Accounting Standards for Private Enterprises Transition Middle of the Road
A DISCLAIMER BEFORE WE BEGIN... Although the presentation and related materials have been carefully prepared, neither the presentation authors, firm, nor any persons involved in the preparation and/or instruction of the materials accepts any legal responsibility for its contents or for any consequences arising from its use.
OBJECTIVES Concentrate on presentation and disclosure of ASPE transition F/S with specific reference to: Fair value Prepaid vs Capital Asset 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
REVIEW OF ASPE Adoption private enterprises must adopt either ASPE or IFRS for fiscal years beginning i 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.
TIMELINE
ASPE AFFECTS: Fair value Prepaids Government payables Asset retirement obligations (ARO) Election for Property, Plant & Equipment Intangibles Employee future benefits Stock-based compensation Business combinations and Joint Ventures Goodwill Income taxes Opening balance sheet
CHANGES TO THE NUMBERS: OPENING BALANCE SHEET Entities must show an opening balance sheet that is prepared in accordance with ASPE This includes a reconciliation of retained earnings, previously reported income and cash flows
CASE STUDY Off the Ground Incorporated (OGI)
INTRO TO CASE STUDY: OFF THE GROUND INCORPORATED (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.
CHANGES TO THE NUMBERS: FAIR VALUE OF INVESTMENTS 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 at fair value. Investments not quoted in an active market are subsequently measured at cost less impairment.
FAIR VALUE OF INVESTMENTS IN OGI Book value is $250,000, 000 which h is the cost of the original investments. Marketable securities include common shares in: - Tim Horton s - Yellow Media - Magna At what dates do we need relevant market rates?
FAIR VALUE OF INVESTMENTS IN OGI
FAIR VALUE OF INVESTMENTS IN OGI
IS 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 p asset. When the spare parts are used, the Company DR repairs and maintenance expense and CR the prepaid account. Is this correct?
PREPAID OR CAPITAL ASSET 1510.06 - Prepaid expenses that meet the definition of a current asset shall be classified as current assets 1510.0303 - 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? In some cases yes if these are regularly replaced parts In some cases no, as the repairs are sporadic or rare
PREPAID OR CAPITAL ASSET CONT D 3061.03 - Property, plant and equipment are identifiable tangible assets that meet all of the following criteria: (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 property, plant and equipment; (ii) have been acquired, constructed or developed with the intention of being used on a continuing basis; and (iii) are not intended for sale in the ordinary course of business.
CHANGES TO THE NUMBERS: GOVERNMENT PAYABLES ASPE now requires the separate disclosure of amounts payable for government remittances other than income taxes including federal and 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.
INCOME TAXES Differential reporting option to account for taxes under the taxes payable method is now part of the handbook. Unanimous consent of shareholders is no longer required. Disclosure changes are minimal and a consistent Disclosure changes are minimal and a consistent with current disclosures under existing GAAP.
PREFERRED SHARES OGI has preferred shares that are redeemable at the option of the shareholder. You need to disclose the fact that there is a redemption option on the face of the balance sheet. Authorized vs. Issued
SUBSIDIARIES All the options that were available under differential reporting exist under ASPE: Cost method 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, private, name of subsidiary. Impairment disclosure has been expanded. All other disclosures remain the same.
QUESTIONS? Q
COFFEE TIME!
AND WE RE BACK!
BUSINESS COMBINATIONS The acquisition method is the required method (used to be the purchase method). The acquisition method measures the fair value of what has been acquired (not what has been given up). Any contingent consideration should be measured at fair value at the acquisition date (not just disclosed). Identify the acquirer, acquisition date, and identify if and measure the assets and liabilities i that were acquired. Measurement period once all facts known but cannot exceed 1 year from date of acquisition.
BUSINESS COMBINATIONS CONT D Any adjustments during the measurement period will be apply retrospectively as if it was always known. Acquisition iti costs are expensed.
BUSINESS COMBINATIONS -EXAMPLE Company ABC purchased 100% of the shares of 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 Purchase price $1,050,000 000 Cash paid of - $650,000 and a note taken back of $400,000 with payments in four equal (noninterest bearing) instalments of $100,000 beginning Dec 31, 2011 if certain income targets are met.
WHAT ARE THE ENTRIES YOU WOULD RECORD: On acquisition? The date the 1st instalment is due if target is met? The date the 1st instalment t is due if the target t in NOT met? The date of 2 nd instalment is due when the target is met in the 1 st year but not subsequently?
BUSINESS COMBINATIONS -EXAMPLE Initial entry on acquisition DR Investment 1,030,000 CR Cash 650,000 CR Note payable 380,000000 (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 assess the fair value at this point in time.
BUSINESS COMBINATIONS -EXAMPLE First instalment date if target is met: DR Note payable 95,000 DR Interest expense 5,000 CR Cash 100,000000 First instalment date when target is NOT met: DR Note payable 100,000 CR Investment 100,000 (on acquisition i i date) This would indicate that goodwill is impaired and This would indicate that goodwill is impaired and should be tested.
BUSINESS COMBINATIONS -EXAMPLE The date of 2 nd instalment is due when the target is met in the 1 st year but not subsequently? DR Note payable 95,000 DR Interest t expense 5,000 CR Gain on purchase price adjustment 100,000
BUSINESS COMBINATIONS - DISCLOSURE On April 15, 2011, Company ABC acquired 100% of the outstanding t 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 is non-interest bearing and resulting in goodwill of $500,000. Cash FV Accounts receivable FV Investments FV Capital assets FV Liabilities FV L-T debt FV Company ABC does not consolidate this subsidiary but accounts for it using the cost method.
CALLABLE DEBT 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.
OPENING BALANCE SHEET 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 issues (ARO, goodwill, PPE etc)
RETAINED EARNINGS, NET INCOME AND CASH FLOW RECONCILIATION Retained earning reconciliation at transition date is a note disclosure that outlines all the changes with respect to retrospective application of the new ASPE standards.
INSIGHTS AND INDUSTRY OBSERVATIONS Netting of government payables and receivables Is it permitted? How to properly present on FS? Asset Retirement Obligations i Watch for Leaseholds! Watch for Environmental Liabilities! What have we heard from banks? What have we heard from clients?
EXAMPLE OF AUDIT REPORT UNDER ASPE Comparative Information we are not engaged to report on the restated comparative information, and as such, it is unaudited. Financial statements are not esthetically pleasing 3 rd 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
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