Monthly Archives: October 2012

IFRS 3 – Business combinations UFE Study Guide

Business Combinations (IFRS 3)
Last Updated: December 7, 2013

You can find a printer-friendly study sheet in PDF format by clicking here!


This IFRS applies when one business merges with or acquires another. This IFRS does not apply to joint ventures or acquisition of assets which do not constitute a business under common control.

Acquisition MethodBusiness combinations should be accounted for using the acquisition method.

1. Identify the acquirer

  • In each merger/acquisition, an acquirer must be identified.
    • Big picture: who has control/power over the other (voting rights, board of directors)
    • Exposure, or rights, to returns from the acquisition (exposure to both +/- returns)
    • Ability to use power over the acquisition to affect the amount of the returns

2. Determine the acquisition date – the date on which legal control is obtained unless a written agreement provides that control is obtained the day before the closing date.

3. Measure and recognize the assets acquired and liabilities assumed as well as any non-controlling interest in the acquiree that may exist

  • Assets acquired and liabilities assumed must meet the criteria for assets and liabilities.
  • Must be part of the same transaction (the merger/acquisition) and not as part of different transactions which may exist separately from a previous business relationship.
  • The acquisition may result in recognizing assets not previously recognized such as intangibles.
  • The assets acquired and liabilities assumed should be measured at their acquisition date fair values. With these exceptions:
    • Contingent liabilities – must be recognized if it is a present obligation which arises from a past event and its fair value can be measured reliably even if probability of occurrence is low. Subsequent accounting measures as the lesser of IAS 37 and the original amount.
    • Income taxes – In accordance with IAS 12 Income Taxes
    • Employee benefits – In accordance with IAS 19 Employee Benefits
    • Indemnification assets, Reacquired rights  – Not likely to be tested in my opinion
    • Share-based payment transactions – in accordance with IFRS 2
    • Assets held for sale – in accordance with IFRS 5

4. Recognize the difference as goodwill or a gain from a bargain purchase.

The purchase price must first be established and then goodwill is the excess of (a) over (b):

a)      Acquisition-date fair value of consideration transferred.

  • If not 100% acquisition then [acquisition-date FV] / [% acquired] in order to imply a 100% acquisition.

b)      The net acquisition-date amounts of assets acquired and liabilities assumed

Goodwill = FV of Consideration Transferred – The 100% Fair Value of acquired assets & liabilities.

Acquisition-related costs:

  • Should be expensed with the exception of costs to issue debt or equity securities which should be recognized in accordance with IAS 32 and IAS 39.

Bargain Purchase:

  • In cases where the amount in (b) exceeds the amount in (a) above then it is a bargain purchase which means that the acquirer is purchasing the net assets of the acquiree at a bargain. IFRS requires the reassessment of the amounts in (b) and if everything is correct post-reassessment then the gain is recognized in the income of the acquirer.

Business Combination in Stages:

  • When an acquisition occurs in stages, remeasure the previously acquired equity interest at its acquisition-date fair value and recognize the resulting gain or loss into income.

Measurement Period:

  • If the accounting for a business combination is not complete by the end of the reporting period, provisional amounts must be used for incomplete items on the financial statements.
  • During the measurement period which is a maximum of one-year, the acquirer shall retrospectively adjust the provisional amounts to reflect new information.

Disclosure

Disclosure requirements are considerable but unlikely to be tested extensively on the UFE.

Two main objectives:

1. Information that enables users to evaluate the nature and the financial effects of the business combination during the current period or after the end of the reporting period but before the financial statements are authorized.

  • Name and description of acquiree, acquisition date, percentage acquired, reasons, etc.

2. Information that enables users to evaluate the financial effects of adjustments recognized in the current period related to combinations that occurred in the current or previous period.

IFRS 2 – Share-based payment UFE Study Guide

Share-based payment (IFRS 2)
Last Updated: October 30, 2012

You can find a printer-friendly study sheet in PDF format by clicking here!


When share-based payments (shares, options, etc.) in exchange for products or services occur, they have a potentially dilutive effect on earnings and therefore must be reflected on the financial statements.

This IFRS needs to be applied for all share-based payment transactions for products or services including settlements in equity, cash and in transactions when there is a choice of cash or equity settlement.

Exceptions for applying this section include:

  • In business combination when equity is exchanged for control (apply IFRS 3)
  • Joint ventures when equity is exchanged for a part of the venture (apply IFRS 11)

 

Recognition

  • Recognize the good or service received when received.
  • Recognize a corresponding increase in equity if received in an equity-settled share-based payment transaction. If acquired in a cash-settled share-based payment transaction recognize as a liability.
  • If the goods or services received in a share-based payment transactions don’t qualify for recognition as assets, for example, expenses incurred as part of research, recognize as an expense.

Equity-settled share-based payment transactions

  • Measure the value of the goods or service received, and the increased equity, at the fair value of the goods or services received, unless the fair value is not reliably measurable in which case measure by reference to the fair value of the equity investment on the date the entity receives the goods or service (market price or valuation technique if market price unavailable).
  • When granting payments to employees, typically you would measure at the fair value of the equity on the grant date.

Vesting:

  • When equity granted vests immediately for services received, recognize equity payment immediately.
  • When equity granted vests over time for services being received, recognize the service over the vesting period with a corresponding increase in equity.
  • When equity granted based on performance criteria for some future date, presume performance will occur and estimate based on most likely outcome.
  • After the vesting date, no subsequent adjustments to total equity are permitted. The entity may not reverse entries even if the equity is not exercised but may record a transfer within equity.

Modification of Equity Instruments:

  • Recognize, at a minimum, modifications measured at the grant date fair value of the equity instrument.
  • Recognize effects of modifications that increase the total fair value of the equity payment which benefits an employee.
  • If a grant of equity instruments is cancelled or settled during the vesting period the entity should recognize the entire amount immediately.
    • Any payment made to the employee on cancellation treated as a repurchase of equity to the extent that the payment exceeds the fair value of the equity on the repurchase date and any excess is an expense.
    • If any new equity instrument is issued it should be accounted in the same way as a modification of the original grant.

Cash-settled share-based payment transactions

Example: Employees may become entitled to a bonus cash payment based on the future share price of an entity.

  • Measure the goods or services received and the liability incurred at the fair value of the liability.
  • Remeasure the fair value of the liability at the end of each period and at the date of settlement.
  • Recognize changes to fair value in income.

Share-based payment transactions with cash alternatives

Not likely to be examined due to complexity. Big idea: when a compound instrument is granted (equity and/or debt portions/demands) then it should be measured as the difference between the fair value of the goods/services received and the fair value of the debt component at the date that the goods and services are received. For employees, first measure the debt component and then measure the fair value of the equity component.

Disclosure

Entities should disclose information that allows users to understand the nature and extent of share-based payments that existed during the period.

  • A description of the share-based payment arrangements including terms and conditions
  • Number and weighted average exercise prices for:
    • Outstanding at the beginning of period,
    • Granted, forfeited, exercised, expired during the period,
    • Outstanding and exercisable at the end of the period,
    • Weighted average share price at the date of exercise or for the period if multiple exercises occurred.
    • For outstanding share options, the range of exercise prices and weighted average remaining contractual life.
  • How the fair value of goods/services received or the fair value of the equity instruments granted was determined.
  • Information that allows users to understand how share-based payments impacted the income statement and balance sheet.

And now back to our regular programming…

After a brief hiatus to catch up on some other things, I’ll be trying very hard to get back to a regular posting schedule here starting tomorrow. So check back soon as I’ll have a lot more coming up before Ontario writers write the CKE and, of course, the UFE results which are November 30.

  • The goal will be to get up a lot more study guides for people to review before the end of the year. Focus has been PMR so far but I’ll try to tackle Assurance as well. Cross your fingers for that excitement. Technical study, rather than case work, should continue to be the focus of candidates probably until about March.
  • November 30th is the release date for UFE results. I’ll try to do some more posts for 2012 UFE candidates as the time nears, and of course, I’ll be here to talk about the results when they’re released on November 30th.

As always, if there’s something you’d like to see on this site please get in touch and let me know. Happy studying.

 

We'll be back on track soon

Just a quick word today. I’ll be back to a more regular posting schedule soon in case anybody is worried 🙂 Life’s been keeping me too busy lately but I look forward to coming back to this soon.

We’ll be back on track soon

Just a quick word today. I’ll be back to a more regular posting schedule soon in case anybody is worried 🙂 Life’s been keeping me too busy lately but I look forward to coming back to this soon.

IAS 10 – Events after the reporting period (Subsequent Events) UFE Study Guide

Events after the reporting period (IAS 10)
Last Updated: October 17, 2012

You can find a printer-friendly study sheet in PDF format by clicking here!


IAS 10 – Events after the reporting period covers events that occur after the reporting period (date of financial statements) but before the financial statements are authorised for issue (authorisation date). This is also commonly known as subsequent events.

This standard also requires that if the entity is found not to be a going concern after the reporting period then the entity should not prepare its financial statements on a going concern basis.

Financial Statements are considered authorised usually when the board of directors approves them for issue, not when they are released to shareholders.

 

When Should an Entity Adjust its Financial Statements for Subsequent Events?

Two types of events can be identified.

1. Those that provide evidence of conditions that existed at the end of the reporting period. These are adjusting events and require the financial statements to be adjusted.

  • Settlement of court cases that confirms an obligation
  • Receipt of information regarding the impairment of an asset
  • Bankruptcy of a customer that occurs after the reporting period (A/R)
  • Sale of inventory after reporting period provides info on NRV
  • The determination of profit sharing or bonus program amounts
  • Fraud or error in the financial statements discovered

 

2. Those that provide information about conditions that arise after the reporting period. These are non-adjusting events and you may not adjust the financial statements.

  • Change in fair value of investments that occur after the reporting date
  • Dividends that the entity has declared after the reporting date are not a liability on the reporting date

 

Disclosures Necessary

  • Date that the financial statements are authorised for issue
  • Updates about conditions at the end of the reporting period
  • For non-adjusting events, when material:
    • The nature of the event
    • An estimate of the financial effect (or a statement that an estimate cannot be made)

IFRS 1 – First-time adoption of IFRS UFE Study Guide

First-time adoption of IFRS (IFRS 1)
Last Updated: October 16, 2012

You can find a printer-friendly study sheet in PDF format by clicking here!


IFRS 1 applies to entities which are adopting IFRS for the first time.

The objective of IFRS 1 is to provide users high quality information which is:

  • transparent;
  • comparable across periods presented;
  • a suitable starting point for accounting in accordance with IFRS; and
  • can be generated at a cost which does not exceed its benefits.

Scope

When an entity is presenting its financial statements, for the first time, using IFRS it must be clearly stated with a statement in the financial statements. There are numerous disclosure requirements and exceptions available in this standard which is likely too specific to be tested on the UFE so focus on the big picture.

Recognition and Measurement

When an entity transitions to IFRS for the first time it must:

  • present an opening IFRS Statement of Financial Position;
  • comply with all IFRS accounting policies in its opening IFRS Statement of Financial Position and throughout all periods presented (retroactive restatements);
  • not apply different versions of IFRSs which are outdated; and
  • recognize adjustments from previous GAAP that result in changes in the IFRS statements directly into retained earnings. These transactions must occur prior to the IFRS adoption date.
  • Remain consistent at the date of transition with estimates made for the same date in accordance with previous GAAP after adjustments to reflect any difference in accounting policies unless the estimate was an error.
  • Information received after the transition date should be treated as a non-adjusting event in accordance with IAS 10 (Events after the Reporting Period) and should be reflected in profit or loss or other comprehensive income.

Presentation and Disclosure

Numerous requirements, notably including:

  • Comparative information for all statements
  • Previous GAAP information should be labelled clearly as such
  • How the transition from previous GAAP to IFRS impacted the financial statements including reconciliations

ASPE Section 3031 – Inventories

Inventory (ASPE)
Last Updated: October 10, 2012

You can find a printer-friendly study sheet in PDF format by clicking here!


Inventory is covered under

  • IFRS – IAS 2 (Inventories); and
  • ASPE – Section 3031 (Inventories)

This section applies to all inventories (for ASPE), except:

  • Contracts accounting for using the Percentage of Completion method
  • Financial instruments
  • Spare parts usually treated as inventory, but if major enough, can be classified as Property, Plant and Equipment.

See also notes on specific exclusions from measurement under Measurement of Inventories.

 

Definition

Inventories are assets:

  • Held for sale as part of the normal course of business (finished goods);
  • In the production process (unfinished goods)
  • Materials or supplies to be consumed in the production process/rendering services

Net realizable value = Selling price – Estimated cost of completion – Costs to make the sale

Fair Value = Selling price at an arms-length transaction on market

FV is the total revenue that the transaction will generate while NRV is the amount the entity expects to realize.

Measurement of Inventories

Inventory is measured at the lower of cost and net realizable value.

Cost = All costs to:

  • purchase,
  • convert
    • direct labour
    • systemic allocation of fixed/variable production overhead
  • bring the inventory to its present location and condition
    • import duties/taxes,
    • transport,
    • handling and other direct costs less any costs that are recoverable

Items that are excluded from inventory:

  • Abnormal wasted materials or labour
  • Storage costs unless these costs are necessary before a further production stage
  • Administrative overhead (not specific to inventory)
  • Selling costs

Interest costs are included when the inventory takes a substantial time to become finished and the entities policy is to capitalize interest costs.

Techniques for measuring costs

  • Standard Cost Method: Use normal levels of materials, labour, efficiency. Should be regularly reviewed for change in conditions.
  • Retail Method: Often used in retail industry. Reduce the sale value of the inventory by the appropriate percentage of gross margin.

Measurement Exclusions (This section does not apply)

  • For agricultural, forest and mineral products held by producers which are measured at net realizable value based on well-established practices in these industries.
  • Inventories held by commodity broker-traders who measure inventories at fair value less cost to sell. Changes in FV are recognized in net income in period of change.
  • Inventories of living animals and plants (biological assets) and the harvested product of the biological asset. However it does apply to assets processed after harvesting.

Cost Formulas

Must choose a specific method for inventories that have a similar nature.

  • Specified Identification: This method may be used when inventory is not interchangeable and can be specifically identified.
  • First-in, First-out: Inventory purchased first is considered sold first. Items remaining in inventory at period end were those purchased most recently.
  • Weighted Average: Each new item is assigned a weighted average cost based on the previous similar items at the beginning of the period and purchased during the period. Can be calculated on a periodic basis or as each shipment is received.

Net Realizable Value

Inventories may at times become obsolete or diminish in value and must be written down to net realizable value.

Evidence that a write down is necessary:

  • Damage to inventory
  • Obsolescence
  • Decline in selling prices

Inventories should be written down item by item but grouping is permitted for similar products with similar end purposes. It’s not permitted to write down inventories based on classification (finished goods, by geographic segment, etc.)

When the circumstances that existed which required the write down no longer exist, the write-down may be reversed back up to cost. The item is then valued at the lower of cost or revised net realizable value.

Recognition

When inventories are sold, the carrying value of the inventory is recognized as an expense at the same time as the revenue is recognized.

When a write down is required, the write down is expensed in the period when the write down occurs. Reversals of write downs are also recorded in the period which they occur.

Disclosure

  • Accounting policies adopted to measure inventories including costing method.
  • Total carrying amount classified appropriately for the entity (i.e. merchandise, production supplies, materials, work in progress, finished goods, etc.)
  • The amount of inventory recognized as an expense during the period (cost of sales)

How to study for the CKE – Alone, group or something else?

The Core Knowledge Exam (CKE) in Ontario is a 100-question multiple choice exam which is strictly an examination of your technical accounting knowledge.

These qualities also make the CKE very similar to some of your University exams. The simulation-based exams that will be coming for you later next year are usually not something you do to a great degree unless you’ve taken one of the Masters programs that specializes in business cases.

So, the question remains, how should you study for the CKE? I’ve mentioned last week a study strategy that you could utilize but the best advice I heard regarding the CKE is to study in a similar way that you studied in University (for exams you did well on, of course!). I’ve known people who did the CKE course and then just did a 2-3 week blitz in December to practice exams and review the technical. I knew people who studied completely alone and I know others who loved studying in a group but most, including myself, mixed it up and did both to some degree. So my point is that this is similar to a University exam and you should approach it in a similar way since you know yourself best.

Whichever way you choose, make sure to get the following in:

  • Take a course, get a solid set of technical notes or create your own. I’m working on providing 3-4 per week here as well.
  • You’ll need to do a number of practice exams. I recommend this be saved for December. You should practice timing so you have a good intuition for it and don’t get bogged down in questions you can’t get. Each CKE question is worth 1 point.

Do this in a timeline that is doable for you. The highlighted part is my CKE study notes and the base of my UFE Tower… Wow, a UFE Tower, I’m more pathetic each day. Anyway, it’s a lot of material and you’ll need enough time to review it.

Happy studying and pace yourselves. Hope everybody has a great Thanksgiving weekend!

CKE Study Notes

The UFE Tower with a CKE base.

 

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