MGT 224

Definition of an Asset:
1) There is some economic benefit to the entity, embodies a future benefit
2) The entity has control over that benefit, entity can control access to this benefit
3) The transaction or event that gives the entity access to this benefit has occurred (past
transaction)
Ex. inventory, cash, receivables, land, patents, forward contracts, insurance

Definition of a Liability:
1) There is a present duty or responsibility, embodies a duty or responsibility
2) The entity has an obligation that cannot be avoided. The entity has little or no discretion
to avoid the duty
3) The transaction or event that obligates the entity has occurred (past transaction)

Equity: a residual interest in ana entity that remains after deducting its liabilities from its assets

Revenue: Increases in economics resources either by inflows or other enhancements from

ordinary activities. Revenues are ordinary activities in conducting business

Expenses: decreases in economic resources either by outflows or reductions of assets or by the

incurrence of liabilities that result from regular activities

Gains and losses: Gains are increases in equity, losses are decreases in equity. Gains and losses
are peripheral and incidental

Other Comprehensive Income (OCI) : Made up of revenues, expenses, gains, losses that are
recognized in comprehensive income but excluded from Net income. Ex. unrealized holding
gains and losses on certain securities, changes in revaluation surplus when using revaluation
method to account for capital assets.

Matching Principle: The concept of recognizing all costs (past, present and future) when the
related revenue is recognized

Revenue recognition principle:

Recognize revenue when :
1) Risks and rewards have passed and/ or the earning process is substantially complete
2) Revenue is measurable
3) Revenue is collectible

Measurement Uncertainty:

Provisions (IFRS):
A provision is a liability of uncertain timing or amount

A provision shall be recognized when:

 a) An entity has a present obligation (legal or constructive) as a result of a past event
b) It is probable (greater than 50%) that an outflow of resources embodying economic
benefits will be required to settle the obligation, and
c) A reliable estimate can be made of the amount of the obligation
If conditions are not met, cannot recognize a provision
Ex. lawsuits, onerous contracts (losing on a sale/ contract) , warranties, points programs
ALWAYS RECORD A WARRANTY
Measurement:
o The amount recognized as a provision is the best estimate of the expenditure required to
settle the present obligation at the end of the reporting period
If uncertain:
o Where the provision being measured involves a large population of items, the obligation
is estimated by weighting all possible outcomes by their associated probabilities
(expected value)
o Where there is continuous range of possible outcomes and each point in range is equally
likely, the midpoint of the range is used
If a single obligation is measured:
o The most likely outcome may be the best estimate of the liability

Contingent Liability (IFRS):

a) A possible obligation (not probable) anything less than 50 % . If did not meet criteria for
provision, it is a contingent liability
Recognition of Contingent Liability:
A contingent liability shall not be recognized (accrued)
Contingent assets: shall not be recognized (accrued)

Contingencies (ASPE)
A Contingency is an existing condition or situation involving uncertainty as to possible gain or
loss to an enterprise that will ultimately be resolved when future events occur.

Recognition of Contingency
A contingent loss shall be accrued (recognized) by a charge to income when both of the
following conditions are met
a) It is likely that a future event will confirm that an asset had been impaired or a liability
incurred at the date of the financial statements and
b) The amount of the loss can be reasonably estimated
Measurement:
The amount if a contingent loss to be accrued in the financial statements may be based on
information that provides a range of the amount of loss:
o When a particular amount within a range appears to be a better estimate, that amount is
accrued
o When no amount in range is a better estimate than the others, the minimum amount in the
range is accrued
if loss is likely but not measurable, then disclosure is required with no accrual. If outcome cannot
be determined then disclosure is required with no accrual. If loss is unlikely, no accrual or
disclosure required.
PPE impairment (IFRS):
o Entity must assess whether there are indicators of PPE impairment on an annual basis
o If there are impairment indicators, an impairment test must be performed
 Impairment test compares the carrying amount to the recoverable amount
- Carrying amount is the amount in books, cost, amortized cost or net book value
- Recoverable amount is the higher of value in use and fair value less costs of
disposal.
- Value in use is an internal determination vs fair value which is an external
determination. ie value in use is what you think the value is vs fair value is what it
actually is.
- Value in use is calculated by the PV of expected cash flows from asset

 If impairment is confirmed (carrying value > recoverable amount) the impairment

amount is recorded in net income. Amortization is adjusted accordingly on a
prospective basis. Useful life or amortization may change as a result of impairment
test
 Impairments may be reversed if conditions change but only up to where the carrying
amount would be had the initial impairment not been recorded

PPE Impairment (ASPE):

o If indication of impairment exists then an impairment test must be performed
o 1st step is to perform a recoverability test where undiscounted cash flows for use and
eventual disposal are compared to the carrying amount.
 If undiscounted cash flows are less than carrying amount, the asset is impaired, it
is then written down to fair value. Amortization is adjusted prospectively
 Impairments may not be reversed for PPE, only under certain circumstances can
impairment be reversed under ASPE ex. inventory, financial assets

IFRS 13: Fair Value

Fair value = exit price. Fair value is the amount required to sell an asset or transfer a liability in
an orderly transaction between market participants
Valuation techniques:
 Market approach: use inputs generated from market transactions for identical or similar
transactions ex. real estate sales of similar properties in the area
 Income approach: discounting expected cashflows over the life of the asset
 Cost approach: replacement cost, what it would cost to replace the asset in its present
condition
Fair value ASPE S 3063
Fair value is the amount at which an item could be bought or sold in a current transaction
between willing parties (other than forced or liquidation sale).
Measured using: quoted market prices or estimates based on the best information available

Revenue Recognition
IFRS15
 Identify the contract with customer
 Identify performance obligations
  Determine transaction prices
 Allocate transaction price to performance obligations
 Recognize revenue when performance obligation is satisfied

1) Identify contract with customer: contract may be written, implied or verbal but all criteria
mut be met:
- Parties to contract have approved the contract
- The entity can identify each party’s rights and obligations regarding
goods/services to be transferred
- The entity can identify the payment terms for the goods/services transferred
- The contract has commercial substance (nature timing or amount of cashflows is
expected to change) and
- It is probable the entity will collect the consideration it is entitled to in exchange
for the goods/services transferred
2) Identify the performance obligations in the contract:
- Cannot recognize revenue until performance obligations have been satisfied
- Distinct performance obligations are:
 Goods and services that either on their own or in combination with other
readily available resources (electricity) will benefit the customer and
 The entity’s promise to transfer the good or service to the customer is
separately identifiable from other promises in the contract.
3) Determining the transaction price:
 Estimate using either: probability weighted average approach (expected value) or
an approach based on the single most likely amount – whichever is a better
estimate
 Transaction price may be variable due to discounts, rebates, price concessions,
credits etc. variable considerations is only included if it is highly probable and
will not result in a revenue reversal
 If uncertain, don’t record revenue
o Right of return:
Only record revenue if it is highly probable and will not result in revenue reversal
If company expects 3 products will be returned, do not recognize revenue for those 3 products
sold, instead recognize a refund liability and asset for returned products (assuming they can be
sold again)
Dr. Cash 10000 (100x 100)
Dr. COGS 5820 (97 x 60)
Dr. Right to recover products 180 (3x60)
Cr. Revenue 9700 (97 x 100)
Cr. Refund liability 300. (3x100)
Cr. Inventory 6000 (60 x 100)

o Financing transaction:
Time value of money must be considered, exemption for contract of less than one year
Fair value is calculated by measuring the consideration received using an inputted interest rate,
the difference is interest income or expense
Ex. company sells asset and transfers control after 2 years. Two payment options: 5000 at end of
two years when control is obtained or payment of 4000 when contract is signed. Assume 4000 is
chosen. Must find interest rate at which both equal each other Pmt= 0 PV=4000 FV=5000 N=2
i= 11.8 . Must also consider what discount rate would have been used in separate transaction ie
6% entries are:
Dr. cash. 4000
Cr. Contract liability 4000
Liability is then accreted over 2 years with total interest expense of 494 (4000*6%) + (4240*6%)
Year 1:
Dr. interest expense 240
Cr. Contract liability 240
Year 2:
Dr. interest expense 254
Cr. Contract liability 254
When asset is transferred, revenue is recognized
Dr. contract liability 4494
Cr. Revenue 4494
I= 6 pv= 4000 fv=4494 pmt=0

o Noncash consideration – measured at the fair value of the goods/services received

o Consideration paid/payable to customer ex. discounts, rebates, coupons, free products. This
reduces amount of revenue, not a cost of sale or other expense

Recognize revenue when performance obligation is satisfied ie when the customer obtains
control of the good or service
Customer has control of the good when it has the ability to direct the use and obtain substantially
the remaining benefits from the asset or service. Indicators of control:
o The entity has a present right to payment for the asset
o The customer has legal title to the asset
o The entity has transferred physical possession of the asset
o The customer has the significant risks and rewards of the asset
o The customer has accepted the asset

Construction contracts
IFRS 15
-if the contract is satisfied over time, use one of 2 methods:
o Input method
o Output method
If no reliable measure of progress, use cost recovery method

Cost recovery method recognizes revenue equal to costs each period until complete. Cost must
be recoverable or else no revenue recognized

-record all of the entries that occurred during the year

o Record eligible costs to contract asset and expense other costs
o Record billings and receipts over the period
-determine amount of revenue to recognize for period. Determine the amount of costs to expense.
Close out progress billings net against the contract asset account assuming revenue recognized to
date is greater than billings to date.

ASPE Long term contracts

o % of completion method -recognize as significant events occur
o Completed contract method- if single act/ cannot estimate %

% of completion:
1) Costs incurred to date = percent complete
2) Percent complete x estimated total revenue( or gross profit) = revenue to be recognized to
date
3) Revenue (or gp) to be recognized to date – revenue (or gp) recognized in prior periods =
current period revenue (or gp)
4) Current period revenue – current costs = gross profit

Warranty
IFRS 15
Assurance warranty: ie one year warranty to ensure product is working
 Costs to provide warranty is estimated at the point of revenue recognition and recorded as
a liability
Performance warranty: sold separately and extends beyond assurance warranty
 Revenue is deferred and recognized usually over the life of the warranty period
 Costs of warranty are expensed as incurred, no separate liability

Customer loyalty program

Fair value must be estimated and allocated as per other performance obligations

Principle vs Agent
Principal records revenue as gross amount of consideration
Agent records revenue as fee or commission received

Forgivable loan
No difference between forgiven loan and a grant to which there is a contingent liability for
repayment
 When govt assistance relates to expenses of future accounting periods, the amounts shall
be deferred and amortized to income as related expenses are incurred
Assistance related to capital expenditures
 Govt assistance towards acquisition of fixed assets shall be either:
o Deducted from the related fixed assets with any depreciation calculated on the net
amount or
o Deferred and amortized to income on the same basis as the related depreciable
fixed assets are depreciated
Repayment of govt assistance: i.e. conditions not met, violated
Dealt with prospectively, for reductions in assets , the cost shall be increased by applicable
repayment amount and depreciation accounted for prospectively
Deferred or amortized credit shall be adjusted by the applicable repayment

Financial Instruments
Nonstrategic investments: DAY 1
1) Measured at fair value
Day 2
2) Recorded at either:
- Cost
- Amortized cost
- FV-NI
- FV-OCI (with recycling)
- FV-OCI (without recycling)
Cost method: (EQUITY)
o Initial cost measured at fair value
o Transaction costs are added to cost base (commission)
o Unless impaired, it is recorded at this cost each period
o Dividend income is recognized when declared
o Gain or loss reported on disposition calculated as proceeds less costs of disposition less
carrying amount

Amortized cost: (DEBT)

o Initial cost measured at fair value
o Transaction costs are added to cost base (commission)
o Premium or discount included in initial carrying amount
o Interest income is recorded using effective interest method under IFRS and either
effective interest or straight-line method for ASPE
o Gain or loss reported on disposition calculated as proceeds less costs of disposition less
carrying amount
o No fair value adjustments unless impaired

FV-NI: (DEBT OR EQUITY)

o Initial cost measured at fair value
o Transaction costs are expensed as incurred
o Interest income earned based on coupon rate (not EI) and dividend income as declared
through net income
o Each reporting date the asset is recorded at fair value with difference going to net income
as unrealized gain or loss
o Impairment rules not necessary
o IFRS: interest income is cash payments (no premium or discount)
o ASPE: fair value adjustment done after amortizing bond discount and premium

FV-OCI (with recycling) only IFRS

o Initial cost measured at fair value
o Transaction costs are added to carrying amount (commission)
o Interest income recognized as earned using EI including premium/ discount amortization
 o Impairment rules apply
o Income recorded in NI
o FV adjustments recorded in OCI (after interest recorded)
o When disposed of the unrealized gain or loss in OCI (AOCI) is transferred to net income

FV-OCI No recycling, IFRS (restricted)

o FV adjustments recorded in OCI
o Income recorded in net income
o On derecognition, OCI transferred to R/E
o No impairment rules as there is no reclassification to net income for derecognition or
impairment
IFRS 9
Default measurement is : FV-NI
Day 2 measurement is based on considering the :
1) Business model for managing financial assets
2) The contractual cash flow characteristics of the financial asset
Financial asset is measured at amortized cost if both of the following are met:
1) The financial asset is held within the business model whose objective is to hold financial
assets in order to collect contractual cashflows and
2) The contractual terms of financial asset give rise on specified dates that solely payments
of principal and interest
Financial asset measured at FV-OCI with recycling if:
1) The financial asset is held within a business model whose objective is achieved by both
collecting contractual cash flows and selling financial assets and
2) The contractual terms of the financial asset give rise on specified dates to cashflows that
are solely payments of principal and interest

Equity = FV-NI or FV-OCI without recycling

Debt = anything except FV-OCI without recycling

ASPE 3856
Amortized cost is default
Financial assets that are equity and are non-strategic AND that have an active market are
recorded using FV-NI
All other financial assets are either cost or amortized cost.

Strategic investments:

Equity method: applies to equity investments where significant influence exists 20% -50 %
ownership
o Investment is initially recorded at FV
o Investor subsequently records its share in investee’s net income as investment revenue
(credit) and debit (increase) the carrying value of the investment
o Dividends are debited to cash and credited to investment account
o No FV adjustments
Leases:
ASPE: classification approach (capitalize leases that are similar to instalment purchases/sales)
o A lease that transfers substantially all the benefits and risks of property ownership should
be capitalized(classified as a finance/capital lease)
o A lease where benefits and risks are not transferred are classified as operating leases
IFRS 16 – Contract based (capitalize all long-term leases)
o Lease contracts create assets and liabilities that should be recognized
o Almost all leases would be capitalized

ASPE Lessee
Only one criteria is needed to capitalize lease:
1) Reasonable assurance that lessee will obtain ownership at end
a) Legal title transfer
b) Bargain purchase option (provision allowing lessee to purchase property at discount)
2) Lease term is 75% or more of estimated life of the asset
3) Lessor reasonably assured of recovering investment- PV of minimum lease payments
equals or exceeds 90% of FV of asset
At inception: asset and liability are recorded using the lower of PV of the minimum lease
payments and FV
Day 1 entry:
Dr. Leased equipment
Cr. Lease liability
o Discount rate used to compute the PVMLP is the lower of the implicit rate (IR) and lessee
incremental borrowing rate (IBR).Lease payments are allocated to interest expense and
principal payment by the effective interest method.
o Interest expense = lease liability at beginning * interest rate
o Principal portion = lease payment – interest expense
o Leased asset is amortized over its expected use, if BPO or title transfer, economic life if not,
lease term
Operating Lease ASPE:
o Included in net income over the lease term on a straight line basis as an expense ie rent
expense cr cash
o Not recognized in balance sheet asset account, only disclosed

IFRS Lessee
o All leases are capitalized and placed on the balance sheet a right of use asset and
offsetting liability
They aren’t capitalized if lease is for a term of 12 months or less(not allowed if BPO) or the
underlying asset is of low value
o If a lease is not capitalized, the lessee recognizes the lease payments as an expense on a
straight line basis
Recognition:
Recognize at PV of lease payments expected to be paid over term of lease
Lease payments are discounted using the interest rate implicit in the lease or IBR
 ROU asset is amortized over term of the lease or useful life if BPO is exercised and is also
considered for impairment
ASPE Lessor: sales type or direct financing lease
2 criteria :
1) Credit risk must be normal (collectible) and
2) Any costs that are not reimbursable can be estimated
o Discount rate is always IR
At inception: Financing lease (FV = CV)
Dr. lease payments receivable LPR (= lease payments * lease term + unguaranteed residual
value)
Cr. Unearned interest revenue UIR= (LPR – cost of asset
Cr. Net investment = LPR – UIR

Sales type lease (FV does not equal CV)

o Revenue recorded at fair value or if lower is the PV of MLP
o Cost of sales is cost of leased property reduced by the PV of the URV
Operating lease – Lessor:
Rental revenue from operating lease shall be recognized on a straight line basis

Sale Leaseback: selling asset to lease it back

ASPE
Accounted for as a capital lease or operating lease by seller-lessee
Treatment by lessee if capital lease:
o Any gain on sale will be deferred and amortized in proportion to the amortization of
leased asset
o If asset is land, it will be recognized straight line over lease term
o Loss is recognized right away
Treatment is Operating lease:
o Any gain arising on sale will be deferred and amortized in proportion to rental payments
over the lease term. Loss is recognized right away

Exception #1 to default gain treatment for lessee

o When the seller-lessee retains the right to a minor portion (10% or less) of the property
sold, the sale and leaseback are accounted for as a separate transaction
o The entire gain is included in net income at date of sale
Exception # 2
o When the seller-lessee retains the right to more than a minor portion of the property but
less than substantially all the property, the amount of the gain included in the
determination of net income is equal to the excess if any of the gain on sale over
A) the PV of MLP over lease term if leaseback is operating lease
B) recorded amount of leased asset if capital lease

Sale Leaseback IFRS

o seller-lessee will measure the right of use asset arising from the leaseback at the
proportion of the previous carrying amount of the asset that relates to the right of use
retained by the seller-lessee
 o ROU is measured at the ratio of PVMLP/ fv of sold asset*Book value of asset
o Seller recognizes the gain or loss that relates to the rights transferred to the buyer/lessor
o Gain = FV -PVMLP / FV* total gain
o If not a valid sale under IFRS 15 then no sale recognized

Lease with land and building:

ASPE
o If land portion is minor compared to total FV then they are considered a single unti and
economic life is the life of the building
o For ASPE the distinction is if there is an ownership transfer in the lease
o If so it is a capital lease and the lessee will record land and building separately based on
relative fair values
o If no ownership transfer, the lessee and lessor classify the portion of the lease applicable
to land and building in proportion to their fair values
o Both also classify land portion as operating lease
IFRS:
o If lease includes both land and building, the lessor assesses the classification of each as a
finance or an operating lease separately
o Minimum lease payments are allocated between land and buildings in proportion to FV

Long term liabilities

Marketable long term debt measurement
o FV-NI
o Amortized cost
o No accounting for premium or discount
o Debt is revalued to FV each period

Debt vs Equity:
Must look at rights and obligations to understand economic substance
Debt:
o Non-permanent source of capital , it has a maturity date payment schedule Principal +
interest
o Return = interest
o Often secured
Equity:
o Permanent source of capital
o Return = dividend which are a function of profits, cash flows and dividend policy
o No need to pay dividends
o Residual in nature
o Often voting rights and risks and rewards of ownership exist
Liability if contractual obligation to deliver cash or other assets. Equity if no contractual
obligation to deliver cash or other financial asset

Hybrid
Triggering event:
ASPE: present as debt or equity if trigger event is highly likely to occur
IFRS: present as debt or equity if trigger event is beyond the entity’s control
Convertible debt / warrants
ASPE
o Option to record equity portion of convertible debt and warrants at zero, or use residual
method
IFRS:
o Required to use the residual method (book value method)
o Method measures the FV of the debt first and then the residual is considered equity
specifically contributed surplus, conversion option or warrants

Derivatives
o Measured at FV
o All gains go to NI