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Panza Inc. owns a plant in Toronto with a carrying value of $ 3,600,000 as at October 31, the company’s fiscal year end. The fair value of the plant is $ 3,400,000. The net cash flows from the plant, over the next 25 years the company expects to use the plant, amount to $100,000 per year. The residual value of the plant at the end of 25 years is $500,000. The present value of the net cash flows of $100,000 per year, using a reasonable rate is $1,165,000. The present value of the residual value is $190,000. What is the amount by which the company must write down the plant as at the year end based on ASPE?

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The plant would be written down to the recoverable amount which is based on the undiscounted cash flows to be derived from both using the plant and disposing of it. Cash flows from using the plant amount to $2,500,000 (i.e. 25 years X $100,000 per year) plus the residual value of $500,000 equals $3,000,000. The company would therefore have to write down the plant, as the carrying value ($3,600,000) is greater than the recoverable amount ($3,000,000).  The writedown would be $200,000, to $3,400,000, the fair market value.
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Cementco Inc. has the following assets in a CGU: Building – CV – $60,000, Equipment – CV – $40,000, Goodwill – CV – $20,000. If they calculate an impairment loss of $30,000 for the CGU, what is the carrying value of the building, equipment and goodwill after applying the impairment loss to these assets under IFRS?

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The goodwill would be written off completely so the carrying value is 0.  The remaining $10,000 would be applied against the building and equipment based on carrying value - 60% building and 40% equipment.  Therefore, the revised carrying value of the building would be $54,000 ($60,000 - $6,000) and the equipment would be $36,000 ($40,000 - $4,000).
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Fatfree Foods purchased a licence with an indefinite life on Sept. 1 of the current year and they have a year end of Dec. 31. Does this asset under IFRS need to be tested for impairment in the current year?

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Yes, an intangible asset with an indefinite life (or not ready for use) that was initially recognized during the current annual period, must be tested for impairment before the end of the current annual period.

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An investor sells inventory to a company subject to significant influence in which it holds a 25% interest for $100 and makes a profit of $40. The investor is using the equity method. The goods are still in the investee’s warehouse at year end. How much profit would the investor be allowed to recognize?

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The investor would only be allowed to recognize $30 (i.e. 75% of the profits).  This is due to the fact that any gain or loss that occurs would be recognized in income at the time of the transfer or sale only to the extent of the interests of the other non-related investors.
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ABC Inc. holds an investment in a publicly traded stock that is subject to significant influence and chooses not to use the equity method. Under ASPE how would the investment be measured?

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It would be measured at its quoted value.  As per HB Section 3051, when an investee's equity securities are quoted in an active market, and the equity method is not used, the investment is valued at the quoted amount with changes in value from period to period recorded in net income.

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When the equity method is being applied, under what circumstances would an investor’s share of losses in excess of the carrying amount of its investment be recorded?

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Comparison with ASPE Under ASPE an investor's share of losses in excess of the carrying amount of the investment is recorded if: (a)     the investor has guaranteed the obligations of the investee; or (b)     the investor is otherwise committed to provide further financial support to the investee; or (c)     the investee seems assured of imminently returning to profitability.
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ABC Inc. is using the equity method to account for its investment in DEF. ABC’s year end is Dec. 31 and DEF’s year end is August 30. Would ABC be allowed to utilize the statements of DEF which have a different year end for the purpose of applying the equity method under IFRS?

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No - Under IFRS one is not allowed to use F/S of an associate with a year end more than 3 months different from the investor.  Therefore the financial statements of DEF would have to be prepared as at December 31 for the purpose of using the equity method.
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What are examples of factors that would indicate significant influence?

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  1. Investor representation of the board of directors
  2. Investor participation in policy making process
  3. Extent of inter-corporate investments, e.g. investor is a major supplier or customer
  4. Investor provides substantial debt financing, technical assistance, significant patents, trademarks, etc. on which firm relies
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How should the following change in accounting policy be accounted for in the financial statements – At the beginning of the current year a company which previously used the completed contract method began to use the percentage of completion method and started to track percentage of completion for each job?

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The financial statements should be adjusted for retrospectively by restating opening retained earnings in the current year’s financial statements. Although the company will not have sufficient information to adjust individual prior periods, sufficient information should be available to compute the cumulative impact on prior periods, by determining the extent of completion of each contract as at the beginning of the current year.  Hence it would be appropriate to apply the change in policy retrospectively, by making a cumulative adjustment to the opening balance of retained earnings for the current year’s financial statements.
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What is the difference between the frequency of impairment testing for goodwill, required by ASPE versus IFRS?

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Under ASPE there is no requirement to test annually for impairment for goodwill.  Goodwill only has to be tested for impairment when events or changes in circumstances indicate that the carrying amount of the reporting unit to which the goodwill is assigned may exceed the fair value of the reporting unit..   Under IFRS goodwill is tested at least annually for impairment.
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How is a change in accounting policy applied in the financial statements?

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Accounting policy changes are normally applied retrospectively. As long as it is practicable to do so, one would adjust the opening balance of each affected component of equity for the earliest prior period presented and the other comparative amounts disclosed for each prior period presented as if the new accounting policy had always been applied.
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