MGAC01H3 – Intermediate Financial Accounting I

EXPLORING THE CPA HANDBOOK

Exercise: 3
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 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

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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 An asset retirement obligation is
a legal obligation associated with
retiring a tangible long-lived
asset.
Describe the required
recognition and measurement of
an asset retirement obligation.
2 ASPE The cost of inventories shall
comprise all costs of purchase,
costs of conversion and other
costs incurred in bringing the
inventories to their present
Response
Recognition: An entity shall recognize a
liability for an asset retirement
obligation in the period in which it is
incurred when a reasonable estimate of
the amount of the obligation can be
made. If a reasonable estimate of the
amount of the obligation cannot be
made in the period the asset retirement
obligation is incurred, the liability shall
be recognized when a reasonable
estimate of the amount of the obligation
can be made.
HB3110.05
Measurement: The amount recognized
as an asset retirement obligation shall be
the best estimate of the expenditure
required to settle the present obligation
at the balance sheet date.
HB3110.09
The costs of conversion of inventories
include costs directly related to the units
of production, such as direct labour.
They also include a systematic
allocation of fixed and variable
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 location and condition.
Describe what is included in the
conversion costs.
3 IFRS Describe the accounting for non-
monetary exchange of intangible
assets.
production overheads that are incurred
in converting materials into finished
goods. Fixed production overheads are
those indirect costs of production that
remain relatively constant regardless of
the volume of production, such as
depreciation and maintenance of factory
buildings and equipment, and the cost of
factory management and administration.
Variable production overheads are those
indirect costs of production that vary
directly, or nearly directly, with the
volume of production, such as indirect
materials and indirect labour.
HB3031.13
45 One or more intangible assets may
be acquired in exchange for a non-
monetary asset or assets, or a
combination of monetary and non-
monetary assets. The following
discussion refers simply to an exchange
of one non-monetary asset for another,
but it also applies to all exchanges
described in the preceding sentence. The
cost of such an intangible asset is
measured at fair value unless (a) the
exchange transaction lacks commercial
substance or (b) the fair value of neither
the asset received nor the asset given up
is reliably measurable. The acquired
asset is measured in this way even if an
entity cannot immediately derecognise
the asset given up. If the acquired asset
is not measured at fair value, its cost is
measured at the carrying amount of the
asset given up.
46 An entity determines whether an
exchange transaction has commercial
substance by considering the extent to
which its future cash flows are expected
to change as a result of the transaction.
An exchange transaction has
commercial substance if:
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 (a) the configuration (ie risk, timing
and amount) of the cash flows of the
asset received differs from the
configuration of the cash flows of the
asset transferred; or

(b) the entity-specific value of the

portion of the entity's operations
affected by the transaction changes as a
result of the exchange; and

(c) the difference in (a) or (b) is

significant relative to the fair value of
the assets exchanged.

For the purpose of determining whether

an exchange transaction has commercial
substance, the entity-specific value of
the portion of the entity's operations
affected by the transaction shall reflect
post-tax cash flows. The result of these
analyses may be clear without an entity
having to perform detailed calculations.

47 Paragraph 21(b) specifies that a

condition for the recognition of an
intangible asset is that the cost of the
asset can be measured reliably. The fair
value of an intangible asset is reliably
measurable if (a) the variability in the
range of reasonable fair value
measurements is not significant for that
asset or (b) the probabilities of the
various estimates within the range can
be reasonably assessed and used when
measuring fair value. If an entity is able
to measure reliably the fair value of
either the asset received or the asset
given up, then the fair value of the asset
given up is used to measure cost unless
the fair value of the asset received is
more clearly evident.

HB-IAS38.45-47
4 IFRS Describe the accounting With the exception noted in paragraph
measurement options for 32A, an entity shall choose as its

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 investment property. accounting policy either the fair value
model in paragraphs 33–55 or the cost
model in paragraph 56 and shall apply
that policy to all of its investment
property.
HB-IAS40.30

Fair value model

33 After initial recognition, an entity

that chooses the fair value model shall
measure all of its investment property at
fair value, except in the cases described
in paragraph 53.

35 A gain or loss arising from a

change in the fair value of investment
property shall be recognised in profit or
loss for the period in which it arises.

HB-IAS40.33/35

Cost model

56 After initial recognition, an entity

that chooses the cost model shall
measure investment property:

(a) in accordance with IFRS 5 Non-

current Assets Held for Sale and
Discontinued Operations if it meets the
criteria to be classified as held for sale
(or is included in a disposal group that is
classified as held for sale);

(b) in accordance with IFRS 16 if it is

held by a lessee as a right-of-use asset
and is not held for sale in accordance
with IFRS 5; and

(c) in accordance with the

requirements in IAS 16 for the cost
model in all other cases.
HB-IAS40.56

5 IFRS Impairment testing on intangible The following elements shall be

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 assets requires companies to
calculate recoverable amount to
be the greater of (a) the asset's
fair value less costs of disposal;
or
(b) the asset's value in use
What are the various elements to
consider in calculating the value
in use.
6 IFRS Guidance on what to include in
the cost of property, plant and
equipment asset on the balance
sheet.
reflected in the calculation of an asset's
value in use:
(a) an estimate of the future cash
flows the entity expects to derive from
the asset;
(b) expectations about possible
variations in the amount or timing of
those future cash flows;
(c) the time value of money,
represented by the current market risk-
free rate of interest;
(d) the price for bearing the
uncertainty inherent in the asset; and
(e) other factors, such as illiquidity,
that market participants would reflect in
pricing the future cash flows the entity
expects to derive from the asset.
Estimating the value in use of an asset
involves the following steps:
(a) estimating the future cash inflows
and outflows to be derived from
continuing use of the asset and from its
ultimate disposal; and
(b) applying the appropriate discount
rate to those future cash flows.
HB-IAS36.30-31
The cost of an item of property, plant
and equipment comprises:
(a) its purchase price, including
import duties and non-refundable
purchase taxes, after deducting trade
discounts and rebates.
(b) any costs directly attributable to
bringing the asset to the location and
condition necessary for it to be capable
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7 IFRS What are the different methods
in reporting the operating
activities in the cash flow
statement.
8 ASPE What is the proper accounting
for a company who is dependent
on a significant volume of
business with another business.
of operating in the manner intended by
management.
(c) the initial estimate of the costs of
dismantling and removing the item and
restoring the site on which it is located,
the obligation for which an entity incurs
either when the item is acquired or as a
consequence of having used the item
during a particular period for purposes
other than to produce inventories during
that period.
HB-IAS16.16
An entity shall report cash flows from
operating activities using either:
(a) the direct method, whereby major
classes of gross cash receipts and gross
cash payments are disclosed; or
(b) the indirect method, whereby
profit or loss is adjusted for the effects
of transactions of a non-cash nature, any
deferrals or accruals of past or future
operating cash receipts or payments, and
items of income or expense associated
with investing or financing cash flows.
HB-IAS7.18
When the ongoing operations of a
reporting enterprise depend on a
significant volume of business with
another party, the economic dependence
on that party shall be disclosed and
explained.
To explain the effect of the relationships
described in paragraphs 3841.03-.05, an
entity would disclose the amount of
transactions with these parties and
provide an explanation of whether the
volume of such transactions is normal
for the enterprise and the industry in
which it operates. For example, an
enterprise relying on the continuation of
a contractual relationship for a
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significant percentage of sales may
disclose the following: "The company's
operations consist of supplying catering
services. The contract with one
customer accounts for 60% of sales in
the current year (19X0 — 54%) and is
due for renewal in December 19X2."

HB.ASPE3841.02/06