The probability associated with obtaining a particular value of z is referred to as its

22

Accounts receivable (ASPE)
Considered a financial instrument (financial asset) as it represents a contractual right to receive cash or another financial asset from another party
As such, accounts receivable must be tested for impairment at the end of the reporting period if significant adverse changes during the period cast doubt on collectability
If impaired, then should be written down to the amount expected to be collected, either directly, or through the use of an allowance account
The amount of the reduction shall be recognized as an impairment loss in net income.

Case: Bruin Car Parts
Reference: ASPE 3856.05(h), .16, .17

Inventory valuation (ASPE)
Valued at lower of cost and net realizable value (NRV)
NRV is the estimated selling price in the ordinary course of business less estimated selling costs

Case: Bruin Car Parts
Reference: ASPE 3031.07, .10

Inventory costs (ASPE)
The cost of inventories shall comprise all purchase, conversion and other costs incurred in bringing the inventories to their present location and condition
Trade discounts, rebates and other similar items are deducted in determining the costs of purchase
Storage, administrative overhead, and selling costs are specifically excluded from the cost of inventories

Case: Bruin Car Parts
Reference: ASPE 3031.11, .12, .17

Internally generated intangible assets – R&D (ASPE)
Research costs are always expensed when incurred
Accounting policy choice to either capitalize or expense development costs
Development costs can be capitalized if all of the following exist:
o Technically feasible
o Intention to complete it
o Ability to use or sell it
o Availability of adequate technical, financial and other resources to complete the development
o Ability to reliably measure the expenditures attributed
o Probable future economic benefits will be generated

Case: Bruin Car Parts, TankCo
Reference: ASPE 3064.37, .40, .41

Goodwill and intangible assets – Amortization (ASPE)
Intangibles are to be amortized over their estimated useful lives unless they are considered to have an indefinite life
Assets with indefinite lives are not to be amortized until the life is no longer considered indefinite (however it must still be tested for impairment)
Amortization method and useful life should be reviewed annually
The expected useful life must consider:
o expected use of the asset,
o expected useful life of related assets,
o contractual, legal and regulatory provisions and other economic factors

Case: Bruin Car Parts
Reference: ASPE 3064.56, .57, .61


Investments (ASPE)
Investments subject to significant influence can be accounted for using the equity or cost method
Investments without significant influence:
o Not quoted on an active market – accounted for using cost method (can be designated at fair value upon first recognition)
o Quoted on active market – accounted for at fair value

Case: Bruin Car Parts
Reference: ASPE 3051 and 3856.11 - .15 
Financial instruments – Impairment (ASPE)
Financial instruments tested for impairment at the end of each reporting period. Where impairment exists, reduce the carrying value to the highest of:
o PV of cash flows expected from holding the asset
o Net realizable value (if asset sold)
o Amount entity expects to realize from exercising its right to collateral
Impairment can be reversed if asset subsequently recovers in value

Case: Bruin Car Parts, Kinfolk
Reference: ASPE 3856.16 - .19

Deductibility of expenses (Tax)
General limitation- To be deductible, expense or outlay must be made or incurred by the taxpayer for the purpose of gaining, producing or maintaining income, and be expected to generate income related to the taxpayer’s business or property

Case: Bruin Car Parts, Dogani
Reference: ITA 18(1)(a)

Common business expenses DISALLOWED (Tax)
Amortization / Impairment / Accounting Gains & Losses (deduct via CCA/CEC)
Personal expenses and membership / club dues
Charitable donations – deduction to determine Taxable Income for a Corp.
Political contributions – limited tax credit available
Taxes, interest and penalties related to tax
Meals & entertainment (50% for business purposes, deductible for remote or temporary work sites, or special events for employees)
Expenses re: issue or sale of shares and refinancing costs (reserve over 5 years)
Life insurance premiums (except where the policy has been assigned as collateral)
Unpaid amounts & unpaid remuneration (accrued salary which is unpaid 180 days after fiscal period is deemed not to have been incurred until actually paid)
Carrying charges on vacant land (non-deductible portion added to ACB)
Soft costs on construction of building (include interest, legal, accounting fees, insurance, property taxes; must be capitalized)

Case: Bruin Car Parts, Culinary Crawl, Atlantic Shellfish, TankCo
Reference: ITA 20(1), 18(1)

Common business expenses ALLOWED (Tax)
Automobile expenses
Home office expenses
Convention expenses (limited to 2 per year)
Foreign taxes (deductions in excess of 15% on foreign-source property income, since foreign tax credits limited to 15%; if no foreign tax credit can be claimed, entire amount of foreign non-business income tax is deductible)
Inventory valuation (lower of cost or market, method must be consistent, LIFO not permitted, professionals can elect to exclude WIP (thus recognized when billed instead of on accrual basis)
Reserves – no deduction for a reserve, contingent liability or sinking fund in general, but reserve is permitted for doubtful debts, amounts not due under an installment sales contract; any reserve deducted in one year must be taken into income the next year

Case: Bruin Car Parts, Culinary Crawl, Atlantic Shellfish, TankCo
Reference: ITA 20(1)

Capital Cost Allowance (CCA) (Tax)
CCA may be claimed on all tangible capital property other than land, must be available for use
Inducements (such as leasehold improvements) may be included in income or used to reduce capital cost
Most classes subject to ½ year rule (except class 12 and class 52)
Dispositions are credited to UCC at lesser of cost and proceeds (excess of proceeds over original cost result in a capital gain)
Terminal loss – when there is a balance of UCC in the class but there are no assets remaining, the UCC can be claimed as a terminal loss (capital loss cannot arise on the disposition of depreciable property)
Recapture – arises when the balance in the class is negative (i.e. when the adjustment re: disposal is in excess of the UCC) and is taken into income
Recapture / Terminal loss calculated as: Lesser of a) proceeds and b) cost; less UCC. If positive, then recapture. If negative, then terminal loss.

Case: Bruin Car Parts, Culinary Crawl, Atlantic Shellfish, TankCo
Reference: ITA 20(1)(a)

Reporting alternatives – Specific items (Assurance)
CAS 805 Report – Audit of a Single Financial Statement and Specific Elements, Accounts or Items of a Financial Statement
o A report providing audit level assurance on individual financial statements or accounts, rather than financial statements on the whole
o May not be a practical alternative if the financial statements on the whole are not being audited

Case: Capital Works, Atlantic Shellfish, TankCo
Reference: CAS 805 
Retiring allowance rollover to RRSP (Tax)
A retiring allowance (also called severance pay) is an amount paid to officers or employees when or after they retire from an office or employment, in recognition of long service or for the loss of office or employment. A retiring allowance includes:
payments for unused sick-leave credits on termination; and
amounts individuals receive when their office or employment is terminated, even if the amount is for damages (wrongful dismissal when the employee does not return to work).
Individuals with years of service before 1996 may be able to directly transfer all or part of a retiring allowance to a registered pension plan (RPP) or a registered retirement savings plan (RRSP). The amount that is eligible for transfer is limited to:
$2,000 for each year prior to 1996
$1,500 for each year prior to 1989 (if no vested contributions to RPP or DPSP by employer)

Case: Capital Works
Reference: ITA 60(j.1) 
Shareholder loan (Tax)
Principal amount must be added to shareholder’s income ITA 15(2)
No imputed interest under ITA 80.4(3)
Can be deducted under ITA 20(1)(j) when it is repaid
Exception: If loan repaid prior to second balance sheet date of corporation, then principal amount need not be added to shareholder’s income, but imputed interest under ITA 80.4(2) would apply. However, it cannot be a series of loans and payments (as per ITA 15(2.6))
Exception: Loan advanced as an employee, rather than shareholder, to acquire residence, auto for work or shares of the company, under ITA 15(2.4), as long as at the time the loan was made, bona-fide arrangements were made for repayment of the loan within a reasonable amount of time

Case: Capital Works
Reference: ITA 15(2), ITA 80.4

Revenue recognition – Consignment sales (ASPE)
Consignment sales include goods shipped but not yet billed
They could be returned if not sold or only billed for to the extent sold
Performance is not considered complete upon delivery for such goods, as the risks and rewards are deemed not to have been transferred from the seller to the buyer because of the seller’s continuing involvement
As such, revenue cannot be recognized up until either the goods can no longer be returned or a payment is made in regards to them

Case: Fire in the Sky
Reference: ASPE 3400.13 - .15 
Asset criteria (ASPE)
Definition of an asset:
Future benefit
Entity can control the benefit
Event that caused benefit already occurred

Case: Fire in the Sky, CHHP
Reference: ASPE 1000.25

Inventory valuation (ASPE)
Valued at lower of cost and net realizable value (NRV)
NRV is the estimated selling price in the ordinary course of business less estimated selling costs

Case: Fire in the Sky
Reference: ASPE 3031.07, .10

PPE – Betterments (ASPE)
A “betterment” enhances service potential (increase in physical output or service capacity, associated operating costs are lowered, useful life is extended, or quality of output is improved)
If the expenditure can be classified as a betterment à capitalize asset
If the expenditure cannot be classified as a betterment à expense as repair and maintenance

Case: Fire in the Sky, Lock Stock & Barrel
Reference: ASPE 3061.14

Non-monetary transactions (ASPE)
Asset exchanged in a non-monetary transaction should be measured at the more reliably measurable of the fair value of the asset given up and the fair value of the asset received, unless the transaction lacks commercial substance or neither the fair value of the asset received nor the fair value of the asset given up is reliably measurable, in which case, it should be measured at the carrying value of the asset given up
A non-monetary transaction has commercial substance when the entity's future cash flows are expected to change significantly as a result of the transaction, i.e.
o the risk, timing and amount of the future cash flows of the asset received differ significantly from the risk, timing and amount of the cash flows of the asset given up; or
o the entity-specific value of the asset received differs from the entity-specific value of the asset given up, and the difference is significant relative to the fair value of the assets exchanged

Case: Fire in the Sky
Reference: ASPE 3831.06, .07, .11
Non-monetary transactions (IFRS)
Asset exchanged in a non-monetary transaction should be measured at the more reliably measurable of the fair value of the asset given up and the fair value of the asset received, unless the transaction lacks commercial substance or neither the fair value of the asset received nor the fair value of the asset given up is reliably measurable, in which case, it should be measured at the carrying value of the asset given up
A non-monetary transaction has commercial substance when the entity's future cash flows are expected to change significantly as a result of the transaction, i.e.
o the risk, timing and amount of the future cash flows of the asset received differ significantly from the risk, timing and amount of the cash flows of the asset given up; or
o the entity-specific value of the asset received differs from the entity-specific value of the asset given up, and the difference is significant relative to the fair value of the assets exchanged

Case: Dogani
Reference: IAS 16.24-.26

Review engagements (Assurance)
The objective of a review engagement is to assess whether the information being reported on is plausible and that it is within the framework of appropriate criteria, i.e. ASPE or IFRS for financial statements
Moderate assurance about the results of the examination is provided, with an explicit statement that no audit was performed
Report expresses negative assurance- “nothing has come to our attention…”
Similar to an audit, independence is required as it is an assurance engagement
Typical procedures include:
o Obtaining knowledge of the client’s business
o Making enquiries of client personnel
o Performing analytical procedures
o Discussing with management the information received and the information being reported on
Case: Fire in the Sky, Lock Stock & Barrel, Good Spring Farm
Reference: Section 8100 
Opening balances (Assurance)
Sufficient and appropriate evidence regarding opening balances being free of material misstatement must be obtained in order to issue an opinion
Evidence may be obtained by reviewing the previous auditor’s working papers, if the client has been audited before, or by performing specified audit procedures on the opening balances, if the client is being audited for the first time
If the opening balances cannot be verified, it may be necessary to issue a qualified opinion or denial / disclaimer of opinion due to the scope limitation
Generally, the opening balance scope limitation would not apply to a review engagement as there’s no requirement to send out A/R confirmations or attend inventory counts, which are time-sensitive and generally only required for audit level assurance 

Case: Fire in the Sky, TankCo
Reference: CAS 510, paragraph 6(c) 
Employee vs. Contractor (Tax)
No single test is decisive. Must consider:
o Intention of the parties
o Control of work (hours, location, how job is completed)
o Ownership of tools (who supplies)
o Chance of profit and risk of loss
o Ability to subcontract work or hire assistants
o Integration
Issues:
o Contractors can deduct all reasonable expenses whereas employment deductions are limited
o Employees can receive EI benefits, contractors can opt in with restrictions
o Employers are required to withhold source deductions for employees
o Employer may be responsible for both EE/ER contributions of EI and CPP if an individual is incorrectly classified as a contractor

Case: Fire in the Sky, Handyside, Katwill, CHHP

Employer provided automobile – Standby charge (Tax)
Standby charge is a taxable employment benefit that only applies if an employer-provided automobile is available to the employee for personal use
Calculated as:
o 2% of the original cost per month available; or
o 2/3 of the monthly lease payment per month available
reduced by payments made by the individual to the employer
reduced standby charge applicable where personal use less than 1,667 km per month and automobile primarily used for business purposes (consider greater than 50%)

Case: Fire in the Sky
Reference: IT-63R5

Employer provided automobile – Operating cost benefit (Tax)
Taxable employment benefit, calculated as:
o $0.26 per km of personal use; or
o 50% of the standby charge (only when vehicle used at least 50% for business)
Operating costs include gas, insurance and maintenance, but not parking

Case: Fire in the Sky
Reference: IT-63R5


Employer provided automobile – Tax planning (Tax)
Consider employee purchasing the car and charging a reasonable per-km allowance (may be more tax effective since the standby charge is based on original cost)
Consider employee including allowance in income and claiming business portion of actual car expenses if they exceed the allowance
Consider sale and leaseback for employer-provided cars (leasing may lower tax benefits because otherwise the standby charge is based on original cost)
Maintain log to justify business vs. personal km
Lower standby charge by reducing number of days vehicle available for personal use
Increase business use by visiting clients on the way to and from work

Case: Fire in the Sky
Reference: IT-63R5


Employment – Taxable benefits (Tax)
Board and lodging (unless at remote location)
Most rent-free and low-rent housing
Trips of a non-business nature
Gifts greater than $500 (that are not cash or near-cash)
Cash and near-cash gifts
Cost of tools where employee is not required to have tools to work
Forgiveness of debt
Employer-paid education costs when primarily for the benefit of employee

Case: Fire in the Sky
Reference: ITA 6(1)


Employment – Non-taxable benefits (Tax)
Uniforms and special clothing required to be worn
Transportation to job site
Moving expenses reimbursed
Recreational facilities at place of work
Premiums paid under private health services plans
Professional membership fees when primarily for benefit of the employer
Loyalty points while traveling for business
Points earned using personal credit card for business purposes

Case: Fire in the Sky
Reference: ITA 6(1)

Impairment of definite-life intangible assets (ASPE)
Steps:
1. Determine if factors indicating impairment exist
2. Group asset with other assets/liabilities to form group at the lowest level that generates cash flow (i.e. cash generating unit)
3. Determine if there is impairment by comparing net book value to recoverable amount (i.e. undiscounted future cash flows)
4. Calculate impairment by comparing net book value to net realizable value (i.e. fair value less costs to sell or discounted future cash flows)
Cannot reverse write-downs

Case: Fitness Elitists Inc., TankCo
Reference: ASPE 3063.04-.09, .12, .18

Impairment of assets (IFRS)
An entity is required to assess whether there are any indicators of impairment at the end of each reporting period. If an indication of impairment exists, the asset will need to be tested for impairment.
To test for impairment, compare the asset’s recoverable amount to the carrying value. The extent to which the carrying value exceeds the recoverable amount (if any) is the impairment loss.
Recoverable amount: Higher of the fair value less costs to sell and the value in use
o Fair value less costs to sell: price that would be received to sell an asset or paid to transfer a liability between market participants, less incremental costs directly attributable to the disposal of the asset (excluding finance cost and income tax expense)
o Value in use: Present value of the future cash flows from the continuing use of the asset and its ultimate disposal
Impairment can be reversed if the asset subsequently recovers in value
Case: Atlantic Shellfish
Reference: IAS 36

Investments – Equity method (IFRS)
IAS 28: an entity with significant influence over an investee shall treat the investee as an associate and account for its investment in the associate using the equity method
Significant influence can be demonstrated by owning (directly or indirectly) 20% or more of the voting power of the investee
The entity may be able to demonstrate influence, even with less than 20% ownership. Evidence of influence can include:
o Representation on the board of directors
o Participation in policy-making processes
o Material transactions between the entity and its investee
o Provision of essential technical information
Under the equity method, the investment is initially recognized at cost, and is adjusted for the post-acquisition change in the investor’s share of the investee’s net assets

Case: Atlantic Shellfish
Reference: IAS 28
Accounting for subsidiaries (ASPE)
An enterprise can make an accounting policy choice to account for it’s subsidiaries using one of the following methods:
Cost method
Equity method
Consolidation method

** Once a method has been selected, it must be applied consistently (i.e. all subsidiaries must be accounted for using the same method)

Case: Lock Stock & Barrel
Reference: ASPE 1591, ASPE 3051

PPE – Costs (ASPE)
PPE costs represent the amount of consideration given up to acquire, construct, develop, or better a PPE and comprise of all costs directly attributable to the acquisition, construction, development or betterment, including installing it at the location and in the condition necessary for its intended use
PPE costs include direct construction or development costs (such as materials and labour) and overhead / carrying costs directly attributable to the construction or development activity
The cost of each item of PPE acquired as part of a basket purchase (i.e. when a group of assets is acquired for a single amount) is determined by allocating the price paid for the basket to each item on the basis of its relative fair value at the time of acquisition

Case: Fitness Elitists Inc.
Reference: ASPE 3061.03, .06, .08
Capital lease criteria – Lessee (ASPE)
Must meet one of the criteria:
o Transfer of ownership or bargain purchase option at the end of the lease term
o Lease term at least 75% of economic life of asset
o PV of minimum lease payments at least 90% of FV of leased asset

▪ Discount rate = lower of lessee’s incremental borrowing rate and implicit rate

Case: Fitness Elitists Inc., Lock Stock & Barrel, Kinfolk, CHHP, TankCo
Reference: ASPE 3065.06
Capital lease criteria – Lessor (ASPE)
Capital lease if all of the following exist:
Credit risk is normal
Unreimbursable costs are estimable
Any one of the following criteria are met:
o Transfer of ownership or bargain purchase option at the end of the lease term
o Lease term at least 75% of economic life of asset
o PV of minimum lease payments at least 90% of FV of leased asset
▪ Discount rate = implicit rate

Case: Fitness Elitists Inc.
Reference: ASPE 3065.07
Types of capital leases – Lessor (ASPE)
Sales-type lease
o Arise when a dealer uses leasing as a way to sell their products
o Record as sale
Direct financing lease
o At inception, FV of the leased property is equal to its carrying value
o Usually arises when a lessor acts as intermediary between manufacturer and lessee
o Record as lease receivable (payments to be received and guaranteed residual value, if any)
o Difference between lease receivable and carrying value should be recorded as unearned finance income
o Finance income will be recognized each year

Case: Fitness Elitists Inc.
Reference: ASPE 3065.29, .30, .37
Compound Financial Instruments (ASPE)
Financial instruments, or their component parts, should be classified as a liability or equity in accordance with the substance of the contractual arrangement on initial recognition and the definitions of a liability and an equity instrument
Financial instruments that contain both a liability and an equity element, including warrants or options issued with and detachable from a financial liability, should be separated into component parts, as follows:
o The equity component is measured as zero, i.e. the entire proceeds of the issue are allocated to the liability component; or
o The less easily measurable component is allocated the residual amount after deducting from the entire proceeds of the issue the amount determined for the component that is more easily measurable
The sum of the carrying amounts assigned to the liability and equity components on initial recognition is always equal to the carrying amount that would be ascribed to the instrument as a whole, i.e. no gain or loss can arise from recognizing and presenting the components of the instrument separately

Case: Fitness Elitists Inc.
Reference: ASPE 3856.20 - .22
Capital Budgeting – Buy vs. Lease (Finance)
Calculate NPV of each option and compare to determine which option is cheapest
NPV of buy option – consider:
o Cost of asset
o PV of tax shield
o Maintenance costs
NPV of lease option – consider:
o PV of after tax lease payments
Other factors to consider:
o Impact on covenants
o Cash flows (leasing lessens the current cash burden)
o Leasing may be easier to come by if company has trouble obtaining financing
o Purchasing the asset might provide more flexibility (ownership of asset)
o Leasing might insulate company from severe declines in asset value
o Possible tax advantages (no capital leases for tax purposes – CRA sees all leases the same so cash payments would be deductible, however no CCA)

Case: Fitness Elitists Inc, CHHP
Financing Options – Debt vs. Equity (Finance)
Debt financing options:
o Loan- consider loan term, and security/collateral required
o Lease
o Government assistance
Equity financing options:
o Angel investors- can be friends or family looking for a return on investment; generally passive investors
o Venture capitalists- professional investment funds, looking for superior returns (>30%); active participants in management, with a clear exit strategy
o Private equity- tends to participate later in business lifecycle, hence lower risk
o Public markets

Case: Fitness Elitists Inc.

Revenue recognition criteria – Completed contract method (ASPE)
The completed contract method would only be appropriate when performance consists of the execution of a single act or when the enterprise cannot reasonably estimate the extent of progress toward completion.
NOTE: There is no equivalent recognition criteria under IFRS.

Case: Handyside, Fire in the Sky, CHHP, TankCo
Reference: ASPE 3400.18

Revenue recognition criteria – Percentage-of-completion method (ASPE)
The percentage-of-completion method, by contrast, is appropriate when:
performance consists of the execution of more than one act, and
revenue would be recognized proportionately by reference to the performance of each act.

For practical purposes, when services are provided by an indeterminate number of acts over a specific period of time, revenue would be recognized on a straight line basis over the period unless there is evidence that some other method better reflects the pattern of performance.

The amount of work accomplished would be assessed by reference to measures of performance that are reasonably determinable and relate as directly as possible to the activities critical to the completion of the contract.

Case: Handyside, Fire in the Sky, CHHP, TankCo
Reference: ASPE 3400.17

Revenue recognition – Effect of uncertainties (ASPE)
Recognition of revenue requires that the revenue is measurable and that ultimate collection is reasonably assured.
If significant and unpredictable amounts of goods being returned, do not recognize revenue
If the amount of returns can be reasonably estimated based upon experience, it may be possible to provide for an allowance for a returns expense.

Case: Handyside
Reference: ASPE 3400.19-.21

Inventory measurement – Cost vs. net realizable value (ASPE)
Inventories shall be measured at the lower of cost and net realizable value.
The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.
Estimates of net realizable value are based on the most reliable evidence available, at the time the estimates are made, of the amount the inventories are expected to realize upon sale.

Case: Handyside, Lock Stock & Barrel
Reference: ASPE 3031.10-12, 3031.29

Inventory measurement – Cost formulas (specific identification) (ASPE)
The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects shall be assigned by using specific identification of their individual costs.

Case: Handyside
Reference: ASPE 3031.22


Inventory measurement – Allocation of overhead (ASPE)
The allocation of fixed production overheads to the costs of conversion is based on the normal capacity of the production facilities.
The actual level of production may be used if it approximates normal capacity.
Unallocated overheads are recognized as an expense in the period in which they are incurred.

Case: Handyside
Reference: ASPE 3031.14

Intangible assets (ASPE)
In order to meet the definition of an intangible asset, assets must meet the identifiability, control, and future economic benefits tests.
An asset meets the identifiability criterion in the definition of an intangible asset when it:
o is separable, or
o arises from contractual or other legal rights
An entity controls an asset if the entity has the power to obtain the future economic benefits flowing from the underlying resource and to restrict the access of others to those benefits.
An intangible asset shall be recognized if, and only if:
o it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and
o the cost of the asset can be measured reliably.

Case: Handyside, Kinfolk, CHHP, TankCo
Reference: ASPE 3064


Lease inducements (ASPE)
Lease inducements are an inseparable part of the lease agreement and, accordingly, are accounted for as reductions of the lease expense over the term of the lease.

Case: Handyside
Reference: ASPE 3065.27

Business income vs. property income (Tax)
It is a question of fact whether income is from business or property.
Capital property is property that provides a long term or enduring benefit
Disposition of capital property gives rise to capital gains or losses
Business income will arise from an “adventure or concern in the nature of trade”, determined as follows:
o Conduct
▪ How long was the asset held? Have there been similar transactions?
o Nature of the asset
▪ Is the asset capable of producing income? Is the asset related to the taxpayer’s ordinary business?
o Intent
▪ Did the taxpayer originally acquire the asset with the intention to sell?
For an individual, business income is generally taxed at a higher rate than capital gain, as only 50% of capital gains are taxable.
For a CCPC earning less than the SB Limit, capital gain is generally taxed at a higher rate than business income, as the SBD doesn’t apply to capital gains

Case: Handyside, Capital Works, TankCo Reference: ITA 9, ITA 248(1), IT-218R
Incremental Cash Flows (Finance)
Incremental cash flows comprise the additional cash flows from taking on a new project, incorporating the tax-affected initial outlay, annual revenues & expenses and terminal value (or cost) associated with the project, in accordance with the scale and timing of the project
When determining incremental cash flows from a new project, consider:
o Sunk Costs – These are the initial outlays that cannot be recovered even if a project is accepted. As such, these costs will not affect the future cash flows of the project and are not considered incremental
o Opportunity Costs – These represent any potential loss of current cash flows due to accepting a new project and are considered incremental
o Cannibalization – This is the opportunity cost where a new project takes sales away from an existing product
o Working Capital Changes – These represent changes in receivables, payables and inventory due to accepting a new project and are therefore considered incremental

Case: Molly Sue Brews, Kinfolk, TankCo
Control Deficiencies (Assurance)
The most effective format to address controls weaknesses consists of a short statement of the problem (deficiency), its potential effect(s) on the financial statements or operations (implication) and suggestions to address the matter (recommendation)
o Deficiency (D) – this is generally a case fact outlining something that might be deficient with the current controls
o Implication (I) – here, we go beyond case facts to explain the effects of the noted deficiency either on the financial statements or on operations. To the extent possible, effects on the financial statements must be tied to assertions or at least the affected accounts must be outlined along with a discussion of how they might be affected by the deficiency
o Recommendation (R) – this involves suggesting a solution to rectify the noted deficiency that is specific and practical given the case facts and circumstances.
Case: Molly Sue Brews, Garden and Landscaping Emporium, Culinary Crawl, Atlantic Shellfish, CHHP, TankCo
Internally generated intangible assets (IFRS)
Research is defined as original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding
Development is defined as the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems, or services before the start of commercial production or use
Research costs are always expensed
Development costs can be capitalized if all of the following exist:
o Technically feasible
o Intention to complete it
o Ability to use or sell it
o Probable future economic benefits will be generated
o Availability of adequate technical, financial and other resources
o Ability to reliably measure the expenditures attributed
Costs meeting the tangible asset criteria should not be capitalized as intangible

Case: K-Med, Nationwide, Digital Future Tech, Atlantic Shellfish
Reference: IAS 38.4, .8, .54, .57

Internally generated intangible assets (IFRS)
To meet the definition of an intangible asset the item must be: identifiable, the entity must have control over the future benefit and the item must meet the recognition criteria
The asset is identifiable if it either:
o It can be separated from the entity
o Arises from contractual, legal right that allow it to be transferrable or separable
The entity controls the asset if it has the power to obtain future economic benefits
Recognition criteria:
o Probable that the expected future economic benefits will flow to the entity
o Cost of the asset can be measured reliably


Case: K-Med Reference: IAS 38.12, .13,.17 .21


Intangible assets – Amortization (IFRS)
Intangibles are to be amortized over their estimated useful lives unless they are considered to have an indefinite life
Assets with indefinite lives are not to be amortized until the life is no longer considered indefinite, but they must be tested for impairment annually
Assets with definite lives can be reported following either the cost model or the revaluation model
Amortization method and useful life should be reviewed annually
Consider expected use, life of related assets, contractual provisions, product life cycles and other economic factors

Case: K-Med, Nationwide
Reference: IAS 38.72, .88, .97, .104, .107, .109

Discontinued operations (IFRS)
A component of an entity where its operations and cash flows can be clearly distinguished operationally and for financial reporting purposes, from the rest of the entity and it has been disposed of or classified as held for sale
Report results of discontinued operations on the statement of comprehensive income for current and prior periods, net of tax, segregated as follows:
o the post-tax profit or loss of discontinued operations
o the post-tax gain or loss recognized on the measurement to fair value less costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operation.

Case: K-Med, Nationwide
Reference: IFRS 5.03, .31 - .33

Assets held for sale (IFRS)
Non-current assets (or disposal group) to be disposed of other than by sale should continue to be classified as held and used until they are disposed of
Non-current assets (or disposal group) to be sold should be classified as held for sale when all of the following are met:
o Management commits to a plan to sell
o Steps to locate a buyer and complete the sale have started
o It is being actively marketed at a reasonable price
o It is available for immediate sale in its present condition
o The sale is probable and expected to occur within a year
o Actions required to complete the sale indicate it’s unlikely significant changes to the plan will be made or that the plan will be withdrawn
Non-current assets (or disposal group) held for sale should be measured at lower of carrying amount and fair value less costs to sell, and should not be amortized

Case: K-Med, Nationwide
Reference: IFRS 5.06 - .15, .25

Borrowing costs (IFRS)
Interest and financing costs that an entity incurs in connection with the borrowing of funds
Capitalize borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset
Possible qualifying assets:
o Inventories
o Manufacturing plants
o Intangible assets
o Investment properties

Case: Nationwide
Reference: IAS 23.05, .07, .08

Share-based compensation (IFRS)
For equity-settled share-based payment transactions, the entity shall measure the goods or services received, and the corresponding increase in equity, directly, at the fair value of the goods or services received, unless that fair value cannot be estimated reliably, in which case fair value of the equity instruments granted is used
Transactions with employees and others providing similar services require use of the fair value of the equity instruments granted measured at grant date, because typically it is not possible to estimate reliably the fair value of the services received

Case: Nationwide
Reference: IFRS 2.10, .11


Common audit risk factors (Assurance)

New or additional users
Management bias
Going concern
Debt covenants
Cash flow issues
Control issues
New problems or issues
Significant growth in revenues or assets
Legal claims
High risk industry
Complex systems
Changes in operating environment
New personnel
Changes to information systems
New technologies
Changes in products or activities
Corporate restructuring
Expanded foreign operations
New accounting pronouncements

Case: K-Med, Nationwide, Dogani, Atlantic Shellfish, TankCo
Reference: CAS 315, Appendix 2


Materiality (Assurance)
A misstatement in financial statements is considered to be material if, in the light of surrounding circumstances, it is probable that the decision of a person who is relying on the financial statements, and who has a reasonable knowledge of business and economic activities (the user), would be changed or influenced
Common base = 5% of Normalized Net Income before Taxes (NIBT) for profit-oriented entities
Materiality is not purely quantitative; qualitative factors must be considered
Factors that may indicate the existence of one or more particular classes of transactions, account balances or disclosures for which misstatements of lesser amounts than materiality for the financial statements as a whole could reasonably be expected to influence the economic decisions of users- i.e. “specific” materiality
Performance materiality (generally 50% to 75% of materiality) means the amount less than materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality

Case: K-Med, Nationwide, Lock Stock & Barrel, Digital Future Tech, Dogani, Atlantic Shellfish, TankCo
Reference: CAS 320
Audit approach (Assurance)
If Control Risk assessed at Maximum, then no reliance may be placed on controls, resulting in no Tests of Controls, and a Substantive approach must be followed
If Control Risk assessed at less than Maximum, then some reliance may be placed on controls, based on results of Tests of Controls, which could lower the amount of substantive work to be done at year-end. Such an approach is generally referred to as a Combined approach
Case: Nationwide, Dogani, Atlantic Shellfish, TankCo
Financial statement assertions (Assurance)
Assertions about classes of transactions and events for the period under audit:
o Occurrence – transactions and events that have been recorded have occurred and pertain to the entity
o Completeness – all transactions and events that should have been recorded have been recorded
o Accuracy – amounts and other data relating to recorded transactions and events have been recorded appropriately
o Cut-off – transactions and events have been recorded in the correct accounting period
o Classification – transactions and events have been recorded in the proper accounts
Assertions about account balances at the period end:
o Existence – assets, liabilities, and equity interests exist
o Rights and obligations – the entity holds or controls the rights to assets, and liabilities are the obligations of the entity
o Completeness – all assets, liabilities and equity interests that should have been recorded have been recorded
o Valuation and allocation – assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded
Assertions about presentation and disclosure:
o Occurrence and rights and obligations – disclosed events, transactions, and other matters have occurred and pertain to the entity
o Completeness – all disclosures that should have been included in the financial statements have been
o Classification and understandability – financial information is appropriately presented and described, and disclosures are clearly expressed
o Accuracy and valuation – financial and other information are disclosed fairly and at appropriate amounts

Case: K-Med, Nationwide, Digital Future Tech, Atlantic Shellfish, TankCo Reference: CAS 315.A124
Use of an expert (Assurance)
Evaluate the competence, capabilities and objectivity of the expert
Obtain an understanding of the expert’s work
Evaluate the appropriateness of the expert’s work as audit evidence for the relevant assertion
Case: Nationwide
Reference: CAS 500.A37 - .A48

Revenue recognition criteria (ASPE)
Revenue from sales and service transactions shall be recognized when:
Performance is complete (risks and rewards transferred, significant acts performed)
Consideration is measurable
Collection reasonably assured

Case: Rent a Bike, CHHP, TankCo
Reference: ASPE 3400.04 - .06

Revenue recognition – performance criteria (ASPE)
Performance would be regarded as being achieved when all of the following criteria have been met:
Persuasive evidence of an arrangement exists
Delivery has occurred or services rendered
Price to the buyer is fixed or determinable

In determining if the seller's price to the buyer is fixed or determinable, an entity would consider the impact of the following factors:
Cancellable sales arrangements;
Right of return arrangements;
Price protections and/or inventory credit arrangements; and
Refundable fee for service arrangements.

Case: Rent a Bike, TankCo
Reference: ASPE 3400.07, .10

Revenue recognition – collectability criteria (ASPE)
Recognition of revenue requires that the revenue is measurable and that ultimate collection is reasonably assured
When there is reasonable assurance of ultimate collection, revenue is recognized even though cash receipts are deferred
When there is uncertainty as to ultimate collection, recognize revenue only as cash is received

Case: Rent a Bike
Reference: ASPE 3400.19

Revenue recognition – multiple deliverables (ASPE)
Evaluate all deliverables to determine whether they represent separate deliverables
If you can identify separate deliverables, revenue recognition criteria should be assessed for each deliverable separately
If two or more transactions are linked together in such a way the commercial effect can’t be understood without reference to the series of transactions as a whole, then the recognition criteria will be applied to the series of transactions as one

Case: Rent a Bike, Fitness Elitists Inc.
Reference: ASPE 3400.11

Government assistance (ASPE)
Assistance for non-capital items:
o Include in net income for period when incurred
o When government assistance relates to expenses of future accounting periods, the appropriate amounts shall be deferred and amortized to income as related expenses are incurred.
Assistance for capital items:
o Reduce cost of capital item with any depreciation computed on the net amount; or
o Defer and amortize on the same basis of depreciation
Provided there is reasonable assurance that the enterprise has complied and will continue to comply with the conditions for receipt of the government assistance, the accrual basis of accounting for the assistance is appropriate

Case: Rent a Bike
Reference: ASPE 3800

Discontinued operations (ASPE)
A discontinued operation is a component of an entity where its operations and cash flows can be clearly distinguished from the rest of the entity and it has been disposed of or classified as held for sale
Report results of discontinued operations on I/S for current and prior periods, net of tax

Case: Rent a Bike
Reference: ASPE 3475.03, .30

Assets held for sale (ASPE)
Long-lived assets to be disposed of other than by sale should continue to be classified as held and used until they are disposed of
Long-lived assets to be sold should be classified as held for sale when all of the following are met:
o Management commits to a plan to sell
o It’s available for immediate sale in its present condition
o Steps to locate a buyer and complete the sale have started
o The sale is probable and expected to occur within a year
o It’s being actively marketed at a reasonable price
o Actions required to complete the sale indicate it’s unlikely significant changes to the plan will be made or that the plan will be withdrawn
Asset held for sale should be measured at lower of carrying amount or fair value less cost to sell, and should not be amortized

Case: Rent a Bike
Reference: ASPE 3475.04, .08, .13

Accounting changes – change in estimate (ASPE)
The use of reasonable estimates is an essential part of the preparation of financial statements and does not undermine their reliability
An estimate may need revision if changes occur in the circumstances on which the estimate was based or as a result of new information or more experience
By its nature, the revision of an estimate does not relate to prior periods and is not the correction of an error.
The effect of a change in an accounting estimate is recognized prospectively by including it in net income in:
o the period of the change, if the change affects that period only; or
o the period of the change and future periods, if the change affects both.

Case: Rent a Bike
Reference: ASPE 1506.20 - .23

Net Present Value (NPV) vs. Internal Rate of Return (IRR) (Finance)
The NPV rule states that you invest in any project which has a positive NPV when its cash flows are discounted at the opportunity cost of capital, also known as the discount rate (usually the cost of raising the capital to fund the project)
The IRR rule states that you invest in any project offering a rate of return which exceeds the opportunity cost of capital
A project’s rate of return is calculated as the discount rate at which the NPV of the project would be zero
Therefore, the NPV and IRR rules should give the same accept/reject answer about a project, in most circumstances
A project’s cash flows should include incremental elements only (i.e. additional sales, associated expenses, lost margin on cannibalization, investment & associated tax-shield, etc., but no financing elements, as discounting of the cash flows already addresses financing)

Case: Rent a Bike

Discounted vs. Undiscounted Cash Flows (Finance)
Incremental cash flows (excluding financing elements) should be discounted to recognize the time value of money for the purposes of making a decision regarding accepting or rejecting a project
Incremental cash flows (including financing elements) should be analyzed year over year, without discounting, to determine if a certain cash position would be met by a certain time

Case: Rent a Bike, TankCo

Payback Period (Finance)
Payback period is the time in which the initial cash outflow of an investment is expected to be recovered from the cash inflows generated by the investment
In general, investments with lower payback period are preferred
To determine, calculate the cumulative net cash flow for each period and then use the following formula for payback period:
Payback Period = A + B / C, where:
o A is the last period with a negative cumulative cash flow;
o B is the absolute value of cumulative cash flow at the end of the period A; and
o C is the total cash flow during the period after A.
Case: Rent a Bike

Reporting alternatives – Compliance with agreement (Assurance)
Section 5815 Special Report – Audit reports on compliance with agreements, statutes and regulations
o A report stating compliance with the terms of the agreement, through procedures such as inspection, observation, inquiry, confirmation, recalculation, reperformance and analytical procedures
o High level of assurance and therefore more costly alternative
Section 8600 Report – Reviews of compliance with agreements, statutes and regulations
o A report stating compliance with the terms of the agreement, through procedures such as inquiry, discussion and analysis
o Moderate level of assurance and therefore less costly alternative
Section 9100 Report – Results of Applying Specified Auditing Procedures
o A report providing the factual results of the specific procedures that can be chosen to be performed
o No assurance provided but is the most flexible of all alternatives

Case: Rent a Bike, Capital Works, Good Spring Farm, TankCo
Reference: 5815, 8600, 9100
Methods of collecting audit evidence (Assurance)
Inspection – thorough examination of an item by the auditor
Observation – use of the senses to assess certain activities
Inquiry – obtain written or oral information from the client in response to questions
Confirmation – receipt of a written or oral response from an independent third party verifying the accuracy of information
Recalculation – recheck the computations and mathematical work completed by the client
Reperformance – redo other non-mathematical procedures such as internal controls
Analytical procedures – use comparisons and relationships between financial and non-financial information to determine whether account balances appear reasonable

Case: Rent a Bike, Digital Future Tech, TankCo
Reference: CAS 500-A10-A25

Related Party Transactions (ASPE)
For transactions carried out in the normal course of operations
o monetary related party transactions, or non-monetary RPT with commercial substance should be recorded at their exchange amount, unless
▪ it is a non-monetary RPT that is an exchange of a product/property to be resold in the same line of business. This type of RPT will be recorded at carrying amount, adjusted for any additional consideration/
For transaction NOT in the normal course of business
o monetary RPT, or non-monetary RPT with commercial substance should be recorded at their exchange amount, IF
▪ the change in ownership interest in item transferred/service provided is substantive, and
▪ the exchange amount is supported by independent evidence
When the RPT has been measured at carrying amount, any difference between the carrying amounts of items exchanged, together with any related tax amounts, shall be booked to equity.

Case: Lock Stock & Barrel, Kinfolk
Reference: ASPE 3840.08-.09, .18, .22, .29
Financial Ratio Analysis
Financial ratios are categorized according to the financial aspect that the ratio measures:
Liquidity ratios measure the availability of cash to pay short-term debts.
E.g., Current ratio, Quick ratio, Working capital ratio
Asset turnover ratios measure efficiency in utilizing assets. E.g., accounts receivable turnover, inventory turnover
Profitability ratios measure how well assets are used and expenses are controlled to generate a return. E.g., gross profit margin, net profit
Debt service ratios measure the ability to repay long-term debt. E.g., debt to equity, times interest earned

Ratios generally are not useful unless they are benchmarked against something else such as past performance or another organization. Therefore, the ratios of organizations in different industries, which face different risks, capital requirements, and competition, are usually hard to compare.

Case: K-Med, Lock Stock & Barrel, Kinfolk, Atlantic Shellfish, TankCo

Lease Accounting – Land & Building (ASPE)
When a lease contains both land and building, it must first be determined whether the terms allow ownership to pass or provide for a bargain purchase option.
o If yes, the lessee will capitalize the land separately from the building, based upon fair values.
o If no, is the FV of the land at the inception of the lease significant in relation to the total FV of the leased property?
▪ If yes, the land and building(s) are considered separately for purposes of classification. The lessee and lessor allocate the minimum lease payments between the land and building(s) in proportion to their fair values. Both parties classify the portion of the lease applicable to land as an operating lease.
▪ If no, the land and building are considered a single unit, and the economic life of the building is considered the economic life of the unit.

Case: Kinfolk


Subsequent Events (ASPE)
In general, there are two types of subsequent events:
o those that provide further evidence of conditions that existed at the financial statement date; and
o those that are indicative of conditions that arose subsequent to the financial statement date.
Financial statements shall be adjusted when events occurring between the date of the financial statements and the date of their completion provide additional evidence relating to conditions that existed at the date of the financial statements.
Disclosure shall be made of those events occurring between the date of the financial statements and the date of their completion that do not relate to conditions that existed at the date of the financial statements but:
o cause significant changes to assets or liabilities in the subsequent period; or
o will, or may, have a significant effect on the future operations.

Case: Handyside, Kinfolk
Reference: ASPE 3820

Contingencies (ASPE)
Existing condition involving uncertainty as to a possible gain or loss
Uncertainty will result in a range of probabilities
o likely
o unlikely
o not determinable
Contingent losses
o must be accrued if the future event is likely and a reasonable estimate of the loss can be made
o disclosed if the future event is likely but a reasonable estimate of the loss CANNOT be made
o disclosed if the future event is not determinable
Contingent gains
o must NOT be accrued
o disclosed if the future event is likely
Case: Kinfolk, TankCo
Reference: ASPE 3290

Revenue Recognition (IFRS)
In a transaction involving the sale of goods, performance should be regarded as having been achieved when ALL the following conditions are fulfilled:
the entity has transferred to the buyer the significant risks and rewards of ownership of the goods;
the entity retains no continuing managerial involvement, to the degree usually associated with ownership nor effective control over the goods sold;
the amount of revenue can be measured reliably;
it is probable that the economic benefits associated with the transaction will flow to the entity; and
the costs incurred or to be incurred in respect of the transaction can be measured reliably.

Case: K-Med, Good Spring Farm, Digital Future Tech
Reference: IAS 18.14


Accounting Policies, Changes, Errors (IFRS)
Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. Changes in accounting estimates result from new information or new developments and, accordingly, are not corrections of errors.

Only change a policy if:
Standard/interpretation requires it, or
Change will provide more relevant and reliable information to users
Apply changes to policy retrospectively unless it is impractical.

Changes to accounting estimates should be applied prospectively.

Corrections to errors should be applied retrospectively unless it is impractical

Case: K-Med, Good Spring Farm
Reference: IAS 8

Property, Plant and Equipment (IFRS)
Initial recognition if:
The future economic benefits associated with the asset will flow to the entity, and
The cost of the asset can be reliably measured.
Initial measure- recorded at cost.
Subsequent measurement
Carried at cost less accumulated depreciation, and impairment losses, OR
Carried at revalued amount, i.e. FV, less subsequent depreciation if FV can be reliably measured
o An increase in value is credited to OCI, unless it is a reversal of a revaluation decrease previously recognized as an expense
Significant components are required to be depreciated over their estimated useful life.

Case: Good Spring Farm, Digital Future Tech, Atlantic Shellfish
Reference: IAS 16


Agriculture (IFRS)
This standard is intended to apply to the following which relates to agricultural activity
Biological assets
Agricultural produce at the point of harvest
Government grants related to biological assets
Initial recognition if:
The entity controls the asset as a result of a past event.
The future economic benefits associated with the asset will flow to the entity, and
The cost of the asset can be reliably measured.
Initial measurement at:
FV, less estimated point of sale costs
Cost, if no reliable measurement of FV is available.
Subsequent measurement
FV, less estimated point of sale costs
Cost, less accumulated depreciation if no reliable measurement of FV is available.

Case: Good Spring Farm
Reference: IAS 41

Revenue Recognition – Identification of the transaction (IFRS)
in certain circumstances, it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction:
E.g., products sold with an identifiable amount for subsequent servicing. In such a case, the service revenue should be deferred, and recognized over the period in which the services will be performed.
Conversely, the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series of transactions as a whole:
E.g., an entity may sell goods and, at the same time, enter into a separate agreement to repurchase the goods at a later date, thus negating the substantive effect of the transaction; in such a case, the two transactions are dealt with together.

Case: Digital Future Tech
Reference: IAS 18.13

Provisions, Contingent Liabilities, Contingent Assets (IFRS)
Provisions- a liability of uncertain timing or amount. May be recognized when:
The entity has a present legal or constructive obligation as a result of a past event,
It is probable that an outflow of economic benefits will be required to settle the obligation; and
A reliable estimate can be made of the amount of the obligation
Contingent losses à NOT recognized:
A possible obligation that arises from past events, whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly in the control of the entity;
A present obligation that arises from past events is not recognised when an outflow of future economic benefits is not probable or the amount of the obligation cannot be measured reliably.
Contingent gainsà NOT recognized:
– possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.

Case: Digital Future Tech, Atlantic Shellfish
Reference: IAS 37

Tax Implications of Going Public
Company status will change from CCPC to Public company.
Deemed year end on date of change in status.
Possible acquisition of control
Tax balances that are eliminated àCDA, RDTOH
Small business deduction only available to CCPC à public company will be taxed at “high rate”, creating General Rate income pool (“GRIP”) and eligible dividends.
Any undistributed Small Business earnings in the Low Rate income pool must be paid out first as other than eligible dividends.
SRED public company qualifies for lower rate of ITC, and they are not refundable (only refundable for CCPC)
Public company shares do not qualify for Capital Gains exemption

Case: Boys and Girls Toys

Employer paid automobile expenses – Taxable benefit (Tax)
A taxable benefit arises when an employee is given something that is personal in nature or if something that is personal in nature is paid for by the company
A benefit includes an allowance or a reimbursement of an employee’s personal expense (e.g. personal fuel is reimbursed)
The value of the benefit is generally its FMV
If an employee is provided with a taxable benefit, the amount must be included in their income


Case: Perfecto Painters Inc.


Owner- manager compensation – salary vs. dividends (Tax)
Corporations are separate legal entities therefore, to extract funds, an owner manager must either receive a dividend or be paid a salary
The Canadian tax system is meant to charge the same level of tax on income regardless of whether it is earned directly as an individual (i.e. salary) or flowed through a corporation (i.e. dividend); this is referred to as integration
Salary payments are deductible to the corporation whereas dividends are not
Dividend payments will be paid out of after-tax profits and be eligible for a dividend tax credit which offsets the higher corporate rate of tax paid
Salary is considered earned income for the purpose of generating RRSP contribution room and pensionable earnings for CPP
Salary payment may result in reduced net cash flow available to an owner-manager, as there are CPP and EI costs associated with this type of compensation; these remittances are not required for dividend payments
Dividend payments will reduce an individual’s cumulative net investment loss (CNIL)

Case: Perfecto Painters Inc.

Reserves for bad debts (Tax)
A reserve may be deducted for bad debts to the extent that it is reasonable and based on specific uncollectible accounts
A reserve claimed in one taxation year must be included in income in the following tax year and a new reserve based on the current specific uncollectible accounts will be calculated and deducted from income
o Effectively this means that the increase in the reserve amount should be deducted each year

Case: Perfecto Painters Inc.
Reference: ITA 20(1)(l), ITA 12(1)(d)

Business investment loss (Tax)
For tax purposes, in the year a corporation declares bankruptcy, or is insolvent (subject to certain conditions), its shareholder(s) may file an election to deem the shares to have been disposed of for proceeds equal to nil
o Generally, this will yield a capital loss equal to the ACB of the shares
A capital loss of small business corporations is given special treatment and is deemed to be a business investment loss
o Half of the business investment loss is determined to be an “allowable business investment loss” (ABIL) and can be applied immediately against income from any source
o The ABIL can be carried back up to three years or forward up to ten years
o If the ABIL is not used by the end of the ten years, it will become a capital loss
Case: Perfecto Painters Inc.
Reference: ITA 50(1), ITA 39(1)(c), ITA 111(1)(a), ITA 111(8)

Activity based costing (Management Accounting)
Costs are allocated to activity cost pools and activity rates are calculated
Costs that are not driven by activities are not allocated to cost pools

Case: Perfecto Painters Inc.

Moving expenses
In order for any moving costs to be deductible for tax purposes, the move must be an “eligible relocation” and the costs incurred must be deductible moving expenses.
Eligible relocation is:
o Occurring as a result of a new work location within Canada, and
o One in which the new residence is at least 40 kilometres closer to the new work location than the old residence
Deductible moving expenses include:
o Selling costs related to the old residence (i.e. commissions)
o Costs to transport household goods (i.e. moving company costs, etc.)
o Legal fees associated with the purchase of a new residence
o Disconnecting and connecting utilities, revising legal documents to reflect a new address, replacing driver’s licenses
o Travelling costs
o Meals and lodging (not exceeding 15 days, not including travel days)
o Costs of cancelling a lease on the old residence
o Up to $5,000 of interest, property taxes, insurance, heating and utilities costs on the old resident, subsequent to the time when the taxpayer has moved out, during which reasonable efforts are made to sell the property
Examples of costs that are not deductible include:
o Home renovations for the old property in advance of the sale (these are capital in nature and would be added to the capital cost of the old property)
o Travel expenses for a house-hunting trip
Case: Play Canada Inc.
Reference: ITA 248(1); 62
Principal residence exemption (PRE)
The PRE enables the capital gains arising on the disposition of a principal residence to be received tax-free.
The formula for determining the PRE is (A x (1 + B) /C), where A = the capital gain on the disposition of the property, B = number of years the property is being designated as the principal residence, and C = number of the years the property was owned by the taxpayer.
Only 1 property can be designated as a principal residence for a taxpayer and his/her family in any given year
A principal residence is an accommodation that is ordinarily inhabited by the taxpayer/taxpayer’s family in the year
o To be ordinarily inhabited, the property needs to have been lived in at some point during the year by the taxpayer/taxpayer’s family
If more a taxpayer/taxpayer’s family own more than 1 principal residence in a year, they will have to choose 1 to designate as the principal residence
To minimize taxes, it is most advantageous to designate the residence with the highest average capital gain per year as the principal residence
Case: Play Canada Inc.
Reference: ITA 54; 40(2)(b)
Replacement property rules (Tax)
In an arm’s length transaction, when one property is exchanged for another property, it is deemed to be disposed of for proceeds equal to the fair market value, and any excess of proceeds over adjusted cost base is a capital gain
If replacement property criteria are met, then an election is available to fully defer any capital gain arising on the deemed disposition, by reducing the cost case of the acquired property by the amount of the capital gain
To be eligible to defer the gain, the replacement property rules must apply:
o It is reasonable to conclude that the property was acquired by the taxpayer to replace the former property (and put to the same or similar use)
o Where the former property was used by the taxpayer or a person related to the taxpayer for the purpose of gaining or producing income from a business, the particular capital property was acquired for the purpose of gaining or producing income from that or a similar business or for use by a person related to the taxpayer for such a purpose
o Where the former property was a taxable Canadian property of the taxpayer, the particular capital property is a taxable Canadian property of the taxpayer
Case: Dogani; Reference: ITA 13(4), 44(1), 44(5)
Business use of home expenses (Tax)

A taxpayer can deduct expenses for the business use of a workspace in the home, as long as they meet one of the following conditions:
The home is the principal place of business; or
They use the space only to earn business income, and the taxpayer uses it on a regular and ongoing basis to meet clients, customers, or patients.
Eligible costs include: heat, home insurance, electricity, property taxes, repairs & maintenance, mortgage interest or rent (if tenant).
- Expenses are pro-rated using a reasonable basis such as the area of the work space divided by the total area of the home.
- Home office expenses are also pro-rated for a short business year.
- Losses cannot be created by home office expenses. Unused expenses are carried forward for use in a later year.
- Do not claim CCA on a principal residence as it may negatively impact the ability to use the principle residence exemption.

Case: Culinary Crawl Reference: ITA 18(12), IT-514
Using the work of internal auditors
The external auditor shall determine whether the work of the internal audit function can be used for purposes of the audit by evaluating the following:
o The extent to which the internal audit function's organizational status and relevant policies and procedures support the objectivity of the internal auditors;
o The level of competence of the internal audit function; and
o Whether the internal audit function applies a systematic and disciplined approach, including quality control.
In determining the nature and extent of work that may be assigned to internal auditors the external auditor shall consider:
o The amount of judgment involved in planning/performing audit procedures, and evaluating the audit evidence
o The assessed risk of material misstatement
o The existence of significant threats to objectivity and competence of the internal auditor
Case: Handyside
Reference: CAS 610.15, 610.29
Reporting alternatives – Specific Items (Assurance)
CAS 805 Report – Audit of a Single Financial Statement and Specific Elements, Accounts or Items of a Financial Statement
A report providing audit level assurance on individual financial statements or accounts, rather than financial statements on the whole

The auditor must
comply with all CAS’s relevant to the audit (CAS 200)
determine the acceptable financial reporting framework to be applied and document the agreed terms of the audit engagement, including the expected form of any reports to be issued (CAS210)

CAS’s written in the context of an audit of financial statements are to be adapted as necessary when applied to audits of other historic financial information.
When forming an opinion and reporting on a single financial statement or on a specific element of a financial statement, the auditor shall apply the requirements in CAS 700, adapted as necessary in the circumstances of the engagement.

Case: Lock Stock & Barrel
Reference: CAS 805

General assurance standards (Assurance)
Standards for assurance engagements OTHER THAN audits of financial statements and other historical financial information. General standards:
Before undertaking an assurance engagement, the practitioner should have a reasonable basis for believing the engagement can be completed in accordance with the standards in this Section.
The practitioner should seek management's acknowledgment of responsibility for the subject matter as it relates to the objective of the engagement.
The assurance engagement should be performed with due care and with an objective state of mind.
The practitioner and any other persons performing the assurance engagement should have adequate proficiency in such engagements.
The practitioner and any other persons performing the assurance engagement should collectively possess adequate knowledge of the subject matter.
The practitioner should identify or develop criteria that are suitable for evaluating the subject matter.

Case: Kinfolk
Reference: Section.5025

Responsibility of the Auditor for Assessment of Going Concern
The external auditor should obtain sufficient appropriate audit evidence about management’s use of the going concern assumption in preparation of the financial statements
Conclude if a material uncertainty exists that the entity cannot continue as a going concern
Determine the implications on the auditor’s report
Communicate with those charged with governance if events or conditions cast doubt on the going concern
Additional Audit Procedures When Conditions or Events Are Identified
If no assessment has been made by management, request one
Evaluate management’s plan for future actions
Where there is a cash flow forecast and the forecast is a significant factor:
o Evaluate the reliability of underlying data
o Assess adequate support for assumptions
Consider additional information
Request written representations from management regarding future plans and feasibility
Impact on the Auditor’s Report if Material Uncertainty exists
If adequate disclosures are made in the financial statements, unmodified option but include an emphasis of matter in the auditor’s report
If adequate disclosures are not made, qualified or adverse opinion

Case: K-Med Reference: CAS 570