MGAC01H3 – Intermediate Financial Accounting I

EXPLORING THE CPA HANDBOOK

Exercise: 2
Instructions: Use the CPA handbook (Knotia) to complete the following exercise. Please
describe what the standard requires us to do (cut and paste the standard) and ensure you include
the handbook section and the paragraph number(s). For example:

Question

Item Standard Question Response

1 ASPE Primary source of GAAP: Explanation
of the difference between italicized
and non-italicized paragraphs

Response

Item Standard Question Response

1 ASPE Primary source of GAAP: Explanation Italicized paragraphs generally
of the difference between italicized indicate the main principles, while
and non-italicized paragraphs non-italicized generally explain
their application to a particular
situation.
HB1100.13

This exercise meets the following areas in the CPA competency map as follows:

1.1 Financial Reporting Needs and Systems

1.1.1 evaluates financial reporting needs
1.1.2 evaluates the appropriateness of the basis of financial reporting
1.1.3 evaluates reporting processes to support reliable financial reporting

1.2 Accounting Policies and Transactions

1.2.1 develops or evaluates appropriate accounting policies and procedures
1.2.2 evaluates treatment for routine transactions
1.2.3 evaluates treatment for non-routine transactions
1.2.4 analyzes treatment for complex events or transactions
1.3 Financial Report Preparation
1.3.1 Prepares financial statements
1.3.2 Prepares routine financial statement note disclosure
1.4 Financial Statement Analysis
1.4.1 analyzes complex financial statement note disclosure
1.4.2 evaluates financial statements including note disclosures
After completion of this exercise, students should have
 A better understanding of the CPA handbook
 A solid understanding in exercising professional judgment in applying standards in IFRS and
ASPE in a wide range of financial reporting areas.
 Meets the CPA required technical competency
The exercise has 4 questions, each worth 2 marks
Item Standard Question
1 ASPE The chief accountant discovered
two accounting errors in the
preparation of the current
statements. Provide guidance as
to how accounting for errors
should be probably handled.
Response
Potential current period errors
discovered in that period are corrected
before the financial statements are
completed. However, material errors are
sometimes not discovered until a
subsequent period, and these prior
period errors are corrected in the
comparative information presented in
the financial statements for that
subsequent period (see paragraphs
1506.27-.28).
.27 An entity shall correct material
prior period errors retrospectively in the
first set of financial statements
completed after their discovery by:
(a) restating the comparative amounts
for the prior period(s) presented in
which the error occurred; or
(b) if the error occurred before the
earliest prior period presented, restating
the opening balances of assets, liabilities
and equity for the earliest prior period
presented.

2 IFRS A contract is an agreement
between two or more parties that
creates enforceable rights and
obligations. Ensuring a contract
exists is an important element in
revenue recognition.
Describe the criteria that
determines that a contract exist
with a customer as part of the
revenue recognition process.
.28 The correction of a prior period
error is excluded from net income for
the period in which the error is
discovered. Any information presented
about prior periods, including any
historical summaries of financial data, is
restated.
.29 Corrections of errors are
distinguished from changes in
accounting estimates. Accounting
estimates by their nature are
approximations that may need revision
as additional information becomes
known. For example, the gain or loss
recognized on the outcome of a
contingency is not the correction of an
error.
HB1506.26-29
An entity shall account for a contract
with a customer that is within the scope
of this Standard only when all of the
following criteria are met:
(a) the parties to the contract have
approved the contract (in writing, orally
or in accordance with other customary
business practices) and are committed to
perform their respective obligations;
(b) the entity can identify each party's
rights regarding the goods or services to
be transferred;
(c) the entity can identify the payment
terms for the goods or services to be
transferred;
(d) the contract has commercial
substance (ie the risk, timing or amount
of the entity's future cash flows is
expected to change as a result of the
contract); and
 (e) it is probable that the entity will
collect the consideration to which it will
be entitled in exchange for the goods or
services that will be transferred to the
customer. In evaluating whether
collectability of an amount of
consideration is probable, an entity shall
consider only the customer's ability and
intention to pay that amount of
consideration when it is due. The
amount of consideration to which the
entity will be entitled may be less than
the price stated in the contract if the
consideration is variable because the
entity may offer the customer a price
concession (see paragraph 52).

HB-IFRS15.9
3 IFRS Determine the initial recognition 10 An entity shall recognise a
and measurement of a biological biological asset or agricultural produce
asset. when, and only when:

(a) the entity controls the asset as a

result of past events;

(b) it is probable that future economic

benefits associated with the asset will
flow to the entity; and

(c) the fair value or cost of the asset

can be measured reliably.

11 In agricultural activity, control

may be evidenced by, for example, legal
ownership of cattle and the branding or
otherwise marking of the cattle on
acquisition, birth, or weaning. The
future benefits are normally assessed by
measuring the significant physical
attributes.

12 A biological asset shall be

measured on initial recognition and at
the end of each reporting period at its
fair value less costs to sell, except for
the case described in paragraph 30

4 ASPE The company discovered that a
large customer declared
bankruptcy after year-end but
before the financial statements
were issued. Determine the
section of the CPA handbook
where guidance can be found.
5 ASPE Section of the CPA Handbook
where providing comparative
information is required in
preparing financial statements.
6 IFRS What is the measurement basis
on long lived assets that is
classified as held for sale.
where the fair value cannot be measured
reliably.
13 Agricultural produce harvested
from an entity's biological assets shall
be measured at its fair value less costs to
sell at the point of harvest. Such
measurement is the cost at that date
when applying IAS 2 Inventories or
another applicable Standard.
HB-IFRS-IAS41.10-13
Section HB.3820 provides guidance on
how to deal with subsequent events,
what disclosures and adjustments to
make etc.
.12 Financial statements shall be
prepared on a comparative basis, unless
the comparative information is not
meaningful or the standards set out in
Part II of the Handbook permit
otherwise.
.13 Comparative information is
normally meaningful. However, this
may not be the case in some rare
circumstances, such as when the
financial structure of an enterprise has
significantly changed, or when a
comprehensive revaluation of assets and
liabilities has been made in accordance
with COMPREHENSIVE
REVALUATION OF ASSETS AND
LIABILITIES.
HB 1400.12-13
15 An entity shall measure a non-
current asset (or disposal group)
classified as held for sale at the lower of
its carrying amount and fair value less
costs to sell.
HB.IFRS-5.15
7 ASPE In a transaction involving the
sale of goods, performance shall
be regarded as having been
achieved when the seller of the
goods has transferred to the
buyer the significant risks and
rewards of ownership, in that all
significant acts have been
completed and the seller retains
no continuing managerial
involvement in, or effective
control of, the goods transferred
to a degree usually associated
with ownership.
Describe the consideration in
deciding whether that risk and
rewards of ownership have been
transferred to the buyer.
8 IFRS The CPA handbook requires an
intangible asset to be identifiable
to distinguish it from goodwill.
What is the definition of an
identifiable asset.
.14 Assessing when the risks and
rewards of ownership are transferred to
the buyer with sufficient certainty
requires an examination of the
circumstances of the transaction. In
most cases, revenue is recognized on
passing of possession of the goods. In
retail sales, this is usually coincident
with the passing of legal title. In other
cases, the passing of legal title may
occur at a different time from the
passing of possession or of the risks and
rewards of ownership.
.15 The following considerations are
relevant in deciding whether significant
risks and rewards of ownership have
been transferred to the buyer:
(a) whether any significant acts of
performance remain to be completed;
and
(b) whether the seller retains any
continuing managerial involvement in,
or effective control of, the goods
transferred to a degree usually
associated with ownership.
HB3400.14-15
12 An asset is identifiable if it either:
(a) is separable, ie is capable of being
separated or divided from the entity and
sold, transferred, licensed, rented or
exchanged, either individually or
together with a related contract,
identifiable asset or liability, regardless
of whether the entity intends to do so; or
(b) arises from contractual or other
legal rights, regardless of whether those
rights are transferable or separable from
the entity or from other rights and
obligations.
HB.IAS-38.12