Activity 3 – Sample response 2

Introduction

In order to satisfy investor needs and obtain an unqualified audit opinion, the accounting
treatment of the buildings must be addressed. As a private company, you have the
option of using the Accounting Standards for Private Enterprises (ASPE) or the
International Financial Reporting Standards (IFRS). A review of their options for the
accounting of buildings has been conducted with the highlights and a recommendation
detailed below.

ASPE

Treatment of property, plant and equipment states that cost shall be utilized with
amortization recognized in a rational and systemic manner. As a result, amortization
would be required.

In addition to amortization, impairment losses are recorded. The treatment of

impairment is similar to your current practice, making adjustment when the carrying
amount exceeds the FMV. However, the method for determining when to record
impairment differs as it is based on the undiscounted cash flows of the asset.

Presentation on the financial statements requires:

 cost,
 accumulated amortization,
 and the method used for calculating amortization for the period.

IFRS

IAS 16 allows for two methods of treatment for buildings, the cost model, which is
similar to ASPE and the revaluation model. The revaluation model would value the
buildings at fair market value, reporting both increases and decreases in the valuation.
Since buildings tend to decline in value, it would be similar in substance to your current
accounting with periodic adjustments made to the buildings based on declines in fair
value as reported on the tax roll. IFRS compares the book value to the higher of the fair
market value, which could likely be approximated by the tax roll estimates, and the
value-in-use, which is the present value of the asset’s cash flows. This latter calculation
may be difficult to determine.

In approaching this option it is important to note the adoption of IFRS is an all-

encompassing task, in that you would need to adopt all of the IFRS standards, not just
the one for buildings. This tends to be significantly more time consuming and detailed

Chartered Professional Accountants of Canada, CPA Canada, CPA

are trademarks and/or certification marks of the Chartered Professional Accountants of Canada.
© 2015, Chartered Professional Accountants of Canada. All Rights Reserved.

Les désignations « Comptables professionnels agréés du Canada », « CPA Canada » et « CPA »

sont des marques de commerce ou de certification des Comptables professionnels agréés du Canada.
© 2015 Comptables professionnels agréés du Canada. Tous droits réservés. 13/08/15
Core 1 – Module Workshop Activity 3 Sample 2

than the use of ASPE, including more technical accounting requirements and significant
note disclosures. This may not meet your needs to be cost-effective.

Adopting IFRS may assist you with your future financing requirements, however, as you
would be better able to attract international investors if your statements are comparable
to the other companies in your industry. In addition, if you decide in the future to go
public, using IFRS already would assist you as previous years’ financial statements
need to be provided. Before a decision is made, however, consultation with Frontier and
your bank should be made to ensure such a change would also meet their needs as
that is of critical importance.

Recommendation – ASPE

Taking into consideration that an unqualified opinion is a condition of financing, and the
likelihood that the company will continue as a legacy in majority ownership of the
Dupont family, it is in the best interest of the company to keep costs low and adopt the
treatment put forth by ASPE.

While an argument can be made that the FMV of the building is more important to the
bank than an accounting figure such as “depreciated book value”, presenting this way
gives additional information such as the remaining life of the asset, and the possibility of
substantial cash outlays in the near future. In addition to this, should the bank require
FMV information, property tax assessments remain public knowledge and the
information can be provided in the notes to the financial statements.

With this treatment it will be important to remain mindful of the terms of credit. Currently
50% of the buildings’ value is factored into the covenants on the line of credit; as the
depreciation builds in future years, the net amount presented will in turn decrease.
Should this pose a threat to the financing, I recommend that the branch be contacted
and negotiations made to selectively retain the buildings property tax assessment figure
for the lien calculation independent of how it is presented on the face of the financial
statements.

2/2