest. Remember, leases are
economic benefits (ASPE - lease term
Method usually based on annuity due calculations, and
must be greater than or equal to 75% of
in this case, there is no interest component
asset's economic life).
for the first payment.
Recovery of The lease allows the lessor to recover
Investment by substantially all of its investment and
Lessor earn a return on investment. PV of the
minimum lease payments (discounted
using the lessor's rate) must be close to LESSEE—Capital/Finance
the FV of the leased asset.
ASPE requires the PV of minimum
Leases – Disclosure
lease payments (discounted using the Requirements
lower of lessees borrowing rate and rate
implicit in lease) be equal to 90% or • Similar to disclosure requirements for property,
more of the FV of the leased asset. plant and equipment, and for long-term liabilities.
Degree of Leased asset is so specialized that it is
• Additional disclosures for IFRS include:
specialization useful only to lessee without major
(IFRS criteria only) modification and cost by lessor. – net carrying amount of each leased asset class,
– reconciliation of future MLPs to their PV in total,
GROUP TWO CRITERIA
and for next year, years two to five, and beyond
(ASPE only) must meet both of these to be
considered a capital lease for the lessor. five years from SFP date,
Credit Risk Normal when compared with risk of – any material lease arrangements including contin-
collecting similar receivables. gent rents, sub-lease payments, and restrictions
Unreimbursable If likely to be incurred by the lessor
due to lease agreements.
Costs can be reasonably estimated.

LESSEE—Operating Leases –
Lessor – Other Lessor – Finance Lessor – Operating Disclosure Requirements
Finance Lease Lease: Manufacturer Lease
(ASPE – Direct or Dealer Lease • Disclosure of future minimum lease payments.
Financing) (ASPE – Sales-type)
Results from Contains a Any lease that is
arrangements with manufacturer’s or not direct financing
lessors who are dealer’s profit/loss or sales type.
in the business
of providing
financing.

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Accounting for a Capital/
Finance Lease—Lessor –
Financing Type Lease
Net DR Lease receivable
Investment CR Unearned interest income
in Leased CR Cash
Asset Lessor buys asset to be leased for cash. Gross
Recorded investment in lease is undiscounted lease
payments excluding any executory costs ⫹ any
residual value accruing to lessor at end of lease
term, or ⫹ any bargain purchase option.
Unearned finance revenue is the difference
between the undiscounted Gross
Investment in Lease and the cost of the leased
property.
Effective Used to allocate each lease payment between
Interest principal and interest.
Method Remember, leases are usually based on annuity
due calculations, and in this case, there is no
interest component for the first payment.
Accounting for a Capital/
Finance Lease—Lessor –
Manufacturer/Dealer or Sales
Type Lease
Asset and DR Lease receivable
Liability DR Cost of goods sold
Recorded CR Unearned interest income
CR Sales
CR Inventory
Gross investment in lease is the same as direct
financing lease. Unearned finance revenue is
the difference between the undiscounted Gross
Investment in Lease and the fair value of the
leased property. Sales value is the PV of the
lease payments receivable reduced by the PV of
any unguaranteed residual value. COGS is the
cost of the asset to the lessor reduced by any
unguaranteed residual value.
Effective Used to allocate each lease payment between
Interest principal and interest.
Method Remember, leases are usually based on annuity
due calculations, and in this case, there is no
interest component for the first payment.
LESSOR—Capital Leases –
Disclosure Requirements
Required
• ASPE: the entity’s net investment in capital leases
and implicit interest rate, and carrying amount of
any unpaid leases
• IFRS: A reconciliation between the gross investment
in the lease and the PV of the MLPs, the amounts of
both of these due within the next year, between years
two and five, and beyond five years.
• Amount of unearned finance income, unguaranteed
residual values, contingent rental income, allowance
for doubtful receivables, and general leasing arrange-
ment information.
LESSOR—Operating Leases –
Disclosure Requirements
• IFRS – similar to disclosure for finance leases: report
the future MLPs in total as well as the amounts due
within one year, between years two and five, and
beyond five years.
• ASPE – cost and related accumulated depreciation of
property held for leasing, and carrying amount of
any impaired lease receivable.
Residual Value
Lessee—Lease payments to be capitalized include
GUARANTEED residual value but exclude UNGUAR-
ANTEED residual value.
Lessor—Generally does not matter whether residual
value is guaranteed or not.
Contract-Based Approach
to Leases (Appendix 20B)
After receiving feedback on their August 2012 ED on a
new leasing standard, the IASB and FASB decided in 2012
to modify its proposed lease standard. The Boards intend
to publish the revised ED in 2013. Under the proposed
standard the lessor and lessee capitalize the contractual
right to use the asset, not the asset itself.
Lessee will recognize a Contractual Lease Rights
asset and offsetting Lease Obligation based on the PV of
the lease payments plus amounts for any contingent
rental arrangements and/or residual value guarantees, all
discounted over the longest possible lease term that is
“more likely than not” to occur. Lessee can choose to use
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its rate of incremental borrowing or rate implicit in the
lease if readily determined.
Under a performance obligation approach, the lessor
will recognize a contract-based lease receivable at the PV
CHAPTER 21 Accounting Changes and
Error Analysis
Accounting Changes
Type of Change Definition
Change in Changes in the choice of
Accounting Policy specific principles, bases,
conventions, rules, and practices
applied by an entity in
preparing and presenting
financial statements.
Change in An adjustment to the carrying
Accounting amount of an asset or a liability
Estimate or the amount of an asset’s
periodic consumption, and results
from either an assessment of the
present status of or the expected
future benefits and obligations
associated with an asset or liability.
Correction of a Omissions from or mistakes in the
Prior Period Error financial statements of one or more
prior periods, caused by the misuse
of, or failure to use, reliable
information that existed when those
financial statements were completed
and could reasonably have been
found and used in their preparation
and presentation.
Definition of Impracticability
It is considered impracticable to apply a change to a prior
period if any of the following situations are true:
1. The effects of the retrospective application cannot be
determined.
2. Assumptions are needed about what management’s intents
were in that prior period.
3. Significant estimates must be made that take into account
circumstances that existed in that prior period and it is no
longer possible to do this.
12 ©
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of the rental payments to be received, discounted at the
interest rate the lessor is charging the lessee. A liability
representing its performance obligation is also recog-
nized for the same amount.
Other Information Accounting Approach
When the change is required On adoption of a primary source
by a primary source of GAAP, or of GAAP, apply method in
a voluntary change that results transitional provisions section of
in information that is reliable primary source. Otherwise apply
and more relevant. retrospectively, unless
impracticable, in which case
retrospective application with
partial restatement should be
applied. If not practicable to
determine the cumulative effect of
the change even at the beginning
of the current period, apply the
new policy prospectively from the
earliest date practicable.
In cases where it is unclear Apply prospectively.
whether a change in estimate or
change in policy has occurred,
the change is considered a
change in estimate.
Careful estimates that later prove Apply retrospectively.
to be incorrect are changes in
estimate, but if the estimate was
obviously calculated incorrectly,
it is an error.
Error Correction with Restatement and
Accounting Policy Change Without Restatement
With restatement Without restatement
Restate comparative amounts Comparative financial
for the prior period(s) statements are left as
presented in which the error originally reported and
occurred; or if the error took present the change’s
place before the earliest prior cumulative effect as an
period provided, restate the adjustment to opening
opening amounts of assets, retained earnings.
liabilities, and equity for the
earliest period presented.
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Error Correction with Restatement and

Accounting Policy Change Without Restatement
CHAPTER 22 Statement of
With restatement Without restatement Cash Flows
IFRS allows partial retrospective
restatement where it is Typical Cash Inflows and
impracticable to determine the
accounting adjustment needed for
Outflows
a specific prior period or for the
cumulative effect of an error. Cash Inflows Cash Outflows
In such a case the partial
retrospective restatement allowed Operating From customers To suppliers, employees
is similar to the requirements From investment To government for taxes.
for an accounting policy change. income.
From royalties, For interest expense*
rents, fees.
Investing From sale of property, To purchase property,
plant and equipment. plant and equipment.
Disclosure – Changes in From sale of debt To purchase debt or
or equity securities equity securities of
Accounting Policy and Error of other entities. other entities.
Correction From collection of To loan money to other
principal on loans to entities.
other entities.
Changes in Accounting The effects of the change, to
Financing From issuance of To shareholders as
Policy (regardless of reason) the extent practicable, on each
equity securities dividends*.
financial statement line item
or debt. To redeem long term
affected in the current period,
debt or reacquire
and on periods before those
share capital.
presented. Where full
To reduce capital lease
retrospective application is
obligations.
impracticable, additional
information about why that is *Interest and Interest and
so, the periods affected, and dividends paid. dividends received.
how the change was handled.
ASPE Operating: if Operating
Change in Accounting The title of the primary source, recognized in
Policy due to the initial and, the nature of the change, net income.
application of a primary and that it is made according Financing: if charged to
source of GAAP to its transitional provisions, retained earnings.
and what the provisions are. IFRS Choice: Operating Choice: Operating or
or Financing. Investing.
Voluntary Change in Explain the nature of the
Accounting Policy change and why the new policy
provides reliable and more
relevant information.

Correction of an The nature of the error; the

Accounting Error
Change in Accounting
Estimate
amount of the correction made
to each affected financial
statement item for each prior
period presented; and the
amount of the correction made
at the beginning of the earliest
prior period presented.
The nature of the change in
estimate; the amount of a
change in estimate that affects
the current period or is
expected to affect future
periods, unless it is
impracticable to estimate that
effect. If impracticable, this
fact is disclosed.
Format of Statement of Cash
Flows – Operating Activities
Direct method Indirect method
⫹ Cash receipts from ⫹ Net income
customers Adjustments:
⫺ Cash paid to suppliers ⫺ Increase in current asset accounts
⫺ Cash paid to employees ⫹ Decrease in current asset accounts
⫺ Cash paid for taxes** ⫺ Decrease in current liability
accounts
⫺ Cash paid for interest** ⫹ Increase in current liability
accounts
⫹ Amortization expense
⫹ Losses on disposal
⫺ Gains on disposal
** Note: This is required disclosure, and must be disclosed if
using the indirect method. With the direct method format, the
information is provided in the statement itself.

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CHAPTER 23 Other
Measurement and Disclosure
Issues
Identification of Reportable
Segments
Revenue Test – revenue is 10% or more of the com-
bined revenue of all operating segments.
Profit/Loss Test – the absolute amount of its profit or
loss is 10% or more of the greater, in absolute amount of:
a. the combined operating profit of all operating seg-
ments that did not incur a loss, or
b. the combined operating loss of all operating seg-
ments reported a loss.
Asset Test – assets are 10% or more of the combined
assets of all operating segments.
Segmented Disclosures
• General information about reportable segments.
Factors that management considers most significant
in determining reportable segments and product/
service information for each segment.
• Segment profit and loss, assets, liabilities and related
information. A number of specific items are required
disclosure for each segment.
• Reconciliations of totals of the segment’s revenues to
total revenues, the total of the operating segment’s
profits and losses to income before income taxes and
discontinued operations, and total of the operating
segment’s assets to total assets.
• Products and Services: Revenues from external cus-
tomers; Geographic areas: Revenues from external
customers (Canada versus foreign) and capital assets
and goodwill (Canada versus foreign).
• Major customers: If 10% or more of the revenues are
derived from a single customer, the enterprise must
disclose the total amount of revenues from each of
these customers by segment.
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Interim Reporting Disclosures
• Whether the statements comply with IFRS.
• A statement that the company follows the same
accounting policies and methods as the most recent
annual financial statements including a description
of new or changed policies.
• Description of any seasonality or cyclicality of
interim period operations.
• The nature and amount of any unusual items.
• The nature and amount of changes in estimates.
• Issuances, repurchases and repayment of debt and
equity securities.
• Dividends paid.
• Information about reportable segments.
• Events subsequent to the interim period.
• Specific information about changes in composition
of the entity.
• Any other information required for fair presentation
and/or is material to understanding the interim
period.
Related Party Transactions
When a business enterprise engages in transactions in
which one of the transacting parties has the ability to sig-
nificantly influence the policies of the other, or in which
a non-transacting party has the ability to influence the
policies of the two transacting policies.
Recommended disclosures: The nature of the rela-
tionship, a description of the transactions, the recorded
amount of transactions, the measurement basis used,
amounts due from or to related parties and the terms and
conditions, contractual obligations with related parties,
contingencies involving related parties, and under IFRS,
disclose management compensation, name of entity's
parent and ultimate controlling entity or individual.
IFRS deals only with disclosure requirements whereas
ASPE requires that some related-party transactions be
remeasured.
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Subsequent Events Auditors’ Report

Two types of events that occur between the balance sheet
Unqualified
date and after completion of the financial statement for
opinion
distribution to shareholders and creditors that materially
effect the company’s financial position or operating situa-
tion. (Note disclosure is appropriate):
The auditor expresses the opinion that the
financial statements present fairly, in all
material respects, the entity’s financial position,
results of operations, and cash flows in
conformity with GAAP.

a. Events that provide additional evidence about condi-
tions that existed at the balance sheet date, affect the
estimates used in preparing financial statements, and,
therefore, result in needed adjustments.
Qualified Contains an exception to the standard opinion.
opinion and Ordinarily the exception is not significant
Disclaimer enough to invalidate the statements as a whole.
of opinion Used when there is a departure from GAAP or
a scope limitation (disclaimer of opinion).

b. Events that provide evidence about conditions that
did not exist at the balance sheet date but arise subse-
quent to that date and do not require adjustment of
the financial statements.
Adverse Required in any report in which the exceptions
opinion to fair presentation are so pervasive that a
qualified opinion is not justified. The financial
statements taken as a whole are not presented
in accordance with GAAP.

Financial Statement Analysis

Techniques:
• Ratio analysis: Expression of relationship between
two financial statement numbers. Provides informa-
tion on a company’s liquidity, operational activity,
profitability and solvency.
• Common-size analysis: Conversion of a series of
related amounts to a series of percentages of a given
base; e.g., expressing all income statement items as a
percentage of net sales. Allows comparability over
time of amounts or changes in amounts.
• Limitations: Financial statement information is
risky due to uncertainty about the nature and role of
financial statements, the nature of business opera-
tions portrayed, the limitations of financial state-
ment measurement and disclosure, and management
motives and intentions.

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