Week 8 PCA & Notes.docx

Wednesday October 31, 2012 Critical Accounting Estimates - Biological assets categorized in separate category in balance sheet (BS) o Biological assets could be raw materials before any processing  E.g. trees still in the ground, animals running around in the forest o Grow, change and recorded differently  Recorded into income statement (IS) as the assets grow o Valued by FV less costs to sell o Regular method to record prop, plant and equip:  Historical cost less accumulated amortization, then would check for impairment  Revaluation method is alternative method for land  This is where revaluation reserves would be created In case analysis: - Use industry information - Recognize users, objectives, issues to tackle, alternatives - Read accounting notes to the financial statements to get started - Use plan out an outline, never state “My role is…” - Even though many issues in case, focus on the most important issues at hand - Use discretion when deciding what to disclose, and what methods to use CHAPTER 8, CASE 4  Issues to consider: o What needs to be incorporated? o Constraint on company: ASPE or IFRS? o Benefit of recommendations? o Potential users of financial statements?  Large Japanese company has expressed interest also company will be able to compare financial statements Audit risk  Reasonably high o New controller, Green who has negotiated bonus based on net income o Audit responsibility to Don Strom and potential users, recommendations of controller may not be in Strom’s best interests  Japanese company would be look at many factors besides financial statements o E.g. the economic outlook for the industry o A purchaser also interested in potential cash flows and existing assets and liabilities o Will place some reliance on audited financial statements o Does not make sense that accountant gets bonus based on higher net income  Looks like push for accountant to make statements appear more favourable by any means necessary Changes in accounting policies  IAS 8  Changes made only if IFRS requires it  Results in more representationally faithful and relevant information o Information is neutral, free from error or bias o Relevance: predictive value, comparability, reliability  Therefore need to ensure that change helps users by providing more useful information for decision making  Changes must be made retrospectively so users can compare financial statements of Capilano over time Government Grant  Intangible Asset (IAS 38) acquired at no cost o Get something free from government, there is a section in IAS that allows grant  During the year, CFCL acquired right to log a large area of standing timber on Crown Land  Need to check that company has complied with annual logging limit  Per IFRS company has two choices to account, set up fair value of the intangible asset and fair value of grant which can be offset on BS or grant can be set up as deferred revenue  Grant can be set up at nominal amount  Plus any expenditures required to be able to use right may be capitalized  Note disclosure important to explain rights granted, terms of rights; responsibility for reforestation and fee payable on number of logs removed  Green may have hoped for increase to income but no impact on income per IFRS Recommendation  As rights received two years ago not recorded on balance sheet, may be fair value was not considered useful info or perhaps fair value may not be reliably measured, also cost of determining FV may not exceed benefit  Recording at nominal amount recognizes that the asset exists and note disclosure should satisfy prospective purchaser as to existence of amount Reforestation Expense  As new liability arose in current year based n new government policy, CFCL will have to accrue cost of reforestation  Charge should be to current production costs on IS using present value f estimated cost and corresponding liability to set up  Amount relating to prior years should be segregated in operating segment or in note for more useful financial reporting  Need to know how much actually taken out of ground and then take present value of costs today Logging Fees  All logging fees payable to Ministry must be accrued  Important to ensure liability is fully recorded  Need to ensure that logging records kept substantiate payments to Ministry Logging Rights on Mine Site  Intangible asset set up at cost  Amortized over 5 year life unless further logging available once mine operations completed  Straight line amortization may be appropriate if logging occurs evenly over the year  Need to check for impairment as the intangible asset may be overstated  Estimate PV of net expected ash flow from selling good trees and determine if PV exceeds carrying value of intangible asset Biological Assets IAS 41  Timber component of privately owned lands or standing timber considered biological assets  Valued at financial statement date at fair value less costs to sell using net present value at current market prices and includes harvest value and value for future growth rd  May need to check valuations with a 3 party  Changes in fair value of biological assets included in income statement  Will need to retrospectively apply policy  Green’s assessment is incorrect Sale of Land  Nan will report gain on sale of land on financial statements  On consolidation CFCL will have to write off any acquisition differential allocated to the land thus lowering consolidated gain on land  Assumption last year’s audited financial statements included a review of the business combination and the related accounting for acquisition differential Value of investment in Nan Ltd  Need to review reporting of the values included in Consolidated Statements  Impairment test must be carried out  Note proceeds of sale of 25% seems to indicate overall value of Nan is not impaired  Expense on public relations, advertising, legal cost