Chapter 23

Intermediate Accounting
13th Canadian Edition, Volume 2

Kieso ● Weygandt ● Warfield ● Wiecek ● McConomy
Chapter 23
Other Measurement and Disclosure Issues
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Chapter 23: Other Measurement and
Disclosure Issues (LO 1 to LO 5)
After studying this chapter, you should be able to:
1. Understand the importance of disclosure from a business
perspective.
2. Review the full disclosure principle and how it is implemented
and explain how companies use accounting policy notes.
3. Describe the disclosure requirements for major segments of a
business.
4. Describe the requirements and accounting problems associated
with interim reporting.
5. Discuss the accounting issues for related-party transactions.
Copyright ©2022 John Wiley & Sons, Canada, Ltd. 2

Chapter 23: Other Measurement and
Disclosure Issues (LO 6 to LO 10)
After studying this chapter, you should be able to:
6. Identify the accounting issues relating to subsequent events
and those faced by unincorporated businesses.
7. Identify the major considerations relating to bankruptcy and
receivership.
8. Identify the major disclosures found in the auditor’s report.
9. Describe methods used for basic financial statement analysis
and summarize the limitations of ratio analysis.
10. Identify differences in accounting between IFRS and APSE, and
what changes are expected in the near future.

Importance of Disclosure
• Information disclosure is an important part of capital
markets and the allocation of capital
o Helps investors assess the relative risks and rewards
• Full disclosure principle: information relevant to decision-
making should be included in the financial statements
• Financial statements are not the only source of
information for investors and creditors
• Different users want different information—important to
know costs/benefits of disclosure when making disclosure
decisions
LO 1 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 4

Types of Disclosure
• Key continuous disclosures for public companies (OSC)
o Annual information forms
o Financial statements
o Information circulars
o Management’s discussion and analysis (MD&A)
o Material changes
o Forward-looking information (FLI)
o Executive compensation

Not All Disclosure is Good Disclosure
• Not enough information and too much information are
equally problematic
• Companies and investors should be aware of disclosure
that is
o Misleading: inaccurate, incomplete, unbalanced information
o Selective: disclosing to a select group; not the general public
o Untimely: late disclosure of material changes
• Other issues
o Insider trading (using material information not disclosed to
the public)
o Practices sometimes involve violations of securities law

Management Commentary
• Some information is best provided in the financial
statements; some is best provided by other means (e.g.,
management commentary)
• Some sources are not covered by IFRS; this is changing
Illustration 23.1
Management
Commentary content
areas (as set out in
IASB’s 2021 Exposure
Draft)

Full Disclosure Principle Revisited
• Calls for reporting of any financial facts that are significant
enough to influence the judgement of an informed reader
• Obscuring material information with immaterial
information can make financial statements less
understandable
• IASB clarified in 2020 that information may be obscured
by being vague, unclear or by scattering it throughout the
statements

Increase in Disclosure Requirements
• Disclosure requirements for public companies—
increased substantially over the past several decades
due to
o Growing complexity of the business environment
o Necessity for timely information
o Sustainability and Environmental, Social and
Governance (ESG) reporting
• Requirements for private companies are less: less
complexity, and are closely held (stakeholders have
greater access to information)

Note Disclosure of Accounting Policies
• Notes are an integral part of the financial statements
o Relevant items can be explained in qualitative terms in
notes
o Information can be expanded by adding quantitative data
• Accounting policies disclosure should be one of the first
notes or in a separate section preceding the notes
• Accounting policy notes explain the specific accounting
methods and principles that are currently used and are
considered appropriate for fair presentation
• ASPE allows greater choice and greater flexibility with
accounting policies in certain circumstances
• IASB has been attempting to reduce the policy choice
Accounting Errors and Illegal Acts
• Accounting errors are unintentional mistakes
• Irregularities are intentional distortions of the statements
o Company management is responsible for ensuring
operations are conducted within the applicable laws and
regulations that determine the amounts to be reported in
the statements
o Company auditors should consider the legal and regulatory
framework of a company to help identify non-compliance
that could have a material effect on the statements

Non-Compliance
• Non-compliance means
Acts of omission or commission, intentional
or unintentional, committed by the entity,
or by those charged with governance, by
management or by other individuals
working for or under the direction of the
entity, which are contrary to the prevailing
laws or regulations.
• Non-compliance does not include personal misconduct

unrelated to the business activities of the entity

Segmented Reporting
• For investors, much information is hidden in the
aggregated totals of consolidated amounts; segmented
information is required for public entities
• Some companies are reluctant to disclose segmented data
o Without understanding the business and its environment,
the user might find the information meaningless
o Can be used by competitors
o May discourage risk-taking by managers to avoid losses
o Wide variation of segments limits the usefulness of
information
o Investments are in the whole company, not just a segment
o Classification of segments and allocation of
revenues/expenses may be challenging
In Support of Segmented Reporting
• Investors need segmented information to make intelligent
decisions about diversified companies
o Sales and earnings of individual segments (with different growth
rates, risks and profitability) are needed to forecast future
consolidated profits
o Segmented reports disclose the nature of a company’s business
and the relative size of its components
o Without segmented reporting, single-product-line competitors
must disclose information that a diversified company does not
• Developing standards for segmented financial information has
been a continuing process for 25 years
• ASPE does not contain guidance for reporting segment
information

Objective of Segmented Reporting
• The objective of segmented reporting is to provide
information about the
o Different types of business activities in which a company
engages
o Different economic environments in which a company
operates
• So that users of financial statements can:
o Better understand the business’s performance
o Better assess its prospects for future net cash flows
o Make more informed judgements about the business as a
whole

Basic Principles of Segmented Reporting
• It is not practical to provide complete sets of financial
statements for all segments
• IASB requires including selected information about
operating segments from the perspective of the chief
operating decision-maker (CODM)
• Management approach—based on the way management
sets up the “operating segments” (components) for
making operating decisions
o Evident from the organizational structure

Identifying Operating Segments
• An “operating segment” is a component of an enterprise
that has the following characteristics
o Earns revenues and incurs expenses doing business
activities
o Operating results are reviewed regularly by the CODM to
assess segment performance and allocate resources
o Discrete financial information is available

Aggregating Segmented Information
• Information about two or more operating segments can
be combined only if the segments share the following
characteristics
o Nature of the product and services provided
o Nature of the production process
o Type or class of customer
o Methods of product or service distribution
o Nature of the regulatory environment (if applicable)
• IFRS requires companies combining segments to disclose
o Judgements made in aggregating segments
o Brief description of the segments aggregated

Identifying Reportable Segments
• An operating segment is significant and thus identified as
a reportable segment if it satisfies one or more of the
following quantitative thresholds:
o Revenue (external and internal sales): 10% or more of the
combined revenue of all the operating segments
o Profit or Loss: 10% or more of the greater of the absolute
amount of: the combined profit of those segments with a
profit, and the combined loss of those segments with a loss
o Assets: 10% or more of combined segment assets

Additional Factors for Identifying
Reportable Segments
• In applying the quantitative tests, three additional factors
must be considered
o Segment data must explain a significant portion of the
company’s business—segmented results must equal or
exceed 75% of all sales to all unaffiliated customers
o 10 segments may be the practical limit of what should be
reported by any one company
o A segment that does not meet any of the criteria can still be
presented separately if management believes the
information would be useful to users

Analysis of Different Possible
Reporting Segments
PiP 23.1 Facts: A company is a publicly accountable entity. It operates six
different segments and is preparing segmented reporting disclosures for
the year. Information regarding the segments is below.
Total Reported Revenue test: 10% × $2,160 = $216 (C, D, E)
Segments Revenue Profit (Loss) Assets Profit/Loss test: 10% × $90 = $9 (A, C, D, E)
(amounts in $000) (Note: $5 loss is not included)
A 100 10 60 Assets test: 10% × $970 = $97 (C, D, E)
B 60 2 30
Assumed reportable segments: A, C, D, E
C 700 40 390
D 300 20 160 Sales = $100 + $700 + $300 + $900 = $2,000
E 900 18 280 Minimum 75% test: 75% x $2,160 = $1,620
F 100 (5) 50 Meet 75% test: $2,000 > $1,620
2,160 85 970
Reportable segments: A, C, D, E

Measurement Principles
• Segment information is not prepared according to GAAP
because some principles do not apply at segment level
• Centrally incurred costs (common costs) prevent a
completely objective division of costs among the segments
o Accounting for the cost of the company-wide benefit plan
o Accounting for income tax when just one return is filed
• Allocated costs are presumed to be directly (or reasonably)
attributable to the segment
• Companies should disclose
o Choices in measuring segmented information
o Basis for inter-segment transactions

Required Segmented Disclosures (IFRS)
• General information: about its reportable segments
• Segment: revenues, profit and loss, assets, liabilities, and
related information
• Reconciliations: of segment revenues to total revenues, profits
or losses to total profits or losses, and segment assets and
liabilities to total assets and liabilities
• Product and services: amount of revenues from external
customers for products and services
• Geographic areas: revenues from (Canada versus foreign)
customers and certain non-current (Canada versus foreign)
assets; other information by country if it is material
• Major customers: if 10% or more of revenue from one
customer, must disclose (without identifying the customer)
Interim Reporting—Less Than One Year
• There are two approaches to interim reporting
o The discrete view: each interim period should be treated as
a separate accounting period (preferred under IFRS)
o The integral view: the interim report is an integral part of
the annual report, and should consider the entire year
• Notable exceptions to discrete view
o Calculating income tax (usually done on an annual basis)—
estimate interim taxable income and temporary differences
and then apply the estimated annual tax rate
o Employer’s portion of payroll taxes (usually paid early in the
year)—estimated annual amount is allocated to the interim
periods

Interim Reporting Requirements
• Same accounting principles and methods that apply to
annual reporting apply to interim reporting
• At a minimum, a full set of financial statements and
selected notes is required (F/S can be condensed versions)
• Presentation
o SFP: end of current period; comparative to last year-end
o SFP: restated when changes in accounting policy are
retrospective
o Income statement: current interim period and interim year-to-
date with comparatives
o Changes in equity and SCF: cumulative for current year to date
with comparatives
o EPS: if required in annual statements
Minimum Interim Reporting Disclosures
• Whether statements comply with IAS 34
• Accounting policies and methods
• Any seasonal or cyclical period considerations
• Nature and amount of unusual items
• Nature and amount of estimate changes
• Issuances, repurchases, repayments of debt, equity securities
• Dividends paid
• Information about reportable segments
• Events subsequent to the interim period
• Any changes in the composition of the entity
• Fair value of financial instruments
Unique Problems of Interim Reporting
• Change in accounting policy: retroactive application unless
the data is not practically available
• Earnings per share: each interim period should stand
alone; basic and diluted EPS provided if required annually
• Seasonality: wide fluctuations in profits; a company would
defer revenue or costs only if it was appropriate to do so at
the end of the year
• Auditor’s involvement: many auditors are reluctant to
express an opinion; argue data is too tentative and
subjective; CPA handbook provides guidance to auditors;
the purpose of this type of review is to assist the audit
committee
Online Financial Reporting
• Improves the overall usefulness of the information
o Takes advantage of cloud-based financial reporting services
o Online reports are easily accessible across multiple locations
o Allows for reporting more disaggregated data and more
timely data
• Main obstacle to full electronic reporting is equality of
access and the reliability of the information on the
internet
• Internet financial reporting is voluntary—no standards
and no requirement for auditing

Related-Party Transactions
• Related-party transactions arise when a business engages
in transactions with another party that can significantly
influence its policies
• Related party transactions are individually assessed
• Related parties include the following:
o Companies or individuals with control
o Investors and investees for investments in associates or
joint control
o Company management
o Members of immediate family of the above
o The other party in a management contract

Identifying Related-Party Transactions
• Basic assumption—transactions are at arm’s length
• If this condition is not met, the exchange value is not
necessarily the fair value or the market value
o The transaction may have to be remeasured to reflect the
appropriate value
o ASPE has special measurement principles for related-party
transactions
o IFRS does not require remeasurement
• Under ASPE, economic substance rather than legal form is
reported
• If the arms-length condition is not met, the transaction
should be disclosed as being between related parties
Disclosing Related-Party Transactions
• The following disclosures are recommended under ASPE
o The nature of the relationship(s)
o A description of the transaction and the recorded amounts
o The measurement basis that was used
o Amounts due from/to related parties; related
terms/conditions
o Contractual obligations with related parties
o Contingencies involving related parties
• Additional disclosures under IFRS
o Key management personnel compensation
o The name of the entity’s parent company and its ultimate
controlling entity or individual
Related-Party Transactions:
Remeasurement (ASPE)
• Under ASPE, certain related-party transactions must be
remeasured to the carrying amount of the underlying assets or
services that were exchanged
• Remeasurement happens if
o The transaction is not in the normal course of business
o There is no substantive change in ownership
o The exchange amount is not supported by independent evidence
• If normal business transactions have no commercial substance,
remeasurement is required
• Where transactions are remeasured to their carrying value, the
difference is booked as a credit to equity

Related-Party Transactions Decision
Tree - ASPE
CPA Canada
Handbook—
Accounting;
Part 11,
Section 3840

Accounting for Related-Party
Transactions (ASPE)
PiP 23.2 Facts: A private manufacturing company (Seller) sells land
worth $20,000 to another private company (Buyer). The companies are
related because the same shareholder has a 70% equity in each
company. The land has a carrying value of $15,000 on the Seller’s books.
In exchange, the Buyer transfers a building that cost $30,000 and has a
book value of $12,000. Seller has no contributed surplus. Using the
decision tree, assess how to account for this transaction.
• Is the transaction in the normal course of operations? No. Manufacturing

companies would not normally be selling capital assets.
• Is the change in the ownership interests in the item transferred
substantive? No. Because the same shareholder owns both assets before and
after the transaction, there is no substantive change in ownership.
Measure the transaction at carrying amount.
Journal Entries for Related-Party
Transactions (ASPE)
Because there is no substantive
change in ownership, the Buildings 12,000
transaction would be Retained Earnings 3,000
remeasured to carrying values Land 15,000
by the Seller; follows ASPE
Land 15,000
The Buyer would record the land Accumulated Depreciation-
at $15,000 and take the building Buildings 18,000
and accumulated depreciation Buildings 30,000
off the books; follows ASPE with Contributed Surplus 3,000
credit to contributed surplus

Analysis of RPT at Exchange Amount,
Assuming Commercial Substance
PiP 23.3 Facts: Assume the same facts from PiP 23.2 except the
exchange was made in the normal course of business and had
commercial substance. The parties decided the appropriate exchange
value would be $20,000. Use the decision tree to determine what value
should be used to recognize the exchange.
• Is the transaction in the normal course of operations? Yes. (Given)

• Is the transaction a nonmonetary exchange or transfer of a nonmonetary
asset? Yes. It is an exchange of physical assets.
• Is the transaction an exchange of products or property held for sale in the
normal course of operations to facilitate sales? No.
• Does the transaction have commercial substance? Yes.
Measure the transaction at the exchange amount.

Journal Entries for RPT at Exchange
Amount, with Commercial Substance
The transaction should be
treated like a sale, so the Buildings 20,000
Seller would recognize a Gain on Disposal of Land 5,000
gain of $5,000 Land 15,000
($20,000 − $15,000)
Land 20,000
The Buyer would Accumulated Depreciation-
recognize a gain of $8,000 Buildings 18,000
($20,000 - $12,000) Buildings 30,000
Gain on Disposal of Buildings 8,000

Subsequent Events
• Subsequent events are those that
o Have a significant effect on a company
o Take place after the formal SFP date but before financial
statements are complete
• Under IFRS, this is on the date they are authorized for issue
• Under ASPE, it is a matter of judgement, considering management
structure and procedures for completing the statements
Illustration 23.5 Time Periods for Subsequent Events

Subsequent Events: Existing Conditions
• Events that provide evidence about conditions that
existed at the SFP date and affect the estimates used in
preparing the statements
o Reflected in the SFP and income statement by recording
adjustments
o Includes information that would have been recorded in the
accounts if it had been known before the SFP date
o Example: Settlement of litigation if event giving rise to
litigation existed prior to SFP date
o Example: Loss on accounts receivable due to customer’s
bankruptcy, where customer’s poor financial condition
existed at the SFP date

Subsequent Events: Conditions That
Did Not Exist at SFP Date
• Events that provide evidence about conditions that did
not exist at the statement of financial position date
o Some may have to be disclosed to keep the statements from
being misleading
o Should be disclosed in the notes if the events have a
material impact on the company’s future
• A subsequent event may call into question the going
concern assumption
o Determine if there should be additional note disclosures
o Determine if assets and liabilities should be remeasured to
reflect net realizable values in a liquidation market
Unincorporated Businesses
• Accounting issues facing unincorporated businesses are
like those facing incorporated ones, except
o The question on how to define the economic entity—
unincorporated businesses are not separate legal entities
o The need to clearly indicate salaries, interest, and similar
items accruing to the owners
o Lack of requirement for a provision for income tax
o The need to detail changes in owners’ equity during the
period of the financial statements
• ASPE provides recommendations regarding
unincorporated businesses—defining the entity; accruals
to owners; IFRS has no specific guidance
Bankruptcy and Receivership
• Bankruptcy is a legal process that occurs when a company
(or individual) is unable to pay its debts
• The Office of the Superintendent of Bankruptcy (OSB)
administers the bankruptcy process in Canada in
conjunction with a licensed insolvency trustee (LIT)
• Companies can also use the Companies’ Creditors
Arrangement Act (CCAA), if amount owing is > $5 million
• Under the CCAA act, companies can request short-term
protection while they prepare an offer to creditors

Bankruptcy and Insolvency Options
Illustration 23.8
Bankruptcy and
Insolvency Options

Receivership
• A receivership process is typically started by a secured
creditor, or a group of secured creditors, if a company
defaults on a loan
• The main categories of creditors are
o Secured—have a legal claim on the assets (such as a lien)
o Preferred—first priority (employees for unpaid wages)
o Unsecured—no security or collateral
• A receiver is appointed by the bankruptcy court to take
possession of, and manage, or liquidate the company
• Companies in receivership, or under CCAA protection, may
no longer meet the going concern assumption—may need
to use liquidation approach to statement preparation
Auditor’s Report
• An important source of information is the auditor’s report
• Based on Canadian Auditing Standards in the handbook
• The auditor expresses an unmodified opinion if satisfied
the statements present fairly, in all material aspects, and
in accordance with IFRS or ASPE, the company’s
o Financial position
o Financial performance
o Cash flows

Auditor’s Report: Modified Opinions
• In some situations, the auditor is required to express a modified
opinion (that is, qualified, disclaimer or adverse)
• A qualified opinion usually happens when something does not
follow GAAP
• A scope limitation—insufficient appropriate audit evidence—
could result in
• A qualified opinion—if the effects of the scope limitation are
material but not pervasive, or if there is a deviation from
GAAP that is material but not pervasive
• A disclaimer of opinion or withdrawal from the audit—when
the scope limitation is both material and pervasive
• An adverse opinion is required if misstatements are so material
and pervasive that a qualified opinion is not justified
(statements are not in accordance with IFRS)
Financial Statement Analysis
• We can obtain specific information from financial
statements by
o Examining relationships between items on the statements
o Identifying trends in the relationships
• Relationships are usually expressed numerically, and
trends are identified through horizontal and trend analysis
• Limitations inherent in financial statement analysis
o Financial statements report on the past
o Ratio and trend analysis does not explain why
o A single ratio, by itself, is not likely to be useful
o Limitations to the accounting numbers based on accounting
policy choices
Financial Statement Analysis Techniques
• Various techniques are used in analysis of financial statement
data; no one technique is better than another
o Ratio analysis—a ratio is an expression of the relationship
between two numbers drawn or derived from the financial
statements
o Horizontal analysis– indicates the proportionate change between
years
o Common-size or vertical analysis– reducing all the dollar amounts
to a percentage of a base amount
o Trend analysis-- to assess how companies’ financial position and
performance are changing over time
o Examination of related data (in notes and other sources)--answers
may also be obtained by examining the inter-relationships among
the data provided
Major Types of Ratios
Category Measures what? Reflects Ratios
Liquidity Measures the short-term Financial strength: ability Current ratio
ability to pay maturing to satisfy financial Quick or acid-test ratio
obligations requirements of non- Current cash-debt coverage ratio
ownership interests in the
business
Activity Measures how effectively Management’s Receivables turnover
the enterprise is using its performance Inventory turnover
assets Asset turnover
Profitability Measures financial Management’s Gross profit margin
performance and performance Profit margin on sales
shareholder value Rate of return on assets
creation over a specific Rate of return on common equity
period of time EPS and price earnings ratios
Payout ratio
Coverage or Measures the degree of Financial strength: ability Debt to total assets
Solvency protection for long-term to satisfy financial Times interest earned
creditors and investors requirements of non- Cash debt coverage
(ability to meet long-term ownership interests in the Free cash flow to operating cash flow
obligations) business Book value per share

Common-Size (Vertical) Analysis
PiP 23.4 Vertical analysis: proportionate expression of each item
to a base figure
2023 2022
Amount % of % of
(in $000) Revenue Revenue
Revenue 1,675 100 100
Cost of sales 1,000 60 63 Gross profit
Gross profit 675 40 37 improved:
Expenses: 37% to 40%
SG&A 225 13 11
Depreciation and
Amortization 150 9 11
Potential issue:
Interest expense 50 3 2
cost control--
Selling & Admin
Income taxes 100 6 5
expenses went
Total Expenses 525 31 29 from 11% to 13%
Net income 150 9 8

Limitations of Financial Statement
Analysis
• Significant limitations regarding financial statement
information and analysis arise from a number of
uncertainties
o The nature and role of financial statements
o The nature of business operations portrayed in the financial
statements—the unpredictability of business activities;
competitors’ actions
o Limitations of financial statement measurements and
disclosures—when they are misunderstood, considered
incomplete, or lack relevance
o Management’s motives and intentions
Limitations of Ratio Analysis
• There are some limitations to using ratios for financial
statement analysis
o Based on historical cost—can lead to distortions in
measuring performance
o Estimated items like depreciation, site restoration costs, and
bad debts—ratios based on significant estimates may be less
credible
o Achieving comparability among companies in a given
industry may be difficult—use of different accounting
policies that lead to differences in accounting

A Comparison of IFRS and ASPE
Topic IFRS ASPE
Disclosures Increased level of disclosures Generally, fewer disclosure requirements
Accounting policies Is working towards reducing the Greater range of choices—allows some companies
choices exemption from the reliable and more relevant test
Segmented reporting Info on reportable segments; Provides no guidance
reconcile to reported financial
statements; info on segment
products, services, material
customers and geographical
areas
Interim reporting Does not mandate who should Provides no guidance
report; does provide guidance
Related-party Requires additional disclosure; no Requires remeasurement in certain situations
transactions remeasurement
Subsequent events Event period ends when the Event period ends when the statements are
statements authorized for issue complete
Unincorporated No specific guidance Requires specific information about the entity and
business owners

Looking Ahead
• The OSC has released proposed amendments to its
continuous disclosure requirements
• IASB plans to update its Management Commentary
Practice statement, and issued a new Exposure Draft in
2021 to start the process

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Intermediate Accounting

13th Canadian Edition, Volume 2

Copyright ©2022 John Wiley & Sons, Canada, Ltd. 2

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• Non-compliance does not include personal misconduct

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• Is the transaction in the normal course of operations? No. Manufacturing

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• Is the transaction in the normal course of operations? Yes. (Given)

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Illustration 23.5 Time Periods for Subsequent Events

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