Accounting Standards for. Transition Middle of the Road

Accounting Standards for

Private Enterprises

Private Enterprises

A

DISCLAIMER BEFORE WE BEGIN

...

Although the presentation and

Although the presentation and

related materials have been

carefully prepared neither the

carefully prepared, neither the

presentation authors, firm, nor any

persons involved in the preparation

persons involved in the preparation

and/or instruction of the materials

accepts any legal responsibility for

accepts any legal responsibility for

its contents or for any consequences

arising from its use

O

BJECTIVES

Concentrate on presentation and disclosure of ASPE transition F/S with specific reference to: ASPE transition F/S with specific reference to:

 Fair value

 Prepaid vs Capital Asset  Government payables  Government payables  Income taxes

 Preferred shares disclosure  Subsidiaries

 Business combinations  Callable debt

 Opening balance sheet

 Retained earnings and cash flow reconciliations for

application of new standards

 Insights and industry observations

 Audit or review engagement report example  Audit or review engagement report - example

R

EVIEW OF

ASPE

 Adoption – private enterprises must adopt either

ASPE IFRS f fi l b i i ft ASPE or IFRS for fiscal years beginning on or after January 1, 2011.

 A private enterprise is a profit-oriented entity that

is neither a publicly accountable enterprise nor an entity in the public sector.

 Handbook – now located in Part II

 Retrospective - is applying a new accounting policy

to transactions, other events and conditions as if that policy had always been applied.

ASPE A

FFECTS

ASPE A

FFECTS

:

•

Fair value

•

Prepaids

•

Government payables

•

Asset retirement obligations (ARO)

•

Asset retirement obligations (ARO)

•

Election for Property, Plant & Equipment

•

Intangibles

•

Employee future benefits

•

Stock-based compensation

•

Business combinations

and Joint Ventures

•

Business combinations

and Joint Ventures

•

Goodwill

•

Income taxes

C

HANGES TO THE NUMBERS

:

O

PENING

B

ALANCE

S

HEET



Entities must show an opening

balance sheet that is prepared in

balance sheet that is prepared in

accordance with ASPE



This includes a reconciliation of

t i d i

i

l

retained earnings, previously

reported income and cash flows

C

ASE

S

TUDY

Off the Ground Incorporated

(OGI)

I

NTRO TO

C

ASE

S

TUDY

:

O

FF

T

HE

G

ROUND

I

NCORPORATED

(OGI)

 Large, privately owned company located in Niagara Falls. It

owns a fleet of large cargo helicopters which it rents to businesses and charitable organizations.

 The Company also owns a building which it rents.

 The Company has three foreign subsidiaries located in New

Zealand and Bolivia. There are some related party transactions.

 The Company currently uses differential reporting for income

taxes, investment in subsidiaries, financial instruments and preferred shares issued in a tax arrangement.

 The Company has a January 31 year-end, it is now March 2012

and the controller is starting to prepare the financial statements and working papers for the year-end audit.

C

HANGES TO THE NUMBERS

:

F

AIR VALUE OF INVESTMENTS



Fair value

– the consideration that would be



Fair value

the consideration that would be

agreed upon in an arm’s length transaction

between knowledgeable and willing parties.



Investments in equity instruments quoted in

an active market are subsequently measured

an active market are subsequently measured

at fair value.



Investments not quoted in an active market

are subsequently measured at cost less

F

AIR VALUE OF INVESTMENTS IN

OGI

B k l i $250 000 hi h i th t f th

 Book value is $250,000, which is the cost of the

original investments.

 Marketable securities include common shares in:  Marketable securities include common shares in:

- Tim Horton’s - Yellow Media - Magna

I

S THIS A CURRENT ASSET

-

PREPAID

?

 OGI purchases specialty spare parts needed to

maintain its fleet of helicopters. Currently at January 31, 2012 it has $140,000 in spare parts set-up as

prepaid asset. When the spare parts are used, the

p p p p ,

Company DR repairs and maintenance expense and CR the prepaid account.

P

REPAID OR

C

APITAL

A

SSET

 1510.06 - Prepaid expenses that meet the p p

definition of a current asset shall be classified as current assets

1510 03 C t t h ll i l d th t

 1510.03 - Current assets shall include those assets

ordinarily realizable within one year from the date of the balance sheet or within the normal operating cycle

 Are spare parts “ordinarily realizable” within one year?

year?

 In some cases – yes if these are regularly replaced parts  In some cases – no, as the repairs are sporadic or rare

P

REPAID OR

C

APITAL

A

SSET

– C

ONT

’

D

 3061.03 - Property, plant and equipmentp y, p q p are

identifiable tangible assets that meet all of the following criteria:

 (i) are held for use in the production or supply  (i) are held for use in the production or supply

of goods and services, for rental to others, for administrative purposes or for the development, construction maintenance or repair of other construction, maintenance or repair of other property, plant and equipment;

 (ii) have been acquired, constructed or

developed with the intention of being used on a developed with the intention of being used on a continuing basis; and

 (iii) are not intended for sale in the ordinary

f b i

C

HANGES TO THE NUMBERS

:

G

OVERNMENT PAYABLES

 ASPE now requires the separate disclosure of q p

amounts payable for government remittances other than income taxes including federal and

provincial sales taxes payroll taxes health taxes provincial sales taxes, payroll taxes, health taxes and worker safety insurance premiums.

 Section 1510.15 specifically refers to “payables”

and not “receivables”.

 This disclosure can be a separate line on the BS

or a note disclosure or a note disclosure.

I

NCOME

T

AXES

 Differential reporting option to account for taxes p g p

under the taxes payable method is now part of the handbook. Unanimous consent of

shareholders is no longer required shareholders is no longer required.

 Disclosure changes are minimal and a consistent  Disclosure changes are minimal and a consistent

P

REFERRED

S

HARES

 OGI has preferred shares that are redeemable at p

the option of the shareholder.

 You need to disclose the fact that there is a

redemption option on the face of the balance sheet.

sheet.

S

UBSIDIARIES

 All the options that were available under p

differential reporting exist under ASPE:

 Cost method E it th d  Equity method  Consolidate

 However, all subsidiaries MUST be accounted for using the same method.

o There are changes to the note disclosure:

Significant accounting policy note % owned • Significant accounting policy note - % owned,

“private”, name of subsidiary.

• Impairment disclosure has been expanded. • All other disclosures remain the same.

Q

UESTIONS

?

Q

B

USINESS

C

OMBINATIONS

 The acquisition method q is the required method q

(used to be the purchase method).

 The acquisition method – measures the fair value

of what has been acquired (not what has been of what has been acquired (not what has been given up).

 Any contingent consideration should be

measured at fair value at the acquisition measured at fair value at the acquisition date (not just disclosed).

 Identify the acquirer, acquisition date, and

id if d h d li bili i identify and measure the assets and liabilities that were acquired.

 Measurement period – once all facts known but p

B

USINESS

C

OMBINATIONS

C

ONT

’

D

 Any adjustments during the measurement period y j g p

will be apply retrospectively as if it was always known.

A i iti t d

B

USINESS

C

OMBINATIONS

- E

XAMPLE

 Company ABC purchased 100% of the shares of p y p

Company XYZ on April 15, 2011.

 Company XYZ net assets = $400,000

 Company XYZ customer list was worth $150,000  Company XYZ had goodwill of $500,000

P h i $1 050 000

 Purchase price – $1,050,000

 Cash paid of - $650,000 and a note taken back of

$400,000 with payments in four equal

(non-$ , p y q (

interest bearing) instalments of $100,000

beginning Dec 31, 2011 if certain income targets are met

W

HAT ARE THE ENTRIES YOU WOULD RECORD

:

 On acquisition?q

 The date the 1st instalment is due if target is

met?

Th d t th 1 t i t l t i d if th t t i

 The date the 1st instalment is due if the target in

NOT met?

 The date of 2nd instalment is due when the target

B

USINESS

C

OMBINATIONS

- E

XAMPLE  Initial entry on acquisitiony q

DR Investment 1,030,000

CR Cash 650,000

CR N t bl 380 000

CR Note payable 380,000

(entry considers time value of money – estimated for example)

As the first payment of the note payable is within the measurement period there will be more data to

measurement period there will be more data to assess the fair value at this point in time.

B

USINESS

C

OMBINATIONS

- E

XAMPLE  First instalment date if target is met:g

DR Note payable 95,000

DR Interest expense 5,000

CR C h 100 000

CR Cash 100,000

 First instalment date when target is NOT met:  First instalment date when target is NOT met:

DR Note payable 100,000

CR Investment 100,000

( i i i d )

(on acquisition date)

 This would indicate that goodwill is impaired and  This would indicate that goodwill is impaired and

B

USINESS

C

OMBINATIONS

- E

XAMPLE

 The date of 2nd instalment is due when the target g

is met in the 1st _{year but not subsequently?}

DR Note payable 95,000

DR I t t 5 000

DR Interest expense 5,000

B

USINESS

C

OMBINATIONS

-

DISCLOSURE

 On April 15, 2011, Company ABC acquired 100% of

th t t di h f XYZ C

the outstanding shares of XYZ Company, a

complimentary company providing services in the same industry as Company ABC. The payment was

cash of $650,000 and a $400,000 note payable which $ , $ , p y

is non-interest bearing and resulting in goodwill of $500,000. Cash FV A t i bl FV Accounts receivable FV Investments FV Capital assets FV Liabilities FV Liabilities FV L-T debt FV

Company ABC does not consolidate this subsidiary but accounts for it using the cost method.

C

ALLABLE

D

EBT

 There is now an option to show “callable loans”

(loans with regular payments and callable

feature) as callable debt on the Balance Sheet.

 The non-current portion is placed below current

liabilities but before long-term liabilities liabilities but before long-term liabilities.

O

PENING

B

ALANCE

S

HEET



Common presentation is split between a



Common presentation is split between a

third column on the balance sheet or in a

note to the F/S.



Remember, this opening balance sheet

will include:



Fair value presentation of the

investments (for our example)



Other required and optional transition

R

ETAINED

E

ARNINGS

, N

ET

I

NCOME AND

C

ASH

F

LOW

R

ECONCILIATION

 Retained earning reconciliation at transition date g

is a note disclosure that outlines all the changes with respect to retrospective application of the new ASPE standards

I

NSIGHTS AND

I

NDUSTRY

O

BSERVATIONS  Netting of government payables and receivablesg g p y

 Is it permitted?

 How to properly present on FS?

A R i Obli i

 Asset Retirement Obligations

 Watch for Leaseholds!

 Watch for Environmental Liabilities!Watch for Environmental Liabilities!

 What have we heard from banks?  What have we heard from clients?

E

XAMPLE OF

A

UDIT REPORT UNDER ASPE  Comparative Information p

 “we are not engaged to report on the restated comparative information, and as such, it is unaudited.”

 Financial statements are not esthetically pleasing

 3rd column can make Balance Sheet very busy  3 column can make Balance Sheet very busy

 Note formatting can also make columns look squished (especially capital assets)

 Financial statements can take additional time to

set-up – especially if we have opening balance changes

Q

UESTIONS

?

Q