Tag Archives: study

UFE Study Partner Search

A reminder that there’s someone looking over in the UFE Study Partner search for a 2013 partner in Vaughan, Woodbridge and Brampton area. If anyone is interested, send them off an e-mail!

I’m currently looking for a study group or person(s) who will write 2013 SOA & UFE. Looking to start early to get technicals and case practice intact. Even if you’re writing the UFE, contact me.

Many Thanks,

TAO

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.

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

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.

 

IAS 18 – Revenue UFE Study Guide

Revenue (IFRS)
Last Updated: October 1, 2012

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


Revenue is covered under

  • IFRS – IAS 18 (Revenue); and
  • ASPE – Section 3400 (Revenue)

Determine first whether the entity is a public entity required to use IFRS or private entity opting to use IFRS. Private entities opting to use ASPE should use the ASPE guidance. This standard covers the sale of goods and the rendering of services by an entity but does not apply to construction contracts nor extraction of mineral ores.


Under IFRS (IAS 18)

Definition

  • Revenue is the cash coming into the business from its ordinary business activity such as sale of goods or provision of services.
  • Revenue collected on behalf of another party (sales tax for example) is not an economic benefit for the entity and is excluded from Revenue.

 Measurement

  • Revenue is measured at fair value of consideration received or receivable on the date of the transaction. (IFRS 13 covers Fair Value)
  • When similar goods or services are swapped, this is not considered a transaction which generates revenue.
  • In transactions that have deferred receivable amounts and constitute a financing transaction, the time value of money should be considered and all future receipts are discounted using an imputed interest rate.
    • The imputed rate is the more determinable of the prevailing rate of a similar instrument; or
    • an interest rate that discounts the instrument to the current cash price of the good or service.

Identification of the Transaction

Recognition criteria are usually applied to individual transactions but there are many cases when there are separately identifiable components of a single transaction. This is sometimes referred to as multiple-deliverable transactions. When this occurs (use judgment) then the recognition criteria should be applied to each individual component. An example of this is the sale of software where there is also an identifiable amount of separate servicing for a given amount of time.

Sale of Goods

Revenue Recognition Criteria (All must be met):

  • significant risks and rewards have been transferred
    • Consider: performance warranties, consignment sales, installation still required, buyer can rescind the contract and seller is unsure about probability of return. All these might indicate risks remain.
    • Insignificant risks such as return options for unsatisfied customers should still be recognized if an estimate of returns can be made.
  • managerial involvement and control over the good sold has ceased
  • the amount of revenue is measurable
  • it is probably that the economic benefits will flow to the entity
    • When it’s uncertain that you will collect from an entity after revenue is recognized this is treated as a bad debt expense not a reduction in revenue.
  • the entity’s costs relevant to the transaction can be measured reliably, this is the matching principle and may result in deferred revenue liability.

Rendering of Services

Revenue for services is recognized by reference to the stage of completion (percentage of completion method). The following conditions must all be met:

  • the amount of revenue is reliably measurable
  • it is probable that the economic benefits will flow to the entity
    • When it’s uncertain that you will collect from an entity after revenue is recognized this is treated as a bad debt expense not a reduction in revenue.
  • the stage of completion on the reporting period can be measured reliably
    • A variety of ways can be used to measure the stage of completion including surveys of work performed, services performed / total services, or the proportion of costs to-date / total expected costs. Ignore progress payments.
    • When services are performed in an indeterminate amount of acts then usually it’s recognized straight-line over the specified period unless one act is more significant than any other act in which case recognition is postponed until that act is complete.
    • When the outcome of rendering services cannot be reliably measured then revenue shall be recognized only to the extent of the expenses recognized are recoverable. If recoverability of these expenses is not likely than no revenue should be recognized.
  • the entity’s costs relevant to the transaction can be measured reliably

Interest, Royalties and Dividends

Interest, Royalties and Dividends shall be recognized when it’s probable that the economic benefits will flow to the entity and the amount of revenue is measurable.

Revenue is recognized for each as follows:

  • Interest: Effective interest method (IAS 39 and AG5-AG8)
  • Royalties: Accrual basis based on the substance of the agreement
  • Dividends: When the right to receive the payment is established

Please report errors, omissions or suggestions to technical@ufeblog.com

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