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WILEY
 Intermediate Accounting
DONALD E. KIESO, Ph.D., CPA
KPMG Peat Marwick Emeritus
Professor of Accounting
Northern Illinois University
DeKalb, Illinois
JERRY J. WEYGANDT, Ph.D., CPA
Arthur Andersen Alumni Professor
of Accounting
University of Wisconsin
Madison, Wisconsin
TERRY D. WARFIELD, Ph.D.
PwC Professor in Accounting
University of Wisconsin
Madison, Wisconsin
I Twelfth Canadian Edition I
IRENE M. WIECEK, FCPA, FCA
Professor of Accounting, Teaching Stream
University of Toronto
Toronto, Ontario
BRUCE J. McCONOMY,
Ph.D., CPA, CA
Professor and KPMG Foundation Fellow
in Accounting
Wilfrid Laurier University
Waterloo, Ontario
WILEY
VICE PRESIDENT, EDUCATION Tim Stookesberry
DIRECTOR, BUSINESS, ACCOUNTING, AND FINANCE Michael McDonald
SENIOR EDITOR Emily Marcoux
EDITORIAL ASSISTANT Kirsten Loose
ASSOCIATE PRODUCT DESIGNER Daleara Hirjikaka
PRODUCT DESIGN MANAGER Karen Staudinger
SENIOR MARKETING MANAGER Anita Osborne
SENIOR CONTENT MANAGER Dorothy Sinclair
PRODUCTION EDITOR Rachel Conrad
DESIGN Wiley
COVER DESIGN Joanna Vieira/Wiley
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References to the CPA Canada Handbook-Accounting are reprinted (or adapted) with permission from
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Questions adapted from the Uniform Final Evaluation and the Financial Accounting: Assets (FA2)
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Printed in the United States of America
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 Dedication
Dedicated to our students, who, as graduates and professional accountants, will ably lead us
through the next few decades, a period which promises to be an exciting one, with technological
advancements accelerating the pace of change.

v
About the Authors
Canadian Edition
IRENE M. WIECEK, FCPA, FCA ,isaProfessorofAccount-
ing, Teaching Stream at the University of Toronto, where she
is cross-appointed to the Institute for Management & Inno-
vation and the Joseph L. Rotman School of Management.
She has taught financial reporting in various programs, in-
cluding the Commerce Program (Accounting Specialist) and
the CPA-accredited Master of Management & Professional
Accounting Program (MMPA). The Director of the MMPA
Program (previously Associate Director), she co-founded (in
2004) and was Director of the CPA/ Rotman Centre for Inno-
vation in Accounting Education, which supported and facil-
itated innovation in accounting education until 2018. Irene
has been involved in professional accounting education for
over 25 years, sitting on various provincial and national pro-
fessional accounting organization committees as well as de-
veloping and directing the CICA IFRS Immersion Programs
for practising accountants. She was appointed a member
of the E&Y Academic Resource Center, where she helped
to author a new IFRS curriculum for the Americas. In the
area of standard setting, she has chaired the CAAA Finan-
cial Reporting Exposure Draft Response Committee and is
currently a member of the IFRS Discussion Group (IDG).
Irene co-authored the IFRS Primer: International GAAP
Basics (Canadian and U.S . editions) and was the co-editor
and contributor for the books Leveraging Change-The New
Pillars ofAccounting Education and Educating Professionals:
Ethics and Judgment in a Changing Learning Environment.
She co-authored the Guide to IFRS in Canada series, which
is published by CPA Canada. Irene is on the editorial board
of Accounting Perspectives.
BRUCE J. McCONOMY, Ph.D., CPA, CA , is a Professor
of Accounting and a KPMG Foundation Fellow in Accounting
at the Lazaridis School of Business and Economics at Wilfrid
Laurier University in Waterloo, Ontario. He was a Senior
Audit Manager with Deloitte before returning to Queen's
University to obtain his Ph.D. in accounting. Bruce is Director
of the Graduate Diploma in Accounting program at Laurier
and was Director of the CPA Ontario Centre for Capital Mar-
kets and Behavioural Decision Making, and its predecessor
Centre, from 2005-2018. He has been teaching intermediate
financial accounting since the late 1990s in Laurier's B.B.A.
and M.B.A. programs, and also teaches in Laurier's Ph.D. in
Management program. Bruce has published articles in Con-
temporary Accounting Research, Journal of Accounting, Audit-
ing and Finance, Journal of Business, Finance and Accounting,
Accounting, Auditing &Accountability Journal , Canadian Jour-
nal of Administrative Sciences, and Accounting Perspectives. He
has also published cases in Issues in Accounting Education,
vi
Canadian Financial Accounting Cases-2nd edition, Account-
ing Perspectives, and Journal of Accounting Case Research.
Bruce is an Associate Editor and is on the Advisory Commit-
tee of Accounting Perspectives and is on the Editorial Advisory
Board of the International Journal of Accounting & Informa-
tion Management.
U.S. Edition
DONALD E. KIESO, Ph.D., CPA, received his bachelor's degree
from Aurora University and his doctorate in accounting from
the University of Illinois. He has served as chair of the De-
partment of Accountancy and is currently the KPMG Emeri-
tus Professor of Accountancy at Northern Illinois University.
He has public accounting experience with Price Waterhouse
& Co. (San Francisco and Chicago) and Arthur Andersen
& Co. (Chicago) and research experience with the Research
Division of the American Institute of Certified Public
Accountants (New York). He has done post-doctorate work as a
Visiting Scholar at the University of California at Berkeley and
is a recipient of NIU's Teaching Excellence Award and four
Golden Apple Teaching Awards. Professor Kieso is the author
of other accounting and business books and is a member of the
American Accounting Association, the American Institute of
Certified Public Accountants, and the Illinois CPA Society.
He is the recipient of the Outstanding Accounting Educator
Award from the Illinois CPA Society, the FSA's Joseph A.
Silvoso Award of Merit, the NIU Foundation's Humanitarian
Award for Service to Higher Education, the Distinguished
Service Award from the Illinois CPA Society, and in 2003
received an honorary doctorate from Aurora University.
JERRY J. WEYGANDT, Ph.D., CPA , is Arthur Andersen Alumni
Professor of Accounting at the University of Wisconsin-
Madison. He holds a Ph.D. in accounting from the University of
Illinois. His articles have appeared in Accounting Review, Jour-
nal of Accounting Research, Accounting Horizons, Journal of
Accountancy, and other academic and professional journals.
Professor Weygandt is the author of other accounting and
financial reporting books and is a member of the American Ac-
counting Association, the American Institute of Certified Pub-
lic Accountants, and the Wisconsin Society of Certified Public
Accountants. He has been actively involved with the American
Institute of Certified Public Accountants and has been a mem-
ber of the Accounting Standards Executive Committee (AcSEC)
of that organization. He also served on the FASB task force that
examined the reporting issues related to accounting for income
taxes. He is the recipient of the Wisconsin Institute of CPAs'
Outstanding Educator's Award and the Lifetime Achievement
Award. In 2001, he received the American Accounting Associ-
ation's Outstanding Accounting Educator Award.

TERRY D. WARFIELD, Ph.D. , is the PwC Professor in
Accounting at the University of Wisconsin-Madison. He
received a B.S. and M.B.A. from Indiana University and a
Ph.D. in accounting from the University of Iowa. Professor
Warfield's area of expertise is financi al reporting, and pri-
or to his academic career, he worked for five years in the
banking industry. He served as the Academic Accounting
Fellow in the Office of the Chief Accountant at the U.S. Se-
curities and Exchange Commission in Washington, D.C.,
from 1995-1996. Professor Warfield's primary research ·
interests concern financial accounting standards and dis-
closure policies. He has published scholarly articles in The
Accounting Review, Journal ofAccounting and Economics, Re-
search in Accounting Regulation, and Accounting Horizons,
and he has served on the editorial boards of The Accounting
ABO UT THE AUTHORS vii
Review, Accounting Horizons, and Issues in Accounting
Education. Professor Warfield h as served on the Finan-
cial Accounting Standards Committee of the American
Accounting Association (Chair 1995-1996) and the AAA-
FASB Research Conference Committee. He currently serves
on the Financial Accounting Standards Advisory Council of
the Financial Accounting Standards Board. Professor War-
field has received teaching awards at both the University of
Iowa and the University of Wisconsin, and he was named
to the Teaching Academy at the University of Wisconsin in
1995. Professor Warfield h as developed and published sev-
eral case studies based on his research for use in account-
ing classes. These cases have been selected for the AICPA
Professor-Practitioner Case Development Program and have
been published in Issues in Accounting Education .
Preface
As we present the twelfth edition of this course, we note that over
the years, so much has changed in the accounting profession. We
adopted International Financial Reporting Standards (IFRS) in
Canada as well as Accounting Standards for Private Enterprises
(ASPE), both starting in 2011-moving us into a multiple GAAP
environment. In addition, we saw a merger of the three main leg-
acy accounting bodies (representing Chartered Accountants, Cer-
tified Management Accountants, and Certified General Account-
ants), resulting in one unified group: the Chartered Professional
Accountants of Canada (CPA Canada). From an educational
perspective, the outcome was a new CPA Canada Competency
Map with a broader curriculum, newly formatted professional
examinations with a changed emphasis (Common Final Exami-
nations), and a new roadmap for accredited programs and educa-
tional pathways into the CPA profession.
The body of knowledge seems to have swelled as a result
of these changes. We have been striving to navigate these new
waters as well as thinking about how the different technical
areas interrelate. As we have found out, "more" is not always
better. Our curricula seem to be ever expanding. Many of us, as
accounting educators, feel that the more we add to the curric-
ulum, the less students learn (and retain). So what do we do?
It is important to emphasize that students must continue to
learn the technical material (both quantitative and qualitative).
This is the foundation of who we are as accountants. But stu-
dents must also learn to think through unstructured problems,
especially given the impact of new technologies on emerging
industries and business models. How do we get there? We all
need to clear time and space for working through messy prob-
lems and for subsequent reflection-not an easy task when
there is so much foundational material that needs to be learned.
This edition reaffirms the need for foundational, techni-
cal knowledge but it also reaffirms the need to help students
deal with complicated problems. Part of the key to the latter
is reflection. Who uses financial statements and why? How
do accounting standards help provide useful information?
Our hope is to help produce capable decision-makers who are
thoughtful and able to continue to grow and evolve even when
things keep changing. We encourage students to reflect and
to think about things a little more deeply. This can be surpris-
ingly fruitful in developing insights and lasting knowledge. By
continually going back to the basics of decision-making in the
accounting environment, we can start the reflection process.
It is a good time to do this because IFRS and ASPE are,
for the moment, fairly stable (after a flurry of new standards
affecting financial instruments, measurement, revenue recog-
nition and leases (IFRS 9, 13, 15, and 16)). Many of the larger,
more complex accounting topics have been studied with new
accounting standards produced and put in place. We are now
looking at how these are being implemented. We note that
the standard setters seem to be going back to basics as well,
viii
continuing to refine the conceptual framework, working on the
principles of disclosure framework, and rethinking perform-
ance measures. So as you work your way through the material
in this course, think about two things: foundations and reflec-
tion. We have added some new features to help with this.
Engaging Students Digitally
Intermediate Accounting, Twelfth Canadian Edition, is
completely integrated with WileyPLUS, featuring a suite of
teaching and learning resources. WileyPLUS allows you to
create a personalized study plan, assess your progress along
the way, and access the content and resources needed to
master the material. WileyPLUS provides immediate insight
into your strengths and problem areas with visual reports
that highlight what's most important for both the instructor
and student.
Many dynamic resources are integrated into the course to
help you build your knowledge and understanding, stay moti-
vated, and prepare for decision making in a real-world context.
WileyPLUS also includes Orion, an integrated adaptive prac-
tice that helps you build proficiency and use your study time
most effectively. Additional features of the WileyPLUS course
include:
Chapter OAccounting Cycle Review
This section offers you adaptive review and practice for
essential accounting topics necessary to master Intermedi-
ate Accounting. Built to serve as a refresher of introductory
accounting content, this chapter includes reading content,
algorithmic practice, and interactive tutorials built to improve
your performance.
New Solution Walkthrough Lightboard Videos
These videos feature the authors working through more
than fifty end-of-chapter problems. In these videos, we work
through numerous problems to help you gain a deeper under-
standing of various technical and conceptual issues. You
can watch these multiple times if needed, in order to master
the material. These will help you not only to master techni-
cal materials, but also to pause and think about the issues.
Many of these videos anchor and reinforce the foundations of
accounting. In addition to the Lightboard videos, the Wiley-
PLUS course also offers approximately sixty additional solu-
tion walkthrough videos offering just-in-time homework
assistance and problem-solving techniques. Questions that are
accompanied by videos are identified by a ~ word
mark. ·

Excel Templates and Excel Function Videos
These videos provide you with step-by-step examples of how
to use Excel Functions. Excel templates are also available for
selected end of chapter questions.
New Module on Data Analytics
A new accounting-specific data analytics module with interac-
tive lessons, case studies, and videos has been prepared using
industry-validated content to help you develop the profes-
sional competencies needed for the Common Final Examina-
tion (CFE) and the changing workforce.
New and Continuing Features
New Practice Problems
We have included a Practice Problem at the end of each chap-
ter that reviews some of the key material from the chapter,
together with the related solution. As a first step after reading
the chapter, you will find these problems a jumping-off point
to working through the end-of-chapter material.
New Examples
Each chapter has been rewritten and reformatted to provide
specific examples within the chapter illustrating key con-
cepts. Each example has a fact set, instructions, and a solu-
tion. Highlighting the examples and structuring them in a
consistent manner means that you will be able to test your
knowledge and to quickly identify examples in any chap-
ter. The numerous examples are easily searchable and rein-
force the basics as well as covering nuances and explaining
reasoning.
New Emphasis on Data Analytics
With the advent of new technologies, more data are being
created and collected. How do companies use this explo-
sion of data to make accounting and other decisions? We
have highlighted the exciting developments in the growing
field of data analytics in vignettes and in chapter topics.
The word mark calls the reader's atten-
tion to this new addition. These additions will allow you
to begin to think about emerging issues and their impact
on accounting. Selected chapters include an Analytics in
Action question that allows you to apply the information
derived from the analysis of "big" data to various real-
life accounting scenarios. You will find the data sets and
detailed instructions accompanying these questions in your
WileyPLUS course.
Emphasis on Integration with Related Areas
We have included integration word marks (such as U!.fl.Igj
and rJmD) in each chapter to help identify key areas of
integration, including integration of accounting with finance,
law, economics, managerial accounting, auditing, strategy
PREFACE ix
and governance, and taxation. Many of our end-of-chapter
questions have an integration aspect. For those problems that
most directly focus on integration, we also include integration
word marks so that they are easily identified. By integrating
accounting knowledge with knowledge in related areas, you
will gain a deeper understanding of things. We continue with
our Office Hour Video feature developed for the eleventh edi-
tion, focusing on integration-related topics in most chapters.
CPA Competency Map Integration
At the start of each chapter, we provide a chart linking that
chapter's Learning Objectives with the related requirements
of CPA Canada's Competency Map. This information will help
those of you planning to obtain their Advanced Certificate in
Accounting and Finance (ACAF) or write the CFE to link the
coverage of intermediate accounting topics to the CPA educa-
tional requirements. We have also mapped the content against
the Competency Map and Knowledge Supplement. These
appear in Appendix D. In addition, the material in WileyPLUS
has been more comprehensively mapped.
Emphasis on Business
Books
Cash
Company Customer
The focus of many of the feature stories that start each chapter in
this edition is on the business models of various companies and
industries, along with accounting issues that affect them. The
first section of most chapters focuses on Understanding the
Business, which introduces the accounting topic in the context
of everyday business. Many chapters have a business trans-
actions example box. In most business transactions, you give
something up and receive something. These boxes are meant to
help you understand what has been given up and what has been
received in the transaction. This is tremendously helpful when
you are trying to decide how to account for a transaction or eco-
nomic event. We have added some new feature stories dealing
with current issues relating to new technologies.
Emphasis on IFRS and ASPE
Ilia mJ Individual IFRS and ASPE word marks call
attention to items treated differently by the two sets of stand-
ards. When the IFRS and ASPE word marks appear side by
side this indicates a direct comparison between the two
approaches. Side-by-side journal entries are used to illus-
trate differences in treatment between IFRS and ASPE, and
help with analytical thinking. The end-of-chapter charts that
identify the major differences between IFRS and ASPE include
a column with cross-references to relevant examples, illustra-
tions, and brief exercises that describe the differences outlined
X PREFACE
in the comparison chart. The chapter's Looking Ahead feature
alerts you to upcoming changes to accounting standards.
Emphasis on Professional and Ethical
Behaviour
IS!M Rather than featuring ethics coverage and problem
material in isolation, we use an ethics word mark to highlight
ethical issues as they are discussed within each chapter. This
word mark also appears beside exercises, problems, or cases
where ethical issues must be dealt with in relation to all kinds
of accounting situations.
Emphasis on Readability
The readability of the material has been improved by using fewer
abbreviations, plainer language, shorter sentences, numbered
lists, and clearer headings. A glossary provides definitions of key
terms highlighted in all the chapters and appendices. Alterna-
tive Terminology notes within the chapter familiarize you with
other commonly used terms. As noted earlier, we have structured
the examples in each chapter to make them more accessible.
Grounding in Accounting Research and Theory
11.t§.lij We have always emphasized concepts and princi-
ples, including those that span other disciplines, such as law
and finance. In addition to this, the Accounting Theory
word mark calls attention to accounting theory that underpins
much of the accounting body of knowledge, introducing you
to an accounting research perspective.
Real World Emphasis
Real World Emphasis Because intermediate accounting is
a course in which you must understand the application of
accounting principles and techniques in practice, we strive to
include a wide variety of real-world examples in each chapter.
Real companies are highlighted in colour the first time that
they are mentioned.
Reinforcement of the Concepts
Throughout each chapter, you are asked "What Do the Num-
bers Mean?" and are presented with discussions applying
accounting concepts to business contexts. This feature builds on
the opening feature stories in making the accounting concepts
relevant to you. Through current examples of how accounting
is applied, you will be better able to relate to and understand
the material. The Underlying Concept notes in each chapter
alert you to remember that the issue under discussion draws
on concepts identified in Chapter 2 as part of the conceptual
framework. More emphasis has been placed on measuring fair
values using the IFRS 13 standard. In addition, an Analysis sec-
tion is present in most chapters. This section discusses the effect
on the financial statements of many of the accounting choices
made by corporate management, alerting you to look behind
the numbers. Finally, the accounting equation appears in the
margin next to key journal entries to help you understand the
impact of each transaction on the company's financial position
and cash flows.
Helping You Practise
The end-of-chapter material is comprehensive. Brief exer-
cises, exercises, and problems focus on quantitative material.
lml End-of-chapter material includes questions that pro-
vide you with pre-populated Excel spreadsheets to help you pre-
pare solutions. We also continued our emphasis on having you
evaluate the differences in solutions prepared using IFRS versus
ASPE. Case material allows you to analyze business transac-
tions and apply both IFRS and ASPE, with attention to integra-
tion being provided by Integrated Case questions. Research and
Analysis questions allow you to explore the nature of GAAP
differences and understand how different accounting standard
setters can arrive at different solutions in terms of standards.
A summary of the Case Primer guiding you through the
case study method appears in Appendix E. The complete Case
Primer appears in WileyPLUS and the Student Website. The
Case Primer provides a framework for case analysis to help
you structure your response to case situations.
Analysis doesn't have to be just part of the cases. Our
Digging Deeper feature asks you to look more closely at the
results you obtain in the problems and exercises and to reflect.
For instance, you might be asked to comment on results or
determine how things might be different if one of the original
variables were to change.
We have included end-of-chapter material that is in a for-
mat similar to questions used in the CPA Professional Educa-
tion program. Task-Based Simulations after Chapters 5, 9, 12,
15, 17, and 23 combine material from the current chapter with
previous chapters and present it in a hands-on format. This
allows you to become familiar with the CPA PEP format while
getting a sense of how the various concepts fit together.
Currency and Accuracy
Significant Change As in past editions, we have endeavoured
to make this edition the most current and accurate available.
Where there has been a significant change in an accounting
standard or how it is applied, it has been highlighted with a Sig-
nificant Change word mark. Where change is on the horizon,
we have noted this at the end of each chapter in the Looking
Ahead section. We are also committed to issuing brief update
supplements on WileyPLUSwhen new standards are issued.
The following list outlines the revisions and improve-
ments made to the chapters in Volume 1.
Chapter 2 Conceptual Framework Underlying
Financial Reporting
• We have introduced a three-step method to help learn-
ers ensure both fundamental characteristics of useful
information are present (relevance and representational
faithfulness).
• We have incorporated material from the new IFRS con-
ceptual framework as follows :
• updated discussions on conservatism and prudence

• new definitions of financial statement elements
• new material on unit of account
• the fact that recognition criteria no longer include a
probability criterion
• added discussion relating to the notions of existence
uncertainty and measurement uncertainty including
the introduction of outcome uncertainty
• new material on current values (including value in use)
• guidance on effective communication
• A brief overview of ongoing projects on materiality,
primary financial statements, and disclosures has been
added.
Chapter 3 Measurement
• The opening story focuses on big data and data analytics
in helping accountants to estimate fair values.
• The revised chapter now focuses solely on measurement
since this issue is becoming more prominent and is now
foundational knowledge.
• Material on preparation of financial statements and
the accounting information system has been moved to
a separate appendix (Appendix C). Because this mate-
rial is extensively covered in introductory accounting
courses, students and instructors can choose how much
(or little) review of the basics is needed. Similarly, Chap-
ter 0 is available on WileyPLUS for additional review of
the basics in preparation for Intermediate Accounting
studies.
• We have added a section on disclosures relating to
measurement uncertainty as well as on the IASB post-
implementation review of IFRS 13. This material will
help you reflect upon measurement and how new stan-
dards are being applied.
Chapter 4 Reporting Financial Performance
• The chart relating to Other Comprehensive Income has
been updated, highlighting whether those items are to be
recycled or not.
• New examples relating to discontinued operations and
quality of earnings have been added. Material on quality
of earnings helps develop deeper understanding of how
financial statements provide useful information.
• Updated examples and financial statement disclosures
have been added.
Chapter 5 Financial Position and Cash Flows
• Chapter 5 now includes an example of the direct method
of preparing the statement of cash flows. In addition,
the end-of-chapter material now includes problems that
compare and contrast the direct and indirect methods of
preparing the statement of cash flows.
• Appendix SA includes several additional ratios, such as
"gross profit margin" and "free cash flow to operating
cash flow".
PREFACE xi
Chapter 6 Revenue Recognition
• Chapter 6 has been streamlined and reorganized since
IFRS 15 became effective January 1, 2018, and there has
been more exposure to the standard.
• The detailed discussion of upfront fees, warranties, vol-
ume discounts, and returns has been relocated to earlier
in the chapter (within the five-step discussion) to enhance
the flow.
• Comments about ASPE have been incorporated within
the five-step method, thus integrating the discussion and
helping users to reflect upon differences.
• IFRS/ ASPE differences for volume discounts and sales
returns have been included in greater specificity. These
side-by-side examples help develop critical thinking.
• Additional discussion, illustrations, and/or examples
have been added relating to material rights (loyalty
points, initiation fees, and gift cards), warranties, series
of goods that are substantially the same, royalties, licens-
ing, fulfillment costs, zero profit method (new learning
objective), onerous contracts (new learning objective),
and different types of long-term contracts. There are
now over 40 examples in the chapter (including the
appendix) due to the complexity of the material. Since
accounting for revenues is foundational, the examples
are very important to ensure deeper understanding of
the material.
• Commentary on the use of the gross and net methods of
accounting for discounts has been added.
Chapter 7 Cash and Receivables
• To reflect a new emphasis under IFRS, for sales returns
we discuss use of the Refund Liability account, while
retaining the discussion of the use of an allowance
account under ASPE.
• A data analytics example has been included that discusses
the use of "predictive analytics" by some companies to
assess the collectibility of their accounts receivable.
• Similar to other chapters, we separate out examples from
illustrations. The impact of this change was more signif-
icant for this chapter because it has 17 examples in the
main chapter and one in the appendix.
Chapter 8 Inventory
• Content has been reworked to more closely align with
Chapter 6 (from the purchasing side of the transaction) by:
• making terminology more consistent between chapters
(e.g., repurchase agreements, volume rebates) and
• removing duplication (relating to sales returns and
delayed payments).
• Chapter material has been simplified by:
• removing material on purchase/cash discounts since
they are covered in introductory accounting courses;
• streamlining discussion of the retail method, removing
non-GAAP alternatives (the conventional method);
xii PREFACE
• reducing key terms where necessary and adding a few
new ones dealing with biological assets; and
• streamlining learning objectives and headings.
• Examples and financial statement disclosures have been
updated and refreshed.
• The opening story features the use of new technologies in
collecting large amounts of data to assist with inventory
count procedures and subsequent analyses.
Chapter 9 Investments
• Chapter 9 has been reorganized and simplified. We have:
• restructured the main headings to coincide with learn-
ing objectives;
standardized journal entries (sale, dividend income,
revaluations);
• moved the summary of methods to the end of the chap-
ter; and
• removed references to IAS 39, since IFRS 9 is now fully
in effect.
• The recording of premium/discounts on bonds under the
FV-NI model is no longer identified as an IFRS/ASPE
difference in the chapter. Examples reflect recording of
premium/discount amortization separately in journal
entries since, under IFRS, companies may capture the infor-
mation in this manner (similar to the ASPE treatment).
• We have added some commentary on why the standards
are different to help learners with critical thinking and
reflection.
Chapter 10 Property, Plant, and Equipment:
Accounting Model Basics
• A more detailed discussion of the full cost and successful
efforts methods of accounting for natural resource prop-
erties is now included.
• The revaluation method described in Appendix lOB (the
proportionate method) was reworked and includes an
additional column to better illustrate how the amounts in
the journal entries are calculated.
• We updated the Looking Ahead section for recent and
upcoming changes relating to IAS 16 for property, plant,
and equipment and IFRS 6 (on mineral resources).
Chapter 11 Depreciation, Impairment,
and Disposition
• The Looking Ahead section was updated to discuss some
changes being considered in relation to goodwill impair-
ment and a related Discussion Paper/Exposure Draft being
considered by the IASB.
• A data analytics example has been added examining how
companies use predictive analytics to track baseline asset
performance, machinery failure, the impact of things
like weather conditions on assets that are exposed to the
elements, and other items to help assess the maintenance
and impairment requirements.
Chapter 12 Intangible Assets and Goodwill
• The Looking Ahead section was updated to discuss some
changes being considered in relation to goodwill impairment
and a related Discussion Paper/Exposure Draft being con-
sidered by the IASB.
• A data analytics example has been included that discusses
the use of "Big Data" by bricks and mortar and online
retailers to enhance their customers' shopping experience.
The discussion of the most valuable brands in Canada,
and the world, was updated to reflect the rise in high tech-
nology firms internationally.
Appendix C The Accounting Information System
• The prior Chapter 3 (from the eleventh edition) has been
split into two parts for ease of use and flexibility.
• The overview and review of accounting transactions,
journal entries, and other aspects of the accounting cycle
has been moved to Appendix C (after Chapter 12) for
instructors who prefer to have this as a review and ref-
erence tool for students (rather than something that they
will teach in class).
• For instructors who prefer to have an in-class review of
the accounting information system material, they can
still do so because the chapter material (including the
10-column work sheet approach to assist with financial
statement presentation) is retained in the self-contained
Appendix. Extensive exercise and problem material has
also been retained as part of Appendix C.
Other Special Student Supplements by Wiley
The Intermediate Accounting Simulation Practice
Set by Fred Pries will help students see how the individ-
ual topics they study in intermediate accounting are related
to the accounting systems of an organization and to the
financial statements as a whole. Students play the role of
a newly hired accountant for Woodlawn Engineering, an
owner-managed company, and prepare a full set of financial
statements starting from an unadjusted trial balance. Each
module of the simulation is linked to a particular topic
covered in the intermediate accounting course and intro-
duces new information. Students analyze this information,
recommend what adjustments are needed to the books and
financial statements of the company, and write reports to
the chief financial officer explaining the basis for their rec-
ommendations.
Canadian Financial Accounting Cases by Camillo Lento
and Jo-Anne Ryan provides additional cases at the interme-
diate level that may be used either for assignment purposes or
for in-class discussion. The cases are keyed to various topics
covered by the two volumes of Intermediate Accounting and
have been developed using IFRS and ASPE.
 PREFACE xiii

Acknowledgements
We thank the users of our eleventh edition, including the many in- We are grateful to the following reviewers for their valuable in-
structors, faculty, and students who contributed to this revision sights and feedback :
through their comments and instructive criticism.
Appreciation is also extended to colleagues at the University of Peter Alpaugh George Brown College
Toronto and the Lazaridis School of Business and Economics, Wilfrid Darrin Jay Ambrose University of Calgary
Laurier University, who provided input, suggestions, and support, es- Robert Bruce Capilano University/ University of British
pecially Peter Thomas and Allan Foerster, for their professionalism Columbia
and wisdom. A special thanks to Nicola Young, who devoted her time Megan Costiuk University of Regina
and significant energies to reviewing much of the material. Kevin deWolde University of Fraser Valley
It takes many people and coordinated efforts to get an edition Robert Ducharme University of Waterloo
off the ground. Many thanks to the team at John Wiley & Sons, who Catherine Duffy Humber College
are superb: Emily Marcoux, Senior Editor; Daleara Hirjikaka, Product Kathy Falk University of Toronto
Designer; Karen Staudinger, Product Design Manager, who has been Camillo Lento Lakehead University
an integral part of the last seven editions; Rachel Conrad, Production Marie Madill-Payne George Brown College
Editor; Deanna Durnford, Supplements Coordinator; and Anita Cameron Morrill University of Manitoba
Osborne, Senior Marketing Manager. Their enthusiasm and support have Flora Niu Wilfrid Laurier University
been invaluable. The editorial contributions of Laurel Hyatt, Zofia Lau- Jeffrey O'Leary McMaster University
bitz, Denise Showers, and Belle Wong are also very much appreciated. Laura Simeoni York University
Because this was our first time doing Solution Lightboard
We are particularly grateful to Cecile Laurin and Maria Belanger for
Videos, we especially thank Paul Chen, Lisa Holloway, Eric Hurst,
all their help with the end-of-chapter material and solutions. Thanks also
and Caitlyn Flowers, who helped and guided us during a very busy
go to Laura Cumming, Ilene Gilborn, Chris Leduc, Debra Lee-Hue, Ross
and productive three days of studio recording time. Megan Garvin
Meacher, Marisa Morriello, Joel Shapiro, and Marie Sinnott, who contrib-
was very helpful in terms of setting up the slides and formatting as
uted so much to the related supplements and the accuracy of the course.
well as keeping us on track.
We thank CPA Canada and the IFRS Foundation for allowing us
We appreciate the suggestions offered by the following partici-
to quote from their materials.
pants who attended our focus groups:
We appreciate the opportunity to reach out to so many colleagues
and students through this course. Your conversations and input have
Megan Costiuk University of Regina
greatly helped shape the content and made it all it can be. We are
Catherine Duffy Humber College
thankful to be part of a group of such dedicated educators! Let's keep
Joseph Faello Mississippi State University - Meridian
the conversation going.
Arsineh Garabedian Simon Fraser University /Douglas College
Suggestions and comments are always appreciated. We have
WenxiaGe University of Manitoba
striven to produce error-free content, but if anything has slipped
Irene Herremans Simon Fraser University
through the variety of checks undertaken, please let us know so that
Karel Hrazdil Simon Fraser University
corrections can be made to subsequent printings.
Sandra Iacobelli York University
Camillo Lento Lakehead University IRENE M. WIECEK
Sarah Magdalinski Northern Alberta Institute of Toronto, Ontario
Technology wiecek@rotman.utoronto.ca
Ana Marques Nova School of Business and Economics
Deborah Mortimer University of Winnipeg BRUCE McCONOMY
Elizabeth Peltier Concordia University Waterloo, Ontario
Wendy Schultz University of Manitoba bmcconomy@wlu.ca
Wendy Wilson Northern Alberta Institute of Technology October 2018
Brief Contents
VOLUME ONE VOLUME TWO

PREFAC E vi 13 Non-Financial and Current Liabilities 13-1

1 The Canadian Financial Reporting 14 Long-Te rm Financial Liabilities 14-1

Environment 1-1
15 Shareholders' Equity 15-1
2 Conceptual Framework Underlying
16 Complex Financial Instruments 16-1
Financial Reporting 2-1
17 Earnings Per Share 11-1
3 Measurement 3-1
18 Income Taxes 18-1
4 Reporting Financial Performance 4-1
19 Pensions and Ot her Post-Employment
5 Financial Position and Cash Flows 5-1
Benefits 19-1
6 Revenue Recognition 6-1
20 Leases 20-1
7 Cash and Receivables 7-1
21 Accounting Changes and Error
8 Inventory 8-1 Analysis 21-1

9 Investments 9-1 22 Statement of Cash Flows 22-1

10 Property, Plant, and Equipment: Accounting 23 Other Measurement and Disclosure

Model Basics 10-1 Issues 23-1

11 Depreciation, Impairment, and APPENDIX A Time Value of Money Tables

Disposition 11-1
APPEND I X s Specimen Financial Statements
12 Intangible Assets and Goodw ill 12-1
A PPEND I X c The Accounting Information
APPE ND IX A Time Value of Money Tables AP-1 System (Online content only)

APPE N DI X B Specimen Financial APPEN DI X o CPA Competency Map Coverage

Statements AP-6
A PPENDIX E A Summary of the Case Primer
APPE N DIX C The Accounting Information
GLOSSARY
System AP-27
COMPA NY INDEX
APPENDIX D CPA Competency Map
Coverage AP-76 SUBJECT INDEX

APPENDIX E A Summary of the Case Primer AP-79

GLOSSARY G-1

COMPANY INDEX 1-1

SUBJECT INDEX 1-2

xiv

1 The Canadian Financial Reporting
Environment 1-1
Financial Statements and Financial Reporting 1-3
Accounting and Capital Allocation 1-4
Stakeholders 1-5
Objective of Financial Reporting 1-7
Information Asymmetry 1-9
Standard Setting 1-12
Need for Standards 1-12
Parties Involved in Standard Setting 1-12
Generally Accepted Accounting Principles 1-17
GAAP Hierarchy 1-17
Professional Judgement 1-19
Challenges and Opportunities for the Accounting
Profession 1-19
Oversight in the Capital Marketplace 1-19
Centrality of Ethics 1-20
Standard Setting in a Political Environment 1-21
Principles versus Rules 1-22
Impact ofTechnology 1-23
Integrated Reporting 1-24
Conclusion 1-25
2 Conceptual Framework Underlying
Financial Reporting 2-1
Conceptual Framework 2-3
Rationale for a Conceptual Framework 2-3
Development of the Conceptual Framework 2-3
Information Asymmetry Revisited 2-5
Objective of Financial Reporting 2-5
Qualitative Characteristics of Useful Information
Fundamental Qualitative Characteristics 2-6
Enhancing Qualitative Characteristics 2-10
Trade-Offs 2-11
Elements of Financial Statements 2-12
Assets 2-12
Liabilities 2-13
Equity 2-15
Revenues/Income 2-15
Expenses 2-15
Gains/Losses 2-15
Foundational Principles 2-16
Recognition/ Derecognition 2-17
Measurement 2-23
Presentation and Disclosure 2-29
Contents
Financial Reporting Issues 2-31
Principles-Based Approach 2-32
Financial Engineering 2-32
Fraudulent Financial Reporting 2-33
IFRS/ASPE Comparison 2-34
Looking Ahead 2-34
3 Measurement 3-1
Measuring Financial Statement Elements 3-2
Valuation Techniques 3-3
Value in Use Measurements 3-7
Disclosures Relating to Measurement 3-9
Measuring Fair Value Using IFRS 13 3-9
Present Value Concepts 3-13
The Nature of Interest 3-13
Fundamental Variables in Present Value
Calculations 3-14
Different Ways to Perform the Calculations 3-16
Some Additional Calculations 3-25
IFRS/ASPE Comparison 3-27
A Comparison of IFRS and ASPE 3-28
Looking Ahead 3-28
4 Reporting Financial
Performance 4-1
Performance 4-3
Business Models and Industries 4-3
Communicating Information about Performance 4-7
Quality of Earnings/Information 4-7
Measurement of Income 4-12
2-6 Discontinued Operations 4-14
Component of an Enterprise 4-14
Assets Held for Sale 4-15
Measurement and Presentation 4-16
The Statement of Income and the Statement
of Comprehensive Income 4-20
Presentation 4-21
The Statement of Retained Earnings and the Statement
of Changes in Equity 4-32
Presentation of the Statement of Retained Earnings 4-32
Presentation of the Statement of Changes in Equity 4-34
Disclosure and Analysis 4-35
Disclosure 4-35
Analysis 4-35
Non-GAAP Measu res 4-36
xv
xvi CONTENTS

Other Key Measures 4-37 Usefulness of the Statement of Cash Flows 5-34
IFRS/ASPE Comparison 4-38 Financial Liquidity 5-35
A Comparison of IFRS and ASPE 4-38 Financial Flexibility 5-35
Looking Ahead 4-39 Perspectives 5-35
Appendix 4A: Application of the Cash and Accrual Bases IFRS/ASPE Comparison 5-37
of Accounting 4-39 A Comparison of IFRS and ASPE 5-37
Differences Between Cash and Accrual Bases 4-39 Looking Ahead 5-38
Conversion from Cash Basis to Accrual Basis 4-41 Appendix SA: Ratio Analysis: A Reference 5-39
Theoretical Weaknesses of the Cash Basis 4-44 Business Risks 5-39
Financial Ratios 5-40

5 Financial Position and Cash

Flows 5-1 6 Revenue Recognition 6-1

Usefulness of the Statements of Financial Position
and Cash Flows from a Business Perspective 5-3
Analyzing a Statement of Financial Position 5-4
Assessing Earnings Quality 5-4
Assessing the Creditworthiness of Companies 5-4
Usefulness and Limitations of the Statement
of Financial Position 5-4
Usefulness 5-5
Limitations 5-6
Classification in the Statement of Financial Position
Monetary versus Non monetary Assets
and Liabilities 5-7
Financial Instruments 5-8
Elements of the Statement of Financial Position 5-8
Preparation of the Classified Statement of Financial
Position (Balance Sheet) 5-10
Current Assets 5-10
Non-current Investments 5-15
Property, Plant, and Equipment 5-15
Intangible Assets and Goodwill 5-17
Other Assets 5-17
Current Liabilities 5-18
Long-Term Debt and Liabilities 5-18
Owners' Equity 5-20
Statement of Financial Position Format 5-21
Other Required Disclosures 5-22
Contingencies and Provisions 5-22
Accounting Policies 5-23
Contractual Situations 5-23
Additional Detail 5-24
Subsequent Events 5-24
Techniques of Disclosure 5-24
Parenthetical Explanations 5-24
Notes 5-25
Cross-References and Contra Items 5-25
Supporting Schedules 5-26
Terminology 5-26
Purpose, Content, and Format of a Statement
of Cash Flows 5-26
Preparation of the Statement of Cash Flows 5-29
Understanding the Nature of Sales Transactions
from a Business Perspective 6-4
Economics of Sales Transactions 6-4
Legalities of Sales Transactions 6-9
Information for Decision -Making 6-10
The Asset-Liability Approach to Revenue Recognition:
An Overview of the Five-Step Process 6-10
Identifying the Contract with Customers-Step 1 6-13
Basic Accounting 6-14
5-7 Contract Modifications 6-15
Identifying Separate Performance Obligations-Step 2 6-16
Material Rights 6-17
Warranties 6-18
Upfront Fees 6-19
Series of Goods and Services That Are Substantially the
Same 6-20
Determining the Transaction Price-Step 3 6-21
Variable Consideration 6-21
Time Value of Money 6-25
Non-cash Consideration 6-27
Consideration Paid or Payable to Customers 6-27
Allocating the Transaction Price to Separate Performance
Obligations-Step 4 6-28
Recognizing Revenue When (or As) Each Performance
Obligation Is Satisfied-Step 5 6-32
Earnings Approach to Revenue Recognition 6-35
Selling Goods 6-36
Selling Services 6-37
Measurability and Collectibility 6-38
Other Revenue Recognition Issues 6-38
Repurchase Agreements 6-38
Bill-and -Hold Arrangements 6-39
Principal-Agent Relationships 6-39
Consignments 6-40
Summary of Other Revenue Recognition Issues 6-42
Presentation and Disclosure 6-42
Presentation 6-42
Disclosure 6-45
IFRS/ASPE Comparison 6-47
A Comparison of IFRS and ASPE 6-47

Looking Ahead 6-48
Appendix GA: Long-Term Contracts 6-49
Percentage-of-Completion Method 6-49
Measuring the Progress Toward
Completion 6-50
Zero-Profit Method 6-55
Completed-Contract Method 6-56
Losses on Long-Term Contracts 6-57
Loss in Current Period on a Profitable Contract
Loss on an Unprofitable Contract 6-58
7 Cash and Receivables 1-1
Understanding Cash and Accounts Receivable 7-3
How Do Companies Manage and Control Cash? 7-4
What Types of Companies Have Extensive Accounts
Receivable? 7-4
What Are the Types of Accounts Receivable? 7-4
How Do Companies Manage Accounts Receivable? 7-5
Cash 7-6
What Is Cash? 7-6
Reporting Cash 7-7
Summary of Cash-Related Items 7-9
Receivables 7-9
Recognition and Measurement of Accounts
Receivable 7-11
Trade Discounts 7-12
Cash Discounts (Sales Discounts) 7-12
Sales Returns and Allowances 7-12
Nonrecognition of Interest Element 7-13
Measurement of Accounts Receivable
after Acquisition 7-14
Impairment of Accounts Receivable 7-14
Estimating Uncollectible Trade
Accounts Receivable 7-14
Allowance Method 7-16
Effects on Accounts 7-18
Direct Write Off Method 7-20
Notes and Loans Receivable 7-20
Recognition and Measurement of Short-Term Notes
and Loans Receivable 7-21
Recognition and Measurement of Long-Term Notes
and Loans Receivable 7-22
Derecognition of Receivables 7-30
Secured Borrowings 7-31
Sales of Receivables 7-31
Securitized Receivables-Transparency 7-36
Presentation, Disclosure, and Analysis
of Receivables 7-37
Presentation and Disclosure 7-37
Analysis 7-39
IFRS/ASPE Comparison 7-40
A Comparison of IFRS and ASPE 7-40
CONTENTS xvii
Looking Ahead 7-41
Appendix 7A: Methods for Controlling Cash 7-42
Management and Control of Cash 7-42
Using Bank Accounts 7-42
The Imprest Petty Cash System 7-43
Physical Protection of Cash Balances 7-44
Reconciliation of Bank Balances 7-45
6-57
8 Inventory 8-1
Understanding Inventory 8-4
What Types of Companies Have Inventory? 8-4
Inventory Categories 8-4
Inventory Planning and Control 8-5
Information for Decision-Making 8-5
Recognition of Physical Goods Included in Inventory 8-7
Accounting Definition of Inventory 8-7
Goods Included in Inventory 8-8
Inventory Errors 8-13
Ending Inventory Misstated 8-14
Purchases and Inventory Misstated 8-15
Measurement of Inventory-Costs Included 8-16
Volume Rebates 8-17
Product Costs 8-18
Measurement and Inventory Accounting Systems 8-20
Perpetual System 8-21
Periodic System 8-21
Comparing Perpetual and Periodic Systems 8-22
Supplementary System-Quantities Only 8-23
Measurement and Cost Formulas 8-23
Specific Identification 8-24
Weighted Average Cost 8-26
First-In, First-Out {FIFO) 8-27
Choice of Cost Formula 8-29
Last-In, First-Out {LIFO) 8-29
Measurement and the Lower of Cost and Net Realizable
Value {LC&NRV) Principle 8-30
What Is Net Realizable Value? 8-31
Application of the LC&NRV Principle 8-31
Evaluation of the LC&NRV Principle 8-35
Exceptions to Lower of Cost and Net Realizable
Value 8-35
Inventories Measured at Net Realizable Value 8-35
Inventories Measured at Fair Value Less
Costs to Sell 8-36
Measuring Inventory Using Estimates 8-40
The Need for Estimates 8-40
Gross Profit Method 8-41
Presentation, Disclosure, and Analysis 8-43
Presentation and Disclosure of Inventories 8-43
Analysis 8-44
IFRS/ASPE Comparison 8-45
A Comparison of IFRS and ASPE 8-45
xviii CONTENTS
Looking Ahead 8-47
Appendix BA: The Retail Inventory Method of Estimating
Inventory Cost 8-47
Retail Method Terminology 8-48
Special Items 8-50
Evaluation of Retail Inventory Method 8-51
Appendix BB: Accounting Guidance for Specific
Inventory 8-51
9 Investments 9-1
Understanding Investments 9-3
Types of Investments 9-3
Types of Companies That Have Investments 9-5
Information for Decision-Making 9-7
Measurement: Overview 9-7
Measurement-Cost/Amortized Cost Model 9-9
Investments in Shares of Other Entities 9-9
Investments in Debt Instruments
of Other Entities 9-11
Measurement-Fair Value Through Net
Income (FV-NI) Model 9-15
Measurement-Fair Value Through Other Comprehensive
Income (FV-OCI) Model 9-20
Investments in Shares of Other Entities 9-21
Investments in Debt Instruments
of Other Entities 9-23
Measurement-Impairment Models 9-26
Incurred Loss Impairment Model 9-26
Expected Loss Impairment Model 9-27
Fair Value Loss Impairment Model 9-31
Summary of Impairment Models 9-31
Strategic Investments-Investments in Associates 9-32
Significant Influence 9-32
Equity Method 9-33
Summary of Accounting Standards for Associates 9-37
Strategic Investments-Investments
in Subsidiaries 9-38
Presentation, Disclosure, and Analysis 9-39
Presentation and Disclosure 9-40
Analysis 9-44
IFRS/ASPE Comparison 9-44
A Comparison of IFRS and ASPE 9-45
Looking Ahead 9-48
10 Property, Plant, and Equipment:
Accounting Model Basics 10-1
Definition and Recognition of Property, Plant,
and Equipment 10-4
Property, Plant, and Equipment-Business
Perspective 10-4
Property, Plant, and Equipment-Characteristics
Cost Elements 10-6
Self-Constructed Assets 10-7
Borrowing Costs 10-8
Dismantling and Restoration Costs 10-9
Measurement of Cost for Non monetary Exchange 10-10
Cash Discounts Not Taken 10-10
Deferred Payment Terms 10-11
Lump-Sum Purchases 10-12
Nonmonetary Exchanges 10-13
Contributed Assets and Government Grants 10-18
Measurement of Costs Associated
with Specific Assets 10-19
Land 10-20
Buildings 10-20
Leasehold Improvements 10-20
Equipment 10-21
Investment Property 10-21
Natural Resource Properties 10-21
Biological Assets 10-22
Measurement after Acquisition 10-23
Cost and Revaluation Models 10-23
Fair Value Model 10-27
Costs Incurred after Acquisition 10-29
Additions 10-30
Replacements, Major Overhauls, and Inspections 10-30
Rearrangement and Reinstallation 10-33
Repairs 10-33
IFRS/ASPE Comparison 10-34
A Comparison of IFRS and ASPE 10-34
Looking Ahead 10-36
Appendix lOA: Capitalization of Borrowing Costs 10-37
Qualifying Assets 10-37
Capitalization Period 10-38
Avoidable Borrowing Costs 10-38
Disclosures 10-42
Appendix lOB: Revaluation: The Proportionate
Method 10-42
11 Depreciation, Impairment,
and Disposition 11-1
The Importance of Depreciation, Impairment,
and Disposition from a Business Perspective 11-3
Depreciation 11-4
Factors Considered in the Depreciation Process 11-5
Depreciation-Methods of Allocation and
Calculation 11-7
Straight-Line Method 11-9
Diminishing Balance Method 11-10
Activity Methods 11-11
Other Methods 11-12
Depletion of Mineral Resources 11-13
10-4 Pattern of Depletion 11-13
 CONTENTS xix

Estimating Recoverable Reserves 11-14 Derecognition 12-24

Liquidating Dividends 11-15
Other Depreciation Issues 11-16
Depreciation and Partial Periods 11-16
Revision of Depreciation Rates 11-18
Impairment 11-19
Indicators of Impairment 11-20
Impairment-Recognition
and Measurement Models 11-21
Asset Groups and Cash-Generating Units 11-25
Held for Sale and Derecognition 11-27
Long-Lived Assets to Be Disposed of by Sale 11-27
Derecognition 11-28
Presentation, Disclosure, and Analysis 11-30
Presentation and Disclosure 11-30
Analysis 11-32
IFRS/ASPE Comparison 11-35
A Comparison of IFRS and ASPE 11-35
Looking Ahead 11-36
Appendix llA: Depreciation and Income Tax 11-37
Capital Cost Allowance Method 11-37
12 Intangible Assets and Goodwill
The Business Importance and Characteristics
of Goodwill and Intangible Assets 12-3
Characteristics of Goodwill 12-4
Characteristics of Intangible Assets 12-5
Recognition and Measurement of Intangible Assets
at Acquisition 12-6
Purchased Intangibles 12-6
Intangibles Purchased in a Business Combination 12-7
Prepayments 12-7
Recognition and Measurement of Internally
Developed Intangible Assets 12-9
Identifying Research and Development
Phase Activities 12-9
Accounting for Research Phase Costs 12-10
Accounting for Development Phase Costs 12-10
Costs Included and Excluded 12-11
Recognition and Measurement of Intangible Assets
after Acquisition 12-12
Limited-Life Intangibles 12-14
Indefinite-Life Intangibles 12-15
Specific Intangibles 12-16
Marketing-Related Intangible Assets 12-16
Customer-Related Intangible Assets 12-17
Artistic-Related Intangible Assets 12-18
Contract-Based Intangible Assets 12-18
Technology-Based Intangible Assets 12-19
Goodwill-Recognition and Measurement 12-24
Internally Generated Goodwill 12-24
Purchased Goodwill 12-24
Bargain Purchase 12-26
Valuation after Acquisition 12-27
Goodwill-Impairment 12-27
Presentation, Disclosure, and Analysis 12-30
Presentation and Disclosure 12-30
Analysis 12-34
IFRS/ASPE Comparison 12-35
A Comparison of IFRS and ASPE 12-35
Looking Ahead 12-37
Appendix 12A: Valuing Goodwill 12-37
Excess-Earnings Approach 12-37
Total-Earnings Approach 12-41
Other Valuation Methods 12-42
APPENDIX A TimeValueofMoneyTables AP-1
APPENDIX B Specimen Financial Statements AP-6
APPENDIX c The Accounting Information System AP-27
Accounting System Overview AP-28
12-1 Basic Terminology and Double-Entry Rules AP-28
Accounting Equation AP-30
The Accounting Cycle and the Recording Process AP-31
Identifying and Recording Transactions
and Other Events AP-31
Journalizing AP-31
Posting AP-33
Preparing the Trial Balance AP-34
Adjusting Entries AP-34
Adjusting Entries for Prepayments AP-36
Alternative Method for Adjusting Prepayments AP-39
Adjusting Entries for Accruals AP-40
Adjusting Entries for Estimated Items AP-43
Unrealized Holding Gains or Losses
(FV-NI and FV-OCI) AP-44
Financial Statements and Ownership Structure AP-45
The Closing Process AP-46
Preparing Closing Entries AP-47
Reversing Entries AP-48
Using a Work Sheet AP-50
Work Sheet Columns AP-51
Completing the Work Sheet AP-51
Preparing Financial Statements from a Work Sheet AP-53
AP PEN DIX D CPA Competency Map Coverage AP-76
APPENDIX E A Summary of the Case Primer AP-79
GLOSSARY G-1

Impairment and Derecognition 12-21

COMPANY INDEX 1-1
Impairment of Limited-Life Intangibles 12-21
Impairment of Indefinite-Life Intangibles 12-23 SUBJECT INDEX 1-2
 CHAPTER 1
The Canadian
Financial Reporting
Environment + -
~
%'
.§
£
Capitalizing on Financial Reporting ~
·;::
g,
Every business-from the lawn-mowing service you may have operated 3
in high school to a multinational corporation-needs capital to survive.
You may have borrowed money from your parents to buy a weed trimmer, while the corpora-
tion issued millions of shares to raise capital from the public. But what about new businesses
or those trying to branch into emerging markets? How do they get money to grow?
Large public corporations generally issue shares on a large stock exchange such as the
Toronto Stock Exchange. But the fees, reporting requirements, and other regulations could
be a barrier to smaller companies. To offer a less expensive and less stringent alternative, the
Canadian Securities Exchange (CSE) was launched in 2004. "We seek to facilitate the lowest
cost of public capital for these companies, principally by providing a very streamlined listings
process, and then once the company is listed to provide cost certainty in the form of fixed
fees, regardless of how active the company is in secondary financings, changing its business,
making acquisitions and other activities,'' said the CEO of CSE, Richard Carleton. In 2017, the
value of shares traded among the CSE's 300 listed companies was $7.8 billion-more than four
times the value of the previous year.
In 2017, companies related to cannabis accounted for eight of the top 10 firms in terms
of overall value traded. Fifty-six of the CSE's 300 issuers were cannabis-related and made up
nearly two-thirds of the total market capitalization-the value of all shares traded. The other
two top 10 companies by trading value were firms in the financial technology industry spe-
cializing in blockchain, a way of verifying transactions in cryptocurrencies such as bitcoin.
The cannabis and financial technology industries were both undergoing rapid growth
in 2017, and the value of their trading reflected that. They were boosted by the expectation
of Canada legalizing recreational marijuana in mid-2018 and by the exploding popularity of
cryptocurrencies.
Companies trading on the CSE work in other emerging fields. One example is Global
UAVTechnologies, which manufactures drones, or unmanned aerial vehicles (UAVs), that do
land surveying for mining, construction, engineering, and agricultural firms. The Vancouver-
based company used to be called Alta Vista Ventures Ltd. and owned mining properties in
Mexico. In fiscal 2015, a market downturn and lack of activity at the properties caused the
company to write down its land value to zero. In mid-2017, it changed its name to Global UAV
and moved into aerial surveying by acquiring existing UAV technology companies. Global
UAV earned nearly $600,000 in net income on sales of more than $1 million for its year ended
October 31, 2017.
What does raising capital have to do with financial reporting? No matter how big the
company, no matter how it raises money, it needs to present its financial information to

1-1
1-2 CHAPTER 1 The Canadian Financial Reporting Environment

potential investors and other stakeholders accurately and consistently with financial reporting
standards-using a common "language" that investors understand.

Sources: John Harrington, "Global UAV Technologies: Pure Play Drone Sector Exposure with Earnings Just Starting
to Take Off," Public Entrepreneur (Canadian Securities Exchange), April 4, 2018; Hamish Khamisa, "Interview with
Canadian Securities Exchange CEO Richard Carleton: Year-End Review 2017," CSE website, January 5, 2018; Armina
Ligaya, The Canadian Press, "Canadian Securities Exchange Trades Record $7.81 Billion in 2017, Thanks to Pot, Block-
chain Buzz," The Financial Post, January 4, 2018; Canadian Securities Exchange corporate website, http://thecse.com;
Global UAVTechnologies 2017 annual report; Global UAVTechnologies corporate website, www.globaluavtech.com.

LEARNING OBJECTIVES CHAPTER OUTLINE CPA COMPETENCIES

After studying this chapter, you The chapter headings related Competencies addressed by each
should be able to: to the learning objective are: learning objective are as follows:

1. Understand the financial Financial Statements and Financial 1.1.1, 1.1.2, 1.2.1, 5.2.3
reporting environment. Reporting

• Accounting and capital allocation

• Stakeholders
• Objective of financial reporting
• Information asymmetry

2. Explain the need for accounting Standard Setting 1.1.1, 1.1.2

standards and identify the major
• Need for standards
entities that influence standard
setting and financial reporting. • Parties involved in standard setting

3. Explain the meaning of generally Generally Accepted Accounting 1.1.1, 1.1.2, 1.2.1
accepted accounting principles Principles
(GAAP) and the significance
• GAAP hierarchy
of professional judgement in
applying GAAP. • Professional judgement

4. Discuss some of the challenges Challenges and Opportunities for 1.1.1, 1.1.2, 1.1.4, 1.2.1, 1.3.1
and opportunities for accounting. the Accounting Profession

• Oversight in the capital marketplace

• Centrality of ethics
• Standard setting in a political
environment
• Principles versus rules
• lmpactoftechnology
• Integrated reporting
• Conclusion

Preview of Chapter 1
North American financial reporting systems are among the best in the world. Our commitment to
keeping our financial reporting systems strong is as intense as ever, because in this changing busi-
ness world, information must be relevant and reliable for our capital markets to work efficiently.
 Financial Statements and Financial Reporting 1-3

This chapter explains the environment of financial reporting and the many factors that affect it.
It provides the theory and concepts underpinning the topics covered in the rest of the chapters,
giving you the foundation to exercise professional judgement in the many issues that require it.

Financial Statements and Financial Reporting

LEARNING OBJECTIVE 1
Understand the financial reporting environment.

Like other human activities and disciplines, accounting is largely a product of its environ-
ment. This environment includes conditions, constraints, and influences that are social, eco-
nomic, political, and legal-all of which change over time. As a result, accounting theory and
practices have always evolved and need to continue to evolve in order to remain relevant.
Over the past decade or two, the accounting landscape has changed dramatically, being
shaped by many things-some good and some not so good. These include:

• spectacular business failures, including WorldCom Inc., Enron, and Arthur Andersen;
• capital market failures, including the subprime lending crisis and bank failures;
• near bankruptcies of several countries;
• globalization of capital and other markets;
• globalization of financial reporting standards;
• increasing use of more sophisticated technology; and
• increasing access to information. 1

All of these factors, as well as many others, provide accountants with great challenges but also
great opportunities!
Accounting is defined best by describing its three essential characteristics. Accounting is
(1) the identification, measurement, and communication of financial information (2) about
economic entities (3) to interested persons.
Financial accounting (financial reporting) is the process that culminates in the prepa-
ration of financial reports that cover all of the enterprise's business activities and that are used by Alternative
both internal and external parties. Users of these financial reports include investors, creditors, Terminology 1.1
and others. In contrast, managerial accounting is the process of identifying, measuring,
These financial statements
analyzing, and communicating financial information to internal decision-makers. This in-
are also sometimes called:
formation may take varied forms, such as cost-benefit analyses and forecasts that management
uses to plan, evaluate, and control an organization's operations. This textbook focuses on financial 1. balance sheet,
accounting, while managerial accounting is covered in other courses. 2. income statement,
Financial statements are the principal way of communicating financial information and
to those who are outside an enterprise. These statements give the firm's history, quantified in 3. cash flow statement.
terms of money. The most frequently provided financial statements are the:
Under Accounting
1. statement of financial position, Standards for Private
Enterprises, a statement
2. statement of income/comprehensive income, of retained earnings is
3. statement of cash flows, and generally prepared instead
4. statement of changes in equity. of a statement of changes
in equity.
See Alternative Terminology 1.1.

'Ju lia Christensen Hughes and Joy Mighty, in their book entitled Taking Stock (Queen's School of Policy Studies,
Kingston , 2010), refer to this as the ubiquity of information, meaning that information is now more freely, openly,
and readily available. In the book, Christensen Hughes and Mighty discuss the impact of this phenomenon on
education; however, it applies equally to the capital marketplace.
1-4 CH A PT ER 1 The Canadian Financial Reporting Environment

In addition, note disclosures are an important part of each financial statement. Some
financial information cannot be expressed in the financial statements or is better expressed
through other means. Examples include the president's letter and supplementary schedules
in the corporate annual report, prospectuses, reports filed with government agencies, news
releases, management forecasts, and descriptions of an enterprise's social or environmental
impact. Such information may be required by a pronouncement by an authority, or a regula-
tory rule 2 or custom, or because management wants to disclose it voluntarily. The main focus
of this textbook is the basic financial statements (including notes).

Accounting and Capital Allocation

Because resources are limited, people try to conserve them, use them effectively, and identify
and encourage those who can make efficient use of them. Through an efficient use of re-
sources, our standard of living increases.
l@i.fo.Igj 5.2.3 Markets, free enterprise, and competition determine whether a busi-
ness will succeed and thrive. The accounting profession has the important responsibility of
measuring company performance accurately and fairly on a timely basis. The information
provided by accounting enables investors and creditors to compare the income and assets of
companies and thus assess the relative risks and returns of different investment opportu-
nities. Based on their assessments, investors and creditors can then channel their resources
(that is, invest in these companies or lend them money) more effectively. illustration 1.1
shows the process of capital allocation.

ILLUSTRATION 1.1
$
Capital Allocation Process
capital marketplace-
debt and equity markets
Investors and
Companies
financial institutions

information
(including financial reporting)

In Canada, the primary exchange mechanisms for allocating resources are debt and eq-
uity markets,3 as well as financial institutions such as banks.4 The debt and equity market-
place includes both public stock markets/exchanges and private sources.
illustration 1.2 shows the sources of capital in Canada for various stages of company
growth.
Providing an effective system to facilitate capital allocation is critical to a
healthy economy. Efficient capital markets promote productivity, encourage innovation,

2
All public companies must disclose certain information under provincial securities law. This information is collected
by the provincial securities commissions under the Canadian umbrella organization, the Canadian Securities
Administrators (CSA), and is available electronically at www.sedar.com.
' The largest, most senior equity market in Canada is the Toronto Stock Exchange (TSX). The junior market-the
TSX Venture Exchange (TSXV, formerly called the CDNX Stock Market)- was created in 2001 to handle start-up
companies and the Canadian Securities Exchange (CSE), another junior market, was launched in 2004. The Montreal
Exchange (MX), known also as the Canadian Derivatives Exchange, is the main market for derivatives and futures
trading. In 2014, the TMX Group, which operates the TSX, launched a new market to help private companies raise
capital (called TSX Private Markets).
' According to Bloomberg in an article entitled "Big 5 Canadian Banks Now Big 3 as Assets Diverge" on July 7, 2014,
what were previously known as the "Big 5"-the Royal Bank of Canada, Toronto Dominion Bank, Bank of Nova
Scotia, Bank of Montreal, and Canadian Imperial Bank of Commerce-have now become the "Big 3" with the first
three listed being the largest.
 Financial Statements and Financial Reporting 1-5

ILLUSTRATION 1. 2 Sources of Capital

Financing Growth Companies

PROJECT OR IDEA RESEARCH AND COMMERCIAL STAGE STABLE PRODUCTION OPERATING HISTORY
DEVELOPMENT OR PROTOTYPE STAGE

STAGE OF COMPANY GROWTH

© TSX Inc., 2018. All rights reserved.

and provide a platform for buying and selling securities and obtaining and granting credit. 5
Unreliable and irrelevant information leads to poor capital allocation, which hurts the
securities markets and economic growth. The accounting numbers that companies report
affect the transfer of resources among companies and individuals. Consider the fact that
stock prices generally rise when positive news (including financial information) is unexpect-
edly released. In addition, credit rating agencies use accounting and other information to
rate companies' financial stability.6 This gives investors and creditors additional indepen-
dent information to use when making decisions. For companies, a good rating can mean
greater access to capital and at lower costs.

Stakeholders
Stakeholders are parties who have something at risk in the financial reporting environment,
such as their salary, job, investment, or reputation. Key stakeholders in the financial report-
ing environment include traditional users of financial information as well as others. In the
stakeholder context, users may be more broadly defined to include not only parties who are
relying directly on the financial information for resource allocation (such as investors and
creditors) but also others who help in the efficient allocation of resources (such as financial
analysts and regulators).
The broader definition of users includes anyone who prepares, relies on, reviews, au-
dits, or monitors financial information. It includes investors, creditors, analysts, manag-
ers, employees, customers, suppliers, industry groups, unions, government departments and
ministers, the public in general (such as consumer groups), regulatory agencies, other compa-
nies, and standard setters, as well as auditors, lawyers, and others. Illustration 1.3 shows the
relationships among these stakeholders.
Various stakeholders have specific functions in the financial reporting environment. Com-
pany management prepares the financial statements. It has the best insight into the business
and therefore knows what should be included in the financial statements. The statements
are then audited by auditors, who may discuss with management how economic events and
transactions have been communicated in the financial statements. The value that auditors add
to the statements lies in the auditors' independence. They act on behalf of the shareholders to
ensure that management is accounting properly for the economic transactions. The auditors
also review the information to ensure that it reflects sound accounting practices.

' AICPA Special Committee on Financial Reporting, "Improving Business Reporting: A Customer Focus," supplement
in Journal of Accountancy (October 1994).
6
For example, institutions such as Dom inion Bond Rating Service, Moody's Investor Services (Moody's), and Standard
& Poor's rate issuers of bonds and preferred shares in the Canadian and global marketplaces.
1-6 CH A PT ER 1 The Canadian Financial Reporting Environment

ILLUSTRATION 1.3
Selected Key Stakeholders Securities commissions and Analysts/Credit
stock exchanges/markets rating agencies
in the Financial Reporting
Environment
discuss issues review/monitor review/rate provide information

INVESTORS
FINANCIAL STATEMENTS
MANAGEMENT CREDITORS
RELATED DISCLOSURES
OTHERS
use to make decisions

discuss issues audit/review•

GAAP

Auditors

Standard setters

* Not all financial statements are required to be audited . In general, all companies whose shares or debt is publicly traded must have an
audit and therefore comply with generally accepted accounting principles (GAAP). Private companies may decide not to have an audit but
must have unanimous shareholder consent according to the Canada Business Corporations Act. For private companies, the decision to
have an audit or not may depend on whether the statements' users would find audited GAAP statements more useful.

l!IJ Investors and creditors rely on the financial statements to make decisions. It is up to
these parties to carefully examine the information given. Standard setters set generally accepted
accounting principles (GAAP). Securities commissions and stock exchanges monitor the
financial statements to ensure full and plain disclosure of material information and to determine
whether the companies may continue to list their shares on stock exchanges. Finally, the credit
rating agencies and analysts monitor and analyze the information produced by the company,
looking for signs of change; that is, an improved or weakened financial condition.
Illustration 1.4 identifies what is at stake for each stakeholder. This is not meant to be a
complete list. Rather, it identifies the major stakeholder groups.

ILLUSTRATION 1.4
What Is at Stake for Each Stakeholder What Is at Stake
Stakeholder
Investors/creditors Investment/ loan

Management Job, bonus, reputation, salary increase, access

to capital markets by company

Securities commissions and stock Rep utation, effective and efficie nt capital
exchanges marketplace

Analysts and credit rating age ncies Reputation, profits

Auditors Rep utation, profits (companies are their clients)

Standard setters Reputation

Others Various

As noted in Illustration 1.3, the system provides checks and balances to ensure that the
people with capital-the investors and creditors-have good information to use when decid-
ing where best to invest or allocate their capital. The system does not always work, however.
Because the system involves people, human behaviour is often a key unpredictable variable.
People often act in their own self-interest rather than in the best interest of the capital
marketplace, and by extension, the economy. See What Do the Numbers Mean? 1.1.
 Financial Statements and Financial Reporting 1-7

What Do the Numbers Mean? 1.1

Consider the much-publicized crisis that arose when large num-
bers of borrowers with lower-quality, "subprime" mortgages de-
fau lted, which was partly responsible for destabilizing the capital
markets and the economy, starting in 2007. What was this all about
and how did it trigger a global recession? Much has to do with in-
dividuals and entities acting in their own self-interest and a lack of
transparency or lack of understanding of the true risks involved.
Financial institutions regularly securitize pools of assets in
order to access the cash that is tied up in the assets. As a general
rule, the securitization involves selling the assets to a separate en-
tity, often for cash. The entity then sells units or shares in the pool
of assets to investors. The following are the steps in a normal secu-
ritization of mortgage assets:
1. Lender lends money to customers to buy homes.
2. Lender sells pool of mortgage assets from the above loans to a
separate entity (often referred to as a special purpose entity or
SPE).
3. SPE sells units or shares in the pool of mortgages to investors.
ljj.itd There is nothing inherently wrong with this struc-
ture and it can work very well for all parties as long as they under-
stand the risks involved. It is good for borrowers because it makes
funds more accessible. It is good for lenders because they are able
to get their cash out of the mortgage assets. It is good for SPEs
because they earn interest on the pool of assets. Finally, it is good
for investors because they earn a return on their investment. What
went wrong in the subprime lending situation, then?
First, the lenders or their designated mortgage brokers loaned
money aggressively, in the hopes of higher profits, to borrowers
who may not have been creditworthy.
Second, many of the loans were adj ustable-rate notes, which
meant that, initially, the interest rates were low-often below the
prime lending rate, which is where the term "subprime" comes
from. But afterward, the rates reset themselves according to the
loan agreement, often becoming significantly higher. Therefore,
even though the borrowers may have been able to afford the loan
payments initially, many could no longer afford them once the
interest rates became higher. The borrowers borrowed the funds
anyway because they wanted to buy houses, even though they
knew or should have known that they might not be able to keep
up with the loan payments in future.
Third, many investors in the SPE did not understand the
risks they were taking on by investing in this type of pool of assets,
which was systemically risky due to the creditworthiness of the
borrowers and the mortgages' interest rate reset feature.
Things began to unwind when the mortgages' interest rates
were set higher. This caused many borrowers to default on their
mortgages and lose their homes. These homes were repossessed
and flooded the market, driving house prices down. Many borrow-
ers found that the amounts of their mortgages were now higher
than the value of their homes and they walked away from their
debt, causing more homes to go on sale in an already depressed
market. The investors in the SPE suffered large losses due to the
defaulted loans. All this contributed to a depressed housing mar-
ket and economy.
From a financial reporting perspective, a few lessons were
learned:
1. Many capital market participants act in their own self-interest
to the potential harm of others.
2. The amount and nature of risk are not always properly com-
municated to investors.
3. Investors do not always understand what they are investing in.
Stakeholders in the capital marketplace continue to work
to ensure that this type of situation does not happen again. For
instance, the International Accounting Standards Board has de-
clared that it intends to make better communication in financial
reporting an underlying theme in its work over the next few years.

Objective of Financial Reporting

What is the objective of financial reporting? The objective of general-purpose finan-
cial statements is to provide financial information about the reporting entity that
is useful to present and potential equity investors, lenders, and other creditors in
making decisions in their capacity as capital providers.7 (This is referred to as the
decision-usefulness approach to financial reporting.) Information that is decision-useful
to capital providers may also be useful to other users of financial reporting who are not inves-
tors and creditors. Let's examine each of the elements of this objective.
11.t§.IQ As part of the objective of general-purpose financial reporting, an entity per-
spective is adopted. Using this perspective, companies are viewed as separate and distinct from
their owners (present shareholders). The assets of incorporated entities such as companies listed
on stock exchanges are viewed as assets of the company and not of a specific creditor or shareholder.
Investors and creditors have claims on a company's assets in the form of equity or liability claims.
The entity perspective is common today, because most companies that report their financial
information have substance distinct from their investors (both shareholders and creditors). Thus,

' IASB Conceptual Framework, Chapter l. Copyright © IFRS Foundation. All rights reserved. Reproduced with per-
mission. Reprinted/adapted with permission from the CPA Canada Handbook- Accounting © 2018, Part II, Section
1000.12, by Chartered Professional Accountants of Canada. All rights reserved by the copyright owner.
1-8 CHAPTER 1 The Canadian Financial Reporting Environment

the perspective that financial reporting should be focused only on the needs of shareholders-
often referred to as the proprietary perspective-is not considered appropriate.
As mentioned earlier, investors are interested in assessing (1) the company's ability to
generate net cash inflows and (2) management's ability to protect and enhance the capital pro-
viders' investments. Financial reporting should therefore help investors assess the amounts,
timing, and uncertainty of prospective cash inflows from dividends or interest, and the pro-
ceeds from the sale, redemption, or maturity of securities or loans. In order for investors to
make these assessments, they must understand an enterprise's economic resources, the claims
to those resources, and the changes in them. Financial statements and related explanations
should be a primary source for determining this information.
The emphasis on "assessing cash flow prospects" does not mean that the cash basis is pre-
ferred over the accrual basis of accounting. Information based on accrual accounting generally
better indicates a company's present and future ability to generate favourable cash flows than
does information limited to the financial effects of cash receipts and payments. Recall from your
first accounting course the objective of accrual-basis accounting. It ensures that a company re-
cords events that change its financial statements in the periods in which the events occur, rather
than only in the periods in which it receives or pays cash. Using the accrual basis to determine net
income means that a company recognizes revenues when it provides the goods or services rather
than when it receives cash. Similarly, it recognizes expenses when it incurs them rather than
when it pays them. Under accrual accounting, a company generally recognizes revenues when
it makes sales. The company can then relate the revenues to the economic environment of the
period in which they occurred. Over the long run, trends in revenues and expenses are generally
more meaningful than trends in cash receipts and disbursements.
Providing information that is useful to users is a challenging task because they have dif-
ferent needs and levels of knowledge. Institutional investors,8 such as the Canada Pen-
sion Plan (see What Do the Numbers Mean? 1.2), hold an increasing percentage of equity

What Do the Numbers Mean? 1.2

The Canada Pension Plan ( CPP) is one of the 10 largest retirement invest the CPP funds. Its mandate is to "maximize returns without
funds in the world according to its website. Over 20 million Cana- undue risk of loss."
dians participate in the plan. The plan is managed by the Canada The chart below (based on the CPPIB 2017 Annual Report)
Pension Plan Investment Board (CPPIB), which decides how to shows where the money is invested by type of asset and region.

Asset Mix Global Diversification by Region

As at March 31 , 2017 As at March 31 , 2017
Latin America - - - Australia ($10.4 billion) 3.3%
Other real assets 2.8% - - - - -..., . - - - - - - Emerging market
private equities 1.8% ($10.3 billion) 3.3%
Canadian public equities 3.3% - - - - . . . ,
- - - - - Canadian private
Credit investments 5.5% --~ equities 0.4%
United Kingdom
($18.7 billion) 5.9%
Emerging market
public equities 5. 7%
Europe (excluding UK) -
Infrastructure 7.7%
($42.0billion)13.2%

Real estate 12.6%

Canada ($52.2 billion) 16.5% - -

Government bonds, and - - - - - - ' Asia ($56.2 billion) 17.7%

absolute return strategies 16.0%

Foreign developed market

private equities 16.3%

'Institutional investors are corporate investors such as insurance companies, pension plans, mutual funds, and others.
They are considered a separate class of investors because of their size and fin ancial expertise, and the large size of
the investmen ts that they hold in other companies. In general, for these reasons, institutional investors have greater
power than the average investor.
 Fi nancial Statements and Financial Reporting 1-9

The fund stood at $316.9 billion as at March 31, 2017 and
experienced an 11.8% rate of return for 2017. As you can see in the
following diagram, the composition of types of assets has shifted
from primarily fixed income to primarily equities-including
shares in publicly traded corporations as well as private companies.
CPPIB has increasingly expanded its investment in real assets in-
cluding real estate, infrastructure, agricultural land, energy, and
natural resources. As a large institutional investor with substantial
equities holdings, the CPP is a significant stakeholder in terms of
how publicly traded companies report their financial informat ion.

Historical Comparison of the Investment Portfolio

As at March 31
2000 $44.5 billion 2017 $316.9 billion
Equities 5%----,

shareholdings and generally put a lot of their resources into managing their investment portfolios.
Can those who prepare financial information therefore assume that the average individual inves-
tor has the same needs and knowledge level as an institutional investor when it comes to business
and financial reporting? Likely not. 9 We will discuss this issue further in Chapter 2.

Information Asymmetry
Ideally, to facilitate the flow of capital in the most efficient and effective manner, all stake-
holders should have equal access to all relevant information. In other words, there should be
symmetry of access to information (information symmetry). This is nice in theory but it
does not always work in practice. Management may feel that disclosure of too much informa-
tion may hurt the company's competitive advantage or position. For instance, if the company
were in the middle of a lawsuit, management would want to be careful about how much in-
formation was disclosed because it might affect the outcome of the lawsuit. In cases such as
this, the company must weigh the costs and benefits of sharing information. On the one hand,
if the company is known to be open and forthright, revealing information may facilitate the
flow of capital to the company and perhaps lower the cost of capital. On the other hand, if
the company is too open, it might give away proprietary information that might cause profits
to fall. For this reason, perfect information symmetry does not exist and, as a general rule,
management rightly has access to more or better information than others because they run
the company. In other words, there is information asymmetry. (See What Do the Numbers
Mean? 1.3 for a discussion on how the Internet is changing information asymmetry.)

'The Canadian Coalition for Good Governance (CCGG) is a group of institutional investors that manages over $3.0
trillion in investments (including investments in private and public equities and bonds). Its members include many
sign ificant pension funds in Canada, such as the Alberta Teachers' Retirement Fund, Ontario Teachers' Pension Plan,
OPSEU Pension Trust, and Ontario Municipal Employees Retirement System, as well as many significant mutual
funds and financial institutions, such as Mackenzie Financial Corp. , RBC Global Asset Management Inc., and TD
Asset Management Inc. According to its website (www.ccgg.ca), CCGG was started in 2002 "to represent Canadian
institutional shareholders in the promotion of corporate governance practices that best align the interests of boards
and management wi th those of the shareholder." As a comparison point, the total market capitalization of the TSX is
estimated at $2.8 trillion (as at March 2017).
1-10 CHAPTER 1 The Canadian Financial Reporting Environ ment

What Do the Numbers Mean? 1.3

In their book Freakonomics, Levitt and Dubner acknowledge that
it is very common in most transactions for one party to have more
or better information than the other. Often, in a transaction, one
party is an expert and the other not. In the capital marketplace,
experts, including accountants, bankers, institutional investors,
and company managers, all have more and better information
than the average consumer or investor. Levitt and Dubner go on to
argue, however, that the Internet allows information to pass very
freely from experts to non-experts. They argue that the Internet
has "vastly shrunk the gap between experts and the public."
Shifting to another discipline, for example, consider your
own relationship with your family doctor. Several decades ago,
if something was wrong with you, you would have made an ap-
pointment and sat passively in the doctor's office while he or she
analyzed your symptoms and made a diagnosis. At that time, the
doctor might have shared the analysis and diagnosis with you and
might have handed you an illegible prescription to fill. The Internet
has changed this. Now, most people do a bit of research before
they go to the doctor. By doing a quick search on the Internet, pa-
tients are able to get information so that they know what ques-
tions to ask and what options might be available for treatment.
Patients can now freely access information about side effects and
new drugs. Many people keep their own medical histories. Doc-
tors understand that their role is to help their patients navigate the
significant amount of information that is available, not necessarily
(only) to dictate a diagnosis and treatment.
Returning to the business world, the real question is: As peo-
ple turn more and more to the Internet and the information there
becomes more and more robust, what is the role of experts in the
capital marketplace and how will the issue of information asym-
metry evolve?
Source: Steven Levitt and Stephen Dubner, Freakonomics, HarperCollins
Publishers, New York, 2005.

As well as the above, there are other reasons why information asymmetry exists in the
marketplace. This might be due to the way the markets operate or to human nature. Some
issues are as follows:

1. Capital markets such as stock exchanges are not necessarily fully efficient; that is, not all
information is incorporated into the stock prices of companies. The problem, of course,
is that the prices may not reflect hidden or insider information. This may be due to the
reasons noted above, or other reasons in point 2 below.
2. Human behaviour sometimes results in individuals and companies acting in ways that
will maximize their own well-being at the cost of other capital market participants. For
instance, management may wish to show only positive information about a company in
order to ensure access to capital markets or maximize their own personal bonuses.

Accounting and economic theory tries to help us understand these issues. The efficient mar-
kets hypothesis proposes that market prices reflect all publicly available information about
a company. 10
li,!4'14'1 In addition to researching whether market mechanisms are efficient or not, ac-
counting theorists look at the issue of information asymmetry from other perspectives. There
are two common types of information asymmetry problems that are studied by academics.
These are identified and briefly explained below. Basically these theories argue that informa-
tion asymmetry results in a suboptimal or inefficient capital marketplace. In markets where
this phenomenon is observed, investors may discount share prices, require higher returns
on investment (as a penalty for having to deal with the lack of information), or choose not to
invest in the market. In the extreme, information asymmetry may interfere with a company's
ability to access capital and/or minimize the cost of capital.
We will refer back to these concepts throughout the text. Because these concepts are also
studied in other disciplines, the examples below look at them from a financial reporting and
capital marketplace perspective.
Adverse selection-Basically, this means that, where information asymmetry exists, the
marketplace may attract the wrong types of market participants (including buyers and sellers
as well as investors). If buyers cannot assess the quality of the product they are buying, they
may decide not to buy anything or to buy at a discount. Sellers, knowing this, will therefore

HlThere are three forms of the efficient markets hypothesis: (1) the weak form (market prices incorporate all historic
publicly available information), (2) the semi-strong form (market prices incorporate all public information), and (3)
the strong form (market prices incorporate all information whether public or not). Historically, economists have ar-
gued that North American markets are less than perfectly efficient and that they are efficient in the semi-strong form
only. This hypothesis has come under attack in recent years. Many feel that we have put too much faith in the belief
that markets are efficient and may need other mechanisms to deal with information asymmetry.
Another random document with
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 THE REBEL CAMP.
Upon a high plateau, the heavy trees had all been cut away over a
large area. They were designed for the construction of an abattis, and
though nothing had been done beyond chopping down the heavy
timber, the large trunks and limbs, lying in all directions, would have
presented almost insurmountable obstacles to the approach of
cavalry or artillery, had the rifle-pits, just beyond, been filled with
men.
Crossing the rifle-pits, the Unionists were in the enemy’s camp,
though still more than half a mile from the fort. Here were the wall
tents of a regiment, all standing in complete order, with the camp-
fires still blazing, the copper pots of soup for dinner boiling over
them, and the half-made biscuits in the pans. Inside the tents
everything was just as the enemy had left it—pistols, shot-guns,
muskets, bowie-knives, clothing, tables partially set for dinner,
letters half-written, with the ink scarcely dry upon the open page,
cards thrown down in the midst of the game, overcoats, blankets,
trunks, carpet sacks, and so on through all the articles of camp life. It
seemed as if the men were out at guard-mounting, and expected to
return in ten minutes.
Along the river bank were long rows of log barracks, enough to
accommodate two or three thousand men, and finished comfortably.
Inside they bore the same indications that the inmates had
decamped without a moment’s warning.
 ADVANCE OF NATIONAL GUNBOATS UP
THE TENNESSEE RIVER.
In accordance with the instructions of Commodore Foote, given
before the attack on Fort Henry, immediately after the capture of the
fort, February 6, the gunboats Conestoga, Lexington and Tyler,
under the command of Lieutenant Phelps, advanced up the river
twenty-five miles, to the crossing of the Bowling Green and Memphis
railway, breaking up a portion of the railway bridge, and rendering it
impassable. They next proceeded to destroy the rebel gunboats and
transports, capturing large quantities of munitions of war and
supplies, and advanced up the river for upwards of two hundred
miles to Eastport, in Mississippi, and Florence, at the foot of Muscle
Shoals, in Alabama, annihilating the rebel flotilla in the Tennessee
river. The expedition was welcomed at every point by the
inhabitants. Twenty-five Tennesseans enlisted at Cerro Gordo, where
also three steamers were seized, containing 250,000 feet of valuable
ship timber.
Toward the latter part of February, intelligence reached Fort
Henry that the rebels were fortifying a point on the Tennessee river,
near the Mississippi State line, whereupon Lieutenant-Commanding
William Gwin, with the gunboats Tyler and Lexington, were sent
forward to reconnoitre the position.
Having learned that the rebels had occupied and were fortifying a
place called Pittsburgh, nine miles above, on the right bank of the
river, he determined to attack them.
At twelve M. the Taylor, followed by the Lexington, Lieutenant-
Commanding Shirk, proceeded up the river. When within twelve
hundred yards of Pittsburgh, they were opened upon by the rebel
batteries, consisting of six or eight field pieces, some rifled. Getting
within one thousand yards, the Taylor and Lexington opened a well-
directed fire, and had the satisfaction of silencing the batteries.
They then proceeded abreast of the place, and, under the cover of
grape and canister, landed two armed boats from each vessel,
containing, besides their crews, a portion of company C, Captain
Thaddeus Phillips, and company K, First-Lieutenant John C. Rider,
of the Thirty-second regiment, Illinois Volunteers (sharpshooters).
Second-master Jason Gondy, commanded the boats of the Taylor,
and Second-master Martin Dunn, commanded the boats of the
Lexington. The landing was successfully accomplished. This small
force drove back the rebels, and held them in check until they had
accomplished their difficult object, which was to discover the real
strength and purpose of the enemy, and to destroy a house in close
proximity to the batteries. In addition to their artillery, the enemy
had a force of not less than two regiments of infantry, and a regiment
of cavalry.

SECTION OF THE MISSISSIPPI RIVER.

SHOWING THE DISTANCES FROM

NEW ORLEANS.
 THE BURNSIDE EXPEDITION.

SAILING OF THE FLEET FOR HATTERAS

INLET.
January 12–20, 1862.
Immediately after the departure of the expedition to operate
against Port Royal and the adjacent territory, the organization of
another armament, to proceed to the North Carolina coast, was
commenced, and like its predecessor, was mainly fitted out at
Annapolis, Md., and gradually concentrated at Fortress Monroe.
After many delays, it sailed from that place for its destination on the
12th of January, 1862. The expedition consisted of a large naval force
of light-draught boats, taken from the commercial marine, fitted up
and armed, and a numerous retinue of transports and supply vessels,
all under the command of Commodore L. M. Goldsborough. There
were thirty-one gunboats in the expedition, exclusive of transports,
carrying an aggregate of ninety-four guns. Five of these, called
“floating batteries,” were vessels of strong hulls, heavily braced, and
cut down so as to present but a small surface when in action, and
designed to be anchored during an engagement. The entire number
of vessels of all classes was one hundred and twenty-five.
The land force consisted of about fourteen thousand men, under
the command of Brigadier-General Ambrose E. Burnside, who was
also Commander-in-chief of the expedition. It consisted of fifteen
regiments, divided into three brigades, commanded in their order by
Generals John G. Foster, Jesse L. Reno, and John G. Parke.
The vessels encountered adverse weather immediately after
starting from Fortress Monroe, and a number of the transports were
obliged to put back, having experienced one of those severe storms
which have rendered the coast of Cape Hatteras a terror and a
proverb to the mariner. For a time the expedition was in deadly peril.
Communication between the vessels of the fleet was rendered
impossible, and wreck and disaster appeared to be their inevitable
fate. Several gunboats and vessels were driven ashore and lost, and a
number of valuable lives sacrificed to the fury of the elements, in a
vain endeavor to succor some of the disabled vessels.
Along the whole coast of North Carolina there are many desolate
sand-bars or islands, varying from half a mile to two miles in width,
intersected by numerous inlets, which with few exceptions, are not
navigable. A principal one of these, known as Hatteras Inlet, opening
into the waters of Albemarle Sound, was the point where
Commodore Goldsborough’s fleet was now endeavoring to
concentrate.
On Monday morning, January 13, they were off Hatteras Inlet. Day
broke with a leaden sky, against which the angry, white-crested
waves raced their mad career along the reefs of Cape Hatteras, that
threw its headland oceanward but eight miles distant. Fourteen
steamers were laboring to weather the storm point. Bravely they
breasted on, staggering beneath the giant blows of each successive
sea, the decks swept fore and aft, and all on board reeling from side
to side like drunken men. One figure stood immovable, grasping the
bits and scanning the horizon for traces of ships as they rose on the
glittering mass of foam. It was the square, manly form of General
Burnside, whose anxiety for the fate of his army was intense. Many of
the vessels on which the troops were embarked were nothing more
than huge top-hampered river steamers, with projecting guards, that
would break up like cardboard if fairly struck by a sea.
At dark, all hands on the flag-ship were startled by the report of a
gun, and on reaching the hurricane deck they saw a large brig
drifting rapidly on to the bar. As it grew darker, and her outline
became less defined, the excitement became intense. She was
evidently in a most critical position, and every moment might be her
last. Slowly the black hull rose and fell, each time gliding nearer and
nearer to the vortex of white breakers, which, once reached, nothing
could save her. Suddenly a fringe of musketry fire surrounded her
bulwarks, and blue-lights were burnt in her tops. Volley after volley
succeeded each other in rapid succession, yet apparently no one
could help her; no human power dared face the tempest, and,
perhaps, share her doom. General Burnside boarded every steamtug
in the harbor; offered any reward, and also to go himself in aid of the
brig, but all held back. Were three hundred men to be launched into
eternity, and no effort made to save them? At last one brave seaman
volunteered to take his little steamer out—General Burnside jumped
aboard her—but by the earnest entreaties of the officers he delegated
the honorable position to one of his staff, for his heroic conduct had
nerved every brave heart in his command.
 BURNSIDE’S FLEET AT HATTERAS INLET.
From the 13th of January until the 4th of February, the fleet at
Hatteras Inlet experienced an almost uninterrupted series of gales,
and the two dykes which reach the east and west boundaries of the
inlet, were fringed with perpetual spray and foam from the breakers.
The lighter vessels, comprising the propeller gunboats, the side-
wheel steamers, and most of the schooner transports, had gone
safely through the “Swash,” and were securely anchored some two
miles from the throat of the inlet, while the larger ships and barks
were still riding outside, with colors continually flying for a pilot.
Many of these vessels were crowded with men suffering for the
want of necessary supplies, especially water, and the largest of the
transports had a draught of from two to four feet more than the
specifications of the guarantee should have allowed. The
consequence was, that they grounded in attempting the passage. An
occasional cessation of a few hours in the storm afforded opportunity
that could be taken advantage of by vessels to try the dangerous
passage, aided by the tugs, that responded but shyly to the signals for
aid. And thus for days the severity of the gale defied all
communication between the vessels outside of the bar, as they
battled with a fiercer foe than that upon the land—fighting a very
hand-to-hand fight with storm and ocean.
Nearly three weeks passed before all the vessels of the expedition
were brought in safety through the swash to anchorage within the
inlet. Though the severity of the storm had threatened the
destruction of the entire armada, and occasioned the deepest gloom
and anxiety in the minds of thousands of loyal friends at home, the
brave and skillful commanders were never despondent, and met the
new dangers of each day with hopeful energy and perseverance.
Eight vessels of various sizes were cast away or foundered in the
storm, though but few lives were lost.
Colonel J. W. Allen and Surgeon T. S. Weller, of the Ninth New
Jersey, were drowned from a small boat while on a noble mission to
relieve a suffering crew.
 Many of the large transports were grounded in attempting to pass
inside the inlet. From the necessity of lightening them, vast
quantities of property were lost or thrown overboard. An expedition
beset with such difficulties, all overcome by indomitable
perseverance, has seldom been recorded in the history of any
country.
 CAPTURE OF ROANOKE ISLAND.

February 8, 1862.

After a detention of three weeks in sight of Hatteras Inlet,

occasioned by the severity of the storm, and the difficulty of piloting
the heavily-laden vessels through the inlet, the expedition received
sailing orders on the 4th of February, and proceeded on the next day
to the point of attack. The fleet anchored on the night of February 5,
about ten miles below the southern point of Roanoke Island, from
whence they again weighed anchor at eight o’clock on the morning of
the 6th. A storm retarded their progress, and they remained over
night without passing through Roanoke Inlet to Croatan Sound.
At ten o’clock on the morning of the 7th, the gunboats, under the
lead of the Flag-officer’s ship, moved forward, and were soon inside
the narrow passage leading into Croatan Sound, known as Roanoke
Inlet. The mainland juts eastward, forming a point of marshy land at
the southern extremity of Croatan Sound, which is the only navigable
water leading past Roanoke Island. A small island forms the eastern
boundary of the channel, while the western shore is a low marshy
point. Following Commodore Goldsborough’s squadron were the
gunboats of the coast division, all of which passed through without
interruption.
The S. R. Spaulding, with General Burnside on board, next passed
through, but the remainder of the transports were detained about
two hours. The rebel gunboats could now be seen close in shore,
evidently under the guns of batteries on shore. As the fleet passed
into the sound, a signal was fired from one of the rebel gunboats, to
announce its approach. This was about half-past ten o’clock. At half-
past eleven the first gun was fired from the flag-ship, and was replied
to by the rebels. The Flag-officer hoisted the signal: “This day our
country expects that every man will do his duty.” The effect was
electric. The men worked their guns with unflagging energy,
determined that their country should have nothing to complain of in
relation to them. As the Federal vessels came within shorter range,
the fire became more rapid, but the regular fire did not commence
until noon, when the flag-ship displayed the signal for close action.
The number of the rebel gunboats visible in the early part of the
engagement was seven. As the vessels came into closer action, they
moved to the northward, with the design of drawing the Union fleet
after them, and bring them under the guns of their batteries on the
island. At twelve o’clock the engagement became general, between
the retreating gunboats of the rebels and the Union fleet, varied by
an occasional shot from a battery on shore. The firing was
exceedingly brisk for some time, but the distance was evidently too
great for destructive effect. The one hundred-pound Parrott gun on
board the Southfield, to which the Flag-Officer transferred his flag,
boomed forth terrific explosions, followed by the roar and crash of
flying shells. The puff of smoke in the air was almost simultaneous
with the splash of fragments in the water. The rebel gunboats kept up
a steady fire in reply. Their fire was varied at times by the louder
report of a hundred-pound Parrott gun on board one of their vessels.
The Sawyer gun on board the Fanny, which was captured by the
enemy at Hatteras Inlet, was the most annoying in its effects, as the
range was long and very accurate.
The fire from the fort indicated a weak force working the guns. The
rebel gunboats retired steadily a considerable distance up the sound.
A line of piles driven into the bed across the principal channel,
obstructed the progress of the Union vessels in the pursuit of the
retreating rebels, who occupied an inner channel under the guns of
their battery. The Union fleet now turned their attention to the fort,
which kept up a steady and rapid fire.
On the afternoon of the 7th, the transports, with the land forces,
were all brought safely through Roanoke Inlet, and clustered securely
in rear of the bombarding fleet. General Burnside gave immediate
orders for landing the forces, which was done at a small cove, known
as Ashby’s Harbor. In less than an hour four thousand men were
landed, and by eleven at night, the entire force, excepting one
regiment, were on the island, and their bivouac-fires lighted up the
shore and the woods for the distance of a mile.
At nine o’clock on the morning of the 8th, a few shots were
exchanged between the Federal gunboats and the battery, which
ceased after fifteen minutes’ duration, and was not renewed during
the day. The rebel gunboats had retreated, and all interest now
centered in the movements of the land forces.
From definite information received by General Burnside, the
position of all the works on the island was clearly known, and his
movements were based on this knowledge. The plan of attack
consisted of a central attacking column, led by Brigadier-General
Foster; a left flanking column to attack the right of the enemy’s work,
under Brigadier-General Reno, and a right flank column to attack the
left of the enemy’s position, under the command of Brigadier-
General Parke.
The approach to the enemy’s position was through a swampy
wood, with a dense undergrowth, rendering it almost impenetrable.
An ordinary cart-road leading through this wood from the shore to
the fieldwork, a distance of about a mile, was the only mode of
communication. The woods in front of the battery had been cut down
a distance of three hundred yards, forming an open space to be
played on by the rebel guns, about two hundred feet wide. The woods
immediately in rear of the work were also cut down to permit the
manœuvreing of their own forces.
Their battery consisted of an earthwork with three faces covering
the open space before, and the woods at each side of the open space,
but with a general direction of fire to the front. The guns were
mounted in embrasure, and consisted of a twenty-four-pounder
brass Dahlgren howitzer, a long eighteen-pounder brass field-gun,
and a twelve-pounder brass field piece. In front of the work was a
ditch eight feet wide and about three feet deep, filled with water. The
earthwork was about thirty-five yards wide, and was erected across
the road. The ground in front of the work was a deep marsh, on
which the trees which were felled still lay. The difficult nature of this
ground was increased by the pits from which the turf and earth for
the fieldwork had been taken. Branches were strewn over the front of
the work, making it impossible to discover it from the wood in front.
 The defending force consisted of about three hundred men, within
the breastwork, and about two thousand as a reserve, partly deployed
as skirmishers on the left of the battery. The rebels relied chiefly for
the defence of their flanks on the almost impenetrable nature of the
wood on each side. Their entire force, with the exception of the force
working the battery, was scattered in front and in the woods on the
left as skirmishers.
The Federal army advanced from the bivouac-ground of the
evening previous, where they had spent the night with nothing but
thin overcoats to protect them from a cold, driving rain. They had left
their knapsacks and blankets on the transports, each man carrying
nothing but his haversack, with three days’ provisions, and his
cartridge-box, with forty rounds of ball-cartridge. The centre, under
the command of General Foster, was composed of the Twenty-fifth
Massachusetts, Colonel Upton; Twenty-third Massachusetts, Colonel
Kurtz; Twenty-seventh Massachusetts, Colonel Lee, and the Tenth
Connecticut, Colonel Russell, and moved forward about eight o’clock.
They were followed by the second column, under General Reno,
consisting of the Twenty-first Massachusetts, Lieutenant-Colonel
Maggi; the Fifty-first New York, (Shepard Rifles,) Colonel Ferrero;
Ninth New Jersey, and the Fifty-first Pennsylvania, Colonel Hartraaf.
The third column, led by General Parke, was formed of the Fourth
Rhode Island, Colonel Rodman; First battalion, Fifth Rhode Island,
Major Wright; and Ninth New York, Colonel Hawkins.
A brilliant, well contested fight of two hours’ duration put the
Federal forces in possession of Roanoke Island, with all the batteries,
mounting thirty guns, and Fort Forrest, on the mainland, mounting
eight guns. It resulted in the unconditional surrender of the rebel
army on the island, numbering 2,500 men, with all their arms and
munitions of war. Captain O. Jennings Wise, son of ex-Governor
Wise of Virginia, lost his life in this engagement. The Governor
himself, being absent from his command on the day of battle,
escaped.
Colonel Russell, of the Tenth Connecticut, and Lieutenant-Colonel
De Monteuil, of the New York Fifty-third, were killed.
The Federal loss was fifty killed and one hundred and fifty
wounded. That of the rebels was about twenty killed, and sixty
wounded.
 EVACUATION OF BOWLING GREEN, KY.

February 14–16, 1862.

Before the commencement of hostilities in the State of Kentucky,

the rebel General Buckner, Commander-in-Chief of the State militia,
seized upon the town of Bowling Green, in Warren county, in the
southern section of the State, and occupied it as the grand centre and
depot of future military operations. The position was well chosen. It
was situated on the line of the Louisville and Nashville railway, and
connected also by rail with Memphis and Nashville; while water
communication through the Barren river was open to the Green
river, the Ohio, and Mississippi, and thus to all important points.
As a military post, its means of defence were also of the first
importance. The town lies on the south bank of Barren river, at a
point where the channel makes a bend not unlike a horse-shoe. The
buildings are situated a distance of five hundred yards from the
banks, which rise by jutted rocky sides fifty feet from the water level.
A series of nine swelling hills, or knolls, completely encompass the
town on the land side, and on these Buckner had erected a cordon of
forts; some of stone, and others of earth, twenty feet in thickness—all
of great magnitude. Forty-nine guns were mounted on the various
fortifications, and great engineering skill had been displayed in their
construction.
On learning the defeat of Zollicoffer’s troops at Mill Spring, on the
19th of January, General A. S. Johnson, on the 25th, ordered the
evacuation of Bowling Green, and General Floyd’s brigade
immediately marched from thence to Fort Donelson. Active
measures were then taken to carry out the order further, by shipping
heavy ordnance to Columbus, which place General Grant’s
reconnoissance at that time had induced the Confederates to believe
would be the first point of attack from the Federal army.
After the capture of Fort Henry, on the 6th of February, by which
the enemy’s communication with Columbus was intercepted, the
remaining troops were distributed, some to Fort Donelson, some to
Nashville and other points; and a work of indiscriminate destruction
of the buildings and property in the town commenced. The beautiful
iron railway bridge, and the wooden turnpike bridge over the Barren
river were first destroyed. The railway bridge over the Green river,
some forty miles to the north-east, had long since been burned, and
the forces of General Buell had been deterred from crossing that
stream up to the present time.
On the 11th of February, however, General Mitchell’s division,
encamped on Bacon creek, seven miles north of the Green river, were
ordered to advance on Bowling Green, and on that day marched to
Camp Madison, one mile north of the river; where receiving
confirmatory information of the retreat of the rebel forces, they
hastened forward.
Thursday morning, February 13th, the division—infantry, cavalry,
and artillery, left Camp Madison for Bowling Green, forty-two miles
distant, and made twenty miles the first day. The railroad appeared
to be but little injured, but all the buildings were destroyed. The
roads the first day were in splendid order, but much obstructed by
trees, which were, however, speedily removed by two companies of
mechanics and engineers, who swung their axes with energy, and
were never delayed over fifteen minutes by any impediment. The
ponds along the road were filled with dead horses and cattle, so long
as any cattle were to be found to fill them. The troops rested at noon
at Cave City, which was very nearly destroyed. On the second day
they started again for Bowling Green. The next morning was cold,
with about an inch and a half of snow, but they were up betimes and
on their way, the Nineteenth Illinois ahead as usual, with her blue
flag waving triumphantly. The road was obstructed, and filled with
signs of the rapid retreat of Hindman’s forces.
Hearing repeatedly that the railroad bridge over Barren river was
destroyed, and that the Confederates would not stand this side of the
river, Colonel Turchin ordered the cavalry and one battery ahead.
The ranks opened to the right and left, and Captain Loomis’ battery
dashed by in fine style toward Bowling Green. The men hearing the
cannon roar, hurried on, and reached the banks of the river opposite
Bowling Green, about two o’clock, making the forty-two miles in
about thirty-seven hours. After the firing commenced they seized
every team along the road, and had the knapsacks drawn by horses
the rest of the way, much to the relief of tired shoulders. General
Turchin fired the first shell into the town, and immediately three
regiments were seen scampering to the cars, and putting off in great
confusion.
But though within a mile of Bowling Green, they were powerless to
interfere, for there was Barren river, wide and unfordable, between
them, and both bridges destroyed. The Texan Rangers soon began to
fire all the public buildings. Fifty men under Captain Scott, got ready
to cross in a little skiff by parties, and try to drive out the few who
remained to perform this work, but the General would not allow it.
They then pitched their tents and prepared to wait until a bridge
could be erected. When snugly tucked in their blankets, the assembly
beat to arms, and the brigade was soon in ranks. They expected to
march to town, but were put on the back track some three miles.
They left the main road, and soon came to the river, where they
built fires and rested as well as possible. Here the repairs of an old
wherry were completed, and they crossed the river, protected by
artillery. There was a slight snow falling, and it was uncomfortably
cold. The Nineteenth and Twenty-fourth, Hecker’s Illinois, crossed
first. The men suffered intensely from cold, but declared that they
had rather be shot than frozen, and pushed on. But no enemy
appeared, and the tired soldiers soon surrounded the fires, some of
which had been burning for several days. All the public buildings and
several warehouses, filled with pork, beef, coffee, etc., were
destroyed. A pile of grain thirty feet by twenty, was burning when the
Federal troops arrived. Four engines and several cars were also
burnt. The cars had been carrying away provision for a week, but still
immense quantities were destroyed. Boxes of guns, large numbers of
bowie-knives roughly fashioned of iron, every conceivable kind of
shooting apparatus, and all sorts of hardware for cooking and other
uses were found in immense quantities.
Bowling Green is a town of considerable commercial importance,
and possesses many large stores and warehouses. The majority of the
inhabitants were loyal in their sentiments, though many influential
citizens sympathized with the rebellion; but when the work of
destruction commenced, no discrimination was allowed, and all were
made sufferers. The unexpected arrival of General Mitchell’s army,
and the terror of his artillery, drove the rebels from the town before
their incendiary intentions were fully consummated, and much
private property was saved which would else have been consumed by
the flames.
When General Buckner was exercising military sovereignty in
southern Kentucky, one of his proclamations demanded that every
man in Wright county should deliver to him at his headquarters, one
gun, or twenty dollars in money, under the penalty of fifty dollars’
fine, or ninety days’ imprisonment. In response to this edict, a
motley collection of old squirrel and shot-guns were added to the
Confederate stores, and with other treasures were packed in
buildings at Bowling Green. A hasty evacuation of that stronghold
having become a “military necessity,” these buildings were fired by
the retreating rebels, and among the ruins which met the curious
gaze of General Mitchell’s men when they entered the town, were
scattered piles of the iron parts of these guns, in several places a foot
thick.
 CAPTURE OF FORT DONELSON.

February 13–16, 1862.

Bravely as the army of the West had sustained the honor of the
Union, the crowning glory of taking Fort Donelson remained to be
accomplished. To attack a strongly-defended fort, formidable by
nature and rendered almost impregnable by military art, was a work
of extreme danger, nay, of impossibility to less resolute men.

ATTACK ON FORT DONELSON BY THE FEDERAL GUNBOATS.

 THE SURRENDER OF FORT DONELSON.

The relative positions of Fort Henry and Donelson, the former on

the Tennessee river and the latter on the Cumberland, should be
clearly understood, in order to comprehend the difficulties of this
undertaking.
Fort Henry had been occupied by Federal troops, and it became
necessary to effect the reduction of Fort Donelson, in order to open
the river to the navigation of the national flotilla, and to reach
Nashville, the capital of Tennessee.
The surrender of Fort Henry took place on the 6th of February.
One of the gunboats, the Essex, being disabled, was obliged to return
to Cairo for repairs, while the Lexington, Conestoga and Tyler,
returned to the Ohio, in order to reach the Cumberland river to make
the ascent to Fort Donelson. Commodore Foote having completed
his preparations, left Cairo on the 11th of February for the scene of
action—the Carondelet having previously been sent forward to
reconnoitre the position.
On the same day General Grant issued his orders for the
movement of the land forces in two divisions, on the following
morning. The distance from Fort Henry to Fort Donelson across the
land lying between the two rivers, is fourteen miles. There are several
roads running from Fort Henry to Dover, near which Fort Donelson
was situated. The divisions were disposed by brigades, one of which
was to be thrown into Dover to cut off the retreat of the enemy, if
attempted by that route.
Fort Donelson takes its name from Andrew Jackson Donelson, a
citizen of Tennessee, and its construction was commenced as early as
May, 1861. It occupied the best position for defence on the
Cumberland river, standing on the summit of a fine slope, rising to
the height of one hundred and fifty feet from the river, on its right
bank, and mounted sixteen guns. There were two water batteries,
one of which was about twenty or thirty feet above the river, and
defended by nine pieces, eight thirty-two-pound guns, and one ten-
inch columbiad. The second was some sixty feet above, and was
mounted with one ten-inch columbiad, and two thirty-two pound
carronades.
Both these batteries were sunken or excavated in the hill-side. In
the lower one, strong traverses were left between the guns, to secure
them against an enfilading fire. The elevation above the water at the
time of the gunboat attack, gave them a fine command of the river,
and made the task of attacking them in front an arduous one. The
range of the guns in arc, was, however, quite limited.
The third occupied the summit of the hill, and mounted four 128-
pound guns. The camp was behind the fort on the hill, but within
range of gunboats on the river.
 THE NAVAL ATTACK.
On the night of February 11th, the St. Louis, (the flag-ship,)
Louisville, and Pittsburg, sailed from Cairo. The Carondelet, as
already stated, had been dispatched a day or two in advance, and at
Paducah, on the noon of the 12th, the fleet was joined by the
Conestoga and Tyler. Of these the three first were iron-clad vessels.
From Paducah the fleet was accompanied by sixteen transports,
carrying six thousand infantry, and cavalry and artillery.
The fleet followed the flag-ship of Commodore Foote, as they
turned out of the Ohio, and began the ascent of the Cumberland.
Passing onward from the Ohio, sweeping through Kentucky and
Tennessee up to the western boundaries of Virginia, the fleet carried
the national ensign, which was met with continual cheers and
responses from the people on the banks.
About four o’clock in the afternoon, a messenger steamer, the Alps,
met the fleet, with a dispatch from General Grant, requesting all
haste to be made, as the gunboats were anxiously expected. Putting
on steam, the Alps took the St. Louis and Louisville in tow, leaving
the transports to hasten as rapidly as they could be urged. The
former arrived within two miles of the fort at twelve o’clock, on the
night of Thursday, the 13th.
On the morning of that day, the Carondelet, by order of General
Grant, had bombarded the fort, and single-handed, commenced the
attack on the works. On the previous day she had advanced and fired
eight shots, but without drawing out any reply. The attack of the 13th
was differently met by the fort, as the shells were briskly responded
to, and a vigorous fire was maintained for two hours. The Carondelet
kept her bows hard on the fort, carefully guarding against presenting
her broadside to the enemy. She fired one hundred and twenty-eight
shots in ninety-five minutes. At the end of that time, a ball from one
of the 128-pound guns entered her port-bow, and struck a portion of
her machinery. Six men were slightly wounded by the splinters which
flew from the ship’s timbers. She retired beyond the range of the
guns, to ascertain the amount of damage, and in the afternoon, after
repairing, was again ordered to the charge, and fired a number of
shots, but without sensible effect.