RSM320 Final Exam

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University of Toronto St. George
Rotman Commerce
Lisa Harvey

Non-financial and current liabilities Financial liabilities is any liability that is a contractual obligation to deliver cash or other financial assets to another entity or to exchange financial assets or financial liability under conditions that are potentially unfavourable to the entity.  Recognized initially at fair value  After acquisition, accounted for at their amortized cost  Transition costs that are direct result of issue are netted against its original fair value OR recognized in net income at fair value if after acquisition Short term liabilities are accounted for on practical grounds at maturity value  Non-financial liability  ASPE measure in a variety of ways depending on the specific liability  IFRS, non-financial liabilities are measured initially and at each subsequent reporting date at the best estimate of the amount the entity would rationally pay at the end balance sheet date to settle the present obligation  Usually the present value of obligation measured at the expected value or probability- weighted average of the range of possible outcomes Decommissioning and Restoration Obligations  Obligation (asset retirement obligation) recognized in the period when the obligation is incurred  IFRS recognizes both legal and constructive obligations but ASPE only legal obligations  IFRS only includes cost related to the acquisition of asset as capital assets while ASPE includes also cost from the subsequent production of goods or services  As expected obligation and costs increase due to further damage to site from production activities, ASPE adds to capital asset account while IFRS adds incremental costs caused by production to inventory as production overhead costs  Measured at best estimate of the expenditure required to settle present obligation at reporting date (what would rationally need to pay to be relieved of present obligation).  Discounting future costs is required and interest is accrued each period  IFRS: interest adjustment as borrowing cost (interest expense)  ASPE: operating expense (accretion expense)  Because no stand-alone economic benefit, not recorded separately and ARO is added as cost of asset as necessary in order to acquire and operate the asset  Amortized over useful life through straight-line or other systematic and rational allocations Unearned revenues  As obligation is met, revenue is earned and a transfer is made from unearned revenue to a revenue account Product Guarantees and Customer Programs  Expense approach: liability is measured at the cost of the economic resources needed to meet the obligation. The associated expense needs to be measured and matched with the revenues of the period.  Assuming estimate of cost of obligation in future is close to actual, no effect on net income  In situations where warranty costs are immaterial or period is relatively short, the product may be accounted for on a cash basis. Expense recognized when warranty is honoured.  Revenue approach: liability is measured at the value of the obligation to be provided. Revenue is recognized when service is provided and performance obligation is satisfied  As a separate service or bundled and the amount attributable to warranty has to be broken out and recognized separately as unearned revenue  Revenue is recognized in the same pattern as costs are expected to be incurred  If cost of providing services is greater than remaining unearned revenue (onerous contract), loss and related liability are recognized for expected shortfall  Future income is affected from unearned revenue.  Expense associated with that revenue are also recognized in the future Customer loyalty program  Fair value of award credits is recognized as unearned revenue that is recognized when credits are exchanged for promised awards. Premiums and rebates  Historically expense approach Contingencies and uncertain commitments  Contingency is an existing condition or situation involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur  Gain contingencies and contingent assets are not recorded  Current approach  Under IFRS, contingent liability is only used for obligations that are not recognized  Contingent loss is recognized in income and liability if likely and measurable  New IFRS eliminates contingent liabilities, recognition based on the existence of unconditional contingency, not the uncertainty of amount. Financial guarantees  ASPE – loss contingency and disclosures  IFRS – initially at fair value, usually equal to the premium charged by the guarantor. After measured at higher of best estimate of payment needed to settle the obligation and any amortized premium received as a fee for the guarantee  Most likely amount for single obligation, if large number, expected value of possible outcomes. If significant, time value of money is taken into consideration Commitments  Executory contracts: contracts where neither party has not performed  Not recognized as liabilities  disclosures are required for commitments to make expenditures that are abnormal relative to the company’s financial position and usual operations and for commitments that involve significant risk Income Taxes  Types of differences between accounting and taxable income  Reversible differences (timing differences)  Treatment is the same but the timing of when they are included differs  Permanent differences  Only affect the period in which they occur and no deferred or future tax consequences  Taxes payable method, current rate of tax is simply applied to the company’s taxable income.  Future income taxes method or balance sheet liability method, starts with calculation of current income taxes and then adjusts for the effects of any changes in future income tax assets and liabilities and recognizes these effects as future income tax expense.  Related tax assets and liabilities are called deferred/future income tax assets and liabilities and the associated expense is referred to as deferred/future income tax expense  Both future income tax expense and current income tax expense are reported Tax basis or tax base of an asset or liability is the amount attributed to that asset or liability under the rules established by the tax authorities.  Difference in tax basis and carrying amount is a temporary difference. Taxable temporary difference will result in taxable amounts in future years when the carrying amount is received or liability settled. This increases taxable income and income taxes in the future. Deductible temporary difference will decrease taxable income and taxes in the future.  The taxable temporary difference is multiplied by the applicable future tax rate  Current Income Tax Expense Income Tax Payable  Future Income Tax Expense Future Income Tax Liability  Income tax expense with a credit balance is referred to as an income tax benefit Tax rate considerations  The income tax rates to use should be the ones that are expected to apply when the tax liabilities are settled or tax assets are realized. These would normally be rates that have been enacted at balance sheet date or substantially enacted rate.  Rate includes tax rate reductions provided it is expected the company will qualify for in the periods of reversal  When a change in tax rate is enacted (or substantively enacted), its effect on the existing future income tax asset and liability accounts is recorded immediately as an adjustment to income tax expense in the period of change Loss for income tax purposes or tax loss occurs when the year's tax-deductible expenses and losses exceed the company's taxable revenues and gains.  Carry back 3 years (loss carryback) or carry forward 20 years (loss carryforward).  The tax benefit of loss carryback is recognized in the loss year (Dr. income tax refund receivable, cr. Current income tax benefit)  For carryforward, recognize benefit"  ASPE : "more likely than not" the benefit will be realized  IFRS: "Probable" which means "more likely than not"  If yes, loss carryforward is recognized in the same away as a deductible temporary difference (future income tax asset)  If no, we do not recognize until it can be used  An alternative approach would be to recognize the full amount of the tax effect along with an offsetting valuation allowance, a contra account to the future tax asset account.  Permitted under ASPE but not consistent with current IFRS Presentation  Income tax assets and liabilities have to be reported separately from other assets and liabilities  Income tax amounts currently receivable or payable are reported separately from future or deferred tax assets and liability If debit balance in Income Tax Payable (due to installment payments), current asset called  Prepaid Income Taxes or Income Taxes Receivable  All future or deferred accounts are reported as noncurrent under IFRS but in ASPE, current or noncurrent is determined by the classification of the asset or liability underlying the specific temporary difference. Disclosure  Taxes payable method (ASPE)  Income tax expense or benefit included in determining income (loss) before discontinued operations and the amount related to transactions recognized in equity  Reconciliation of the actual tax rate or expense or benefit to the statutory amount for income with information on major items  Amount of capital gain and other reserves to included in taxable income and amount of unused income tax credits and losses  Future income taxes method (ASPE)  Amount of current and future income tax expense or benefit included in income before discontinued operations and the amount related to capital transactions or transactions recognized in equity  Amount of unused income tax losses, income tax reductions, deductible temporary differences for which no future tax asset is recognized  IFRS  Separate disclosure of major components of income tax expense or benefit and sources of both current and future taxes  Amount of current and future tax recognized in equity in the period and tax expense of each component of OCI  Reconciliation of the effective tax rate to the statutory rate and an explanation  Information about unrecognized future tax assets and underlying deductible temporary differences and unused tax losses and supporting evidence for recognized for deferred tax assets  Information about each type of temporary difference and the future tax asset or liability recognized on the financial statement Pensions and employee future benefits  Defined contribution plans  ASPE: prior or past service cost due to start of plan or amendments, are amortized over the period that organization is expected to realize the economic benefits from plan change  Can be as short as current period  Under IFRS: expensed immediately  Defined benefit plans  The objective in accounting for these plans is for expense and liability related to these plans be recognized in the period which the related services are provided by employees Employer's obligation  Pension obligation is the deferred compensation obligation it has to its employees under the terms of the pension plan  Accrued benefit obligation (ABO) for accounting purposes uses both vested and non- vested and incorporates projected future salaries Accrued benefit obligation (ABO) for funding purposes is measured differently  Changes in the ABO  ABO represents the actuarial present value of the cost of benefits  ABO, beginning of period + Current service cost + Interest cost  Benefits paid to retirees +/- Past service costs of plan amendments +/- Actuarial gains (-) or losses (+) = ABO, end of period  Service cost  Cost of the benefits that are to be provided in the future  To calculate, the actuary predicts the additional benefit that must be paid as a result of current year of service and discount the cost of these benefits to their present value  Attributes the cost of future benefits to the accounting period where service is rendered  Attribution period - the period between date of hire and date when employees become eligible for full benefits  Interest cost  Interest accrues on the ABO just as it does on any discounted debt  IFRS and ASPE require the use of a current market rate  ASPE also allow a current settlement rate  Benefits paid to retirees  As obligations are met, balance of obligation is reduced as other liabilities  Past service costs  When a plan is initiated or amended, credit is often given to employees for service provided before the date of initiation or amendment  Cost of the retroactive benefits  Actuarial gains and losses  Can result from change in actuarial assumptions, experience gain or loss (difference between what has actually occurred and previous assumptions about what would occur) Plan assets  Assets that have been set aside in a trust or other legal entity separate from employer company  Plan assets, beginning + Contributions from employers and employees +/- Actual return (expected return, actuarial (experience) gain or loss Benefits paid to retirees  = Plan assets, end Actual return   Income generated on the assets less the cost of administering the fund  Made
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