Transcript ASPE vs . IFRS : THE BASICS

ASPE VS. IFRS: THE BASICS
Presenters:
Leanne Mongiat, CA
Trudy Snooks, CA
Adams & Miles LLP
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.
Session Overview
 Crash course in ASPE: The Basics
 Crash course in IFRS: The Very Basics
 Key differences:
 Property, Plant and Equipment
 Leases
 Related party transactions
 Income taxes payable
 Financial Instruments
 Example disclosures
 Transition differences
 The Right Option for Your Company
 Closing and Questions
Crash Course in ASPE
 For year-ends beginning on or after January 1,
2011
 Reminder re: effective date vs. transition date
 Handbook – 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 Affects:
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Fair value
Prepaids
Asset retirement obligations (ARO)
Election for Property, Plant & Equipment
Intangibles
Employee future benefits
Stock-based compensation
Business combinations and Joint Ventures
Goodwill
Government payables
Income taxes
Opening balance sheet
Cash flow statements
IFRS Affects
 Revenue recognition
 Asset impairment
 Property, Plant and
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Equipment
Financial Instruments
Investment property
Foreign Exchange
Provisions
Leases
Intangible Assets
Related Party
Transactions
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Business Combinations
Employee future benefits
Income taxes
Stock based
compensation
Hedging
Mining, Oil & Gas
Companies
Joint Ventures
Consolidations
Earnings Per Share
Opening balance sheet
Crash Course in IFRS
 For year-ends beginning on or after January 1,
2011
 Reminder re: effective date vs. transition date
 Entities with rate regulated activities have the
option to defer changeover to January 1, 2012
 Handbook – located in Part I
 Both private companies and Not-For-Profit
organizations have the option to adopt IFRS
 There is significantly more note disclosure
required under IFRS in almost every area
including accounting policies
Crash Course in IFRS - Terms
 IFRS – International Financial Reporting
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Standards (issued post April 2001)
IAS – International Accounting Standards (issued
pre April 2001)
IASB – International Accounting Standards
Board
IFRIC – International Financial Reporting
Interpretations Committee
SIC – Standing Interpretations Committee
Crash Course in IFRS Cont’d
 When transitioning to IFRS most standards and
policies will need to be applied retrospectively
 Optional exemptions to retrospective application:
 Business combinations
 Employee benefits
 Leases
 Borrowing costs, etc.
 Mandatory exemptions to retrospective application:
 Derecognition of financial assets and financial liabilities
 Hedge accounting
 Non-controlling interests, and
 Estimates
IFRS and Presentation Items
 IFRS permits departures from standards if they
would make the F/S misleading
 IFRS does not allow comparative information to
be omitted in the rare circumstances when it is
not meaningful
 When applying an accounting policy
retrospectively, IFRS requires a financial position
for the earliest comparative period possible
IFRS and Presentation Items Cont’d
 Complete set of F/S under IFRS include:
 A statement of financial position
 A statement of comprehensive income
 A statement of change in equity
 A statement of cash flows
 Note disclosure
 An entity may choose different titles for these
statements
IFRS and Presentation Items – Cont’d
 The I/S section under IFRS is less specific as to
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the items that need to be shown on the I/S
IFRS (IAS 1) does not allow for disclosure on
“extraordinary items”
Disclosure of authorization for issue – an entity is
to disclose the date the F/S were authorized and
by whom
Current assets and current liabilities must be in
order of liquidity (IAS 1)
Concept of OCI (Other Comprehensive Income)
Property, Plant and Equipment (PPE)
 Relevant sections IAS 16 and ASPE 3061
 IFRS deals with the following outside the scope of IAS 16
Investment Property - IAS 40 and
 Biological assets (Agriculture) - IAS 41
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 PPE (def’n) – are tangible items that
(a) Are held for use in production or supply of goods or services,
for rental to others, or for administrative purposes; and
(b) Are expected to be used for more than one period
Cost comprises:
(a) Purchase price, including import duties, non-refundable
taxes, less discounts
(b) Amounts for bringing the asset to the location and making it
operational
(c) The initial estimate of dismantling and removing an item and
restoring the site.
PPE Cont’d
 Measurement subsequent to initial recognition: -
There are 2 options:
 (a) Cost Model – PPE shall be carried at its costs
less any accumulated depreciation and
accumulated impairment losses
 (b) Revaluation Model – PPE whose FV can be
reliably measured shall be carried at fair value
(on the date of revaluation) less any subsequent
accumulated depreciation and accumulated
impairment losses. Revaluations should be done
regularly
PPE - Cont’d
 The method chosen must be applied to an entire
class of asset
 If an asset's carrying amount is increased as a
result of a revaluation, the increase shall be
recognized in OCI and accumulated in equity
under the heading of revaluation surplus.
However, the increase shall be recognized in
P&L to the extent that it reverses a revaluation
decrease of the same asset previously
recognized in P&L.
PPE – Amortization vs. Depreciation
 ASPE and IFRS– amortization method chosen
has to be rational and systematic
 IFRS – Includes above, however, there is a direct
relationship between the depreciation method
chosen and the pattern or expectation that the
future economic benefits are to be consumed by
a company over the life of the PPE
PPE – Amortization Cont’d
Amortization vs. Depreciation
ASPE
IFRS
Amortization charged is the greater of:
-The cost less salvage value (estimated
net realizable value at the end of its life)
over the estimated life
- The cost less residual value over the
useful life of the asset.
Depreciation charged is:
- The cost less residual value over the
useful life of the asset
Estimates on the useful life, method of
amortization are reviewed periodically
and residual value only when an event
occurs
Estimates of useful life, method of
depreciation and residual values are
reviewed at each reporting date (at least)
or when expectations deviated from
previous estimates
PPE – Component accounting
 Component accounting exists under ASPE and
IFRS
 Example of component accounting:
 A ship and that is separate into the following with the
following estimated useful lives:
 The body of the ship – 30 years
 Engine – 15 years
 Furniture and fixtures on the ship – 10 years
PPE – Disclosure
 For each Class of PPE the following should
be disclosed:
 the measurement basis
 the depreciation methods
 the useful life or depreciation rates
 gross carrying amt and accumulated
depreciation
PPE – Disclosure Cont’d
 A reconciliation of the carrying amt at the
beginning and end of the period showing:
 additions
 assets classified as held for sale or included in
disposal group classified as held for sale
 acquisition through business combinations
 increases /decreases resulting from revaluations
and from impairment losses
 impairment losses recognized in P&L
 impairment losses reversed in P&L
 depreciation
 net exchange difference arising on translation of
F/S
 other changes
PPE – Disclosure Cont’d
 Additional disclosure:
 the existence and amounts of restrictions on title and
PPE pledged as security
 the amount of expenditures recognized in the carrying
amount of an item of PPE in the course of its
construction
 the amount of contractual commitments related to PPE
 if not disclosed separately in the statement of
comprehensive income, the amount of compensation
from third parties for items of PPE that were impaired,
lost or given up that is included in profit or loss
PPE – Disclosure Cont’d
 If items of property, plant and equipment are
revalued, the following disclosure is needed:
 the effective date of the revaluation
 whether an independent valuer was used
 the methods and significant assumptions in estimating
the FV
 the extent to which the FV was determined directly by
reference to observable prices in an active market
 the carrying amount that would have been recognized
had the assets been carried under the cost model
 the revaluation surplus, indicating the change for the year
and any restrictions on distributions to shareholders
PPE – Final Thoughts
 Topics related to PPE not covered include asset
retirement obligations, PPE impairments and
non-monetary transactions involving PPE
 ASPE 3063 and IAS 36 – Impairment of Long-
lived Assets
Leases
 IAS 17 and ASPE 3065
 IAS 17 – apply to all leases except equipment used to
explore for or use minerals, oil, natural gas and nonregenerative resources and certain licensing agreements
 Both IFRS and ASPE consider whether the benefits and
risks of ownership have transferred when classifying
leases.
 New definitions and terminology under IFRS
 FINANCE LEASE – a lease that transfers substantially all the
risks and rewards of ownership. Title transfer is not
mandatory.
Leases Cont’d
 Under IFRS leases have to be classified as either an
operating lease or a finance lease
 Guidance to determine if the risks and benefits of an
asset have been transferred is provided including:
 Ownership transfer by the end of the lease
 The lessee has an option to purchase the asset for a price
below FV
 The term of the lease is for the majority of the life of the
asset
 At inception, the PV of the minimum lease pymts equals
substantially all of the FV
 The asset is of such a specialized nature
Leases Cont’d
 Lease classifications can only be changed if the
provisions of the lease have been changed
 Changes in estimates related to economic life,
residual value , etc do not give rise to a new
lease classification
 Under IFRS there is no specific guidance on how
to account for the implications when lease terms
are modified
 There are specific standards for land and
building leases – IAS 17 – 15A - 19
Capital/Finance Leases – Recording by Lessee
 The basic process of recording a capital /finance
lease is consistent under ASPE and IFRS
 An asset and obligation is recorded and
represents the lower of the PV of the minimum
lease pymts or the FV of the asset
 The asset is then amortized into operations
similar to other assets in the same class and the
obligation is reduced by payments
Capital/Finance Leases – Recording by Lessee
Continues
ASPE
IFRS
Discount rate:
The discount rate equals the lower of:
-lessee’s rate for incremental
borrowing and
-Implicit interest rate
Discount rate:
A Company is REQUIRED to use the
implicit rate if it is practical to do so. If
it is not practical a company can use
incremental borrowing rate.
Amortization period of asset:
If there are no terms that make
reference to legal ownership passing
or no BPO then the asset is amortized
over the lease term instead of the
expected life of the asset
Amortization period of asset:
If the legal title is not expected to
transfer, then the asset is amortized
over the shorter of the lease term or
the useful life of the asset.
Direct initial costs:
Not specifically addressed.
Direct initial costs:
Costs incurrent on initial set-up are
capitalized as part of the asset.
Leases – Finance Lease Disclosure (Lessee)
 For each class of asset, the net carrying amount at year-end
 A reconciliation between the total of future minimum lease
payments at year-end, and their present value (PV) for each of
the following periods:
 1 year; 1 to 5 years; and later than 5 years
 contingent rents recognized as an expense in the period.
 the total of future minimum sublease payments expected to
be received under non-cancellable subleases at the end of
the reporting period
 a general description of the lessee's material leasing
arrangements including, but not limited to, the following:
 the basis on which contingent rent payable is determined;
 the existence and terms of renewals or purchase options,
escalation clauses; and
 restrictions imposed by lease arrangements, such as
dividends, additional debt and leases
Leases – Final Thoughts
 Impairment – IAS 36 deals with impairment of
lease assets
 First time adoption issues are covered in IFRIC 4
and IFRS 1
 There is an optional exemption to retrospective
application for leases
 Transition date – a lessee or lessor determines the
classification of a lease
SO.....QUESTIONS?
Anyone?
COFFEE TIME!
AND WE’RE BACK!
Related party transactions
 ASPE 3840 and IAS 24
 Identification of related parties is the same,
except that IFRS specifically identifies postemployment benefit plans as related
 Measurement – IFRS provides no specific
guidance on measurement whereas ASPE has a
decision tree for carrying vs. exchange amounts
 Disclosure – IFRS requires disclosure of all
related parties irrespective of transactions or
balances
Related Party Transactions – IFRS Disclosure
 Transactions require separate disclosures by
category:
 The parent;
 Entities with joint control/significant influence;
 Subsidiaries;
 Associates;
 Joint ventures;
 Key management personnel of the entity or its
parent and;
 Other related parties
Related Party Disclosures - IFRS
 Similar to ASPE with a description of the nature of the
transaction, amounts, terms of repayment etc.
 Additional disclosures are required for the following:
 Key management personnel compensation
 Provision for doubtful debts related to outstanding balances
with related parties
 Expense recognised during the period in respect of bad or
doubtful debts due from related parties
 IFRS does provide some exemptions regarding
government control
 Additional disclosure requirements in:
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IFRIC 17 – Distribution of Non-Cash Assets to Owners
IAS 27 – Consolidated financial statements
IAS 28 – Investments in Associates; and
IAS 31 – Interest in Joint Ventures
Income Taxes – Some Differences
ASPE
 Includes all taxes
 Including refundable,
AMT and rate
regulated
 Probable is defined as
greater than 50%
 Classification – current
and non-current for
future taxes
IFRS
 Includes all taxes
 No specific guidance
for refundable, AMT or
rate regulated
 Must record if
probable (no specific
definition indicated)
 Classification – noncurrent for all deferred
taxes
Income Taxes - Methods
ASPE
IFRS
 Choice of:
 Must record both:
 taxes payable method;
 Current taxes - asset
or
 Future income taxes
method
or liability; and
 Deferred taxes as
non-current assets or
liabilities
Income Taxes – Methods
 The taxes payable method is a method of
accounting under which an enterprise reports as an
expense (income) of the period only the cost
(benefit) of current income taxes for that period,
determined in accordance with the rules established
by taxation authorities
 The future income taxes method is a method of
accounting under which an enterprise reports as an
expense (income) of the period the cost (benefit) of
current income taxes and the cost (benefit) of future
income taxes, determined in accordance with the
rules established by taxation authorities
Income Taxes - Definitions
 Temporary differences are differences between the
tax basis of an asset or liability and its carrying
amount in the balance sheet. Temporary differences
may be either:
 (i)
Deductible temporary differences, which are
temporary differences that will result in deductible
amounts in determining taxable income of future periods
when the carrying amount of the asset or liability is
recovered or settled; or
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Taxable temporary differences, which are
temporary differences that will result in taxable amounts
in determining taxable income of future periods when the
carrying amount of the asset or liability is recovered or
settled
Income Taxes – Disclosures - ASPE
Taxes Payable
 Current income tax exp
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(benefit)
Reconciliation
Amount and timing of
capital gains reserves or
similar reserves for 5
years
Unused income tax losses
CF and unused credits
Portion of income tax
related to transactions
charged or credited to
equity
Future Taxes
 Current income tax exp
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(benefit)
Future income tax exp
(benefit)
Amount and timing of
capital gains reserves or
similar reserves for 5
years
Unused income tax losses
CF and unused credits
Portion of income tax
related to transactions
charged or credited to
equity
Income Taxes – Disclosures - IFRS
 Disclose separately the major components of tax
expense(income) included in the determination of
the profit(loss) for the period, including:
 Current tax expense(income);
 Adjustments recognized in the year for current tax of
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prior periods;
Amount of deferred tax expense(income) relating to
changes in tax rates or the imposition of new taxes;
Amount of benefit arising from previously unrecognized
tax loss, tax credit or temp difference of a prior period
that is used to reduce current tax expense;
Likewise for deferred tax expense;
Deferred tax expense arising from the write-down or
reversal of a previous write-down of a deferred tax asset
Financial Instruments
 ASPE 3856 and IFRS 7, IAS 32 and IAS 39
 Differences exist for:
 Scope – IFRS includes many items outside of the
scope for ASPE such as investment companies,
certain types of contracts, and certain types of
derivatives and insurance contracts
 Classification – IFRS requires classification into
loans and receivables, held-to-maturity, fair value
through profit or available –for-sale, financial
liabilities measured at amortized cost
 Classification & presentation– equity vs. liability
 Measurement – fair value, F/X, impairments
Financial Instruments - Classifications
 Taken directly from IAS 39 paragraph 9
 Loans and receivables are non-derivative financial assets with
fixed or determinable payments that are not quoted in an active
market
 Held-to-maturity investments (HTM) are non-derivative financial
assets with fixed or determinable payments and fixed maturity that
an entity has the positive intention and ability to hold to maturity
 Available-for-sale (AFS) financial assets are those non-derivative
financial assets that are designated as available for sale or are not
classified as (a) loans and receivables, (b) held-to-maturity
investments or (c) financial assets at fair value through profit or loss.
 Fair value through profit or loss is a financial asset (liability) that
would otherwise be classified as AFS except that they are
derivatives.
EXAMPLES
Who’s on first? What’s on second? Where did third go?
Transition Implications
 Impact on the bottom line
 Subsequent impact on performance compensation,
ratios and bank covenants, investor relations,
dividend distributions
 Potential for increased volatility of reported
results (fair value accounting)
 Volume and complexity of financial disclosures
(ASPE vs. IFRS)
 Transparency and comparability to other entities
 Competitors, suppliers, customers etc.
Transition Steps
ASPE
 Identify, Analyze,
Determine, Implement
 Create opening balance
sheet (retrospective
treatment)
 Recognize assets &
liabilities required under
ASPE
 Re-measure and
reclassify according to
ASPE (as necessary)
IFRS
 Identify, Analyze,
Determine, Implement
 Create opening balance
sheet (retrospective
treatment)
 Recognize assets &
liabilities required under
IFRS
 Remove those balances
not complying with IFRS
 Re-measure and reclassify
according to IFRS (as
necessary)
The Right Option for Your Company: ASPE vs. IFRS
 Most private entities are expected to transition
from current generally accepted accounting
standards (GAAP) to ASPE
 Facts to consider
 Current operations (your target markets);
 Future plans (IPO); and
 Users of the financial statements (investors, lenders,
etc).
ARE WE THERE YET?
www.adamsmiles.com
Leanne Mongiat – [email protected]
Trudy Snooks – [email protected]