Question

In an examination of Daniel Corporation Ltd. as of December 31, 2017, you have learned that the following situations exist. No entries have been made in the accounting records for these items. Daniel follows IFRS.

1. The corporation erected its present factory building in 1999. Depreciation was calculated by the straight-line method, using an estimated life of 35 years. Early in 2017, the board of directors conducted a careful survey and estimated that the factory building had a remaining useful life of 25 years as of January 1, 2017.

2. An additional assessment of 2016 income tax was levied and paid in 2017.

3. When calculating the accrual for officers' salaries at December 31, 2017, it was discovered that the accrual for officers' salaries for December 31, 2016 had been overstated.

4. On December 15, 2017, Daniel Corporation Ltd. declared a stock dividend of 1,000 common shares per 100,000 of its common shares outstanding, distributable February 1, 2018 to the common shareholders of record on December 31, 2017.

5. Daniel Corporation Ltd., which is on a calendar-year basis, changed its inventory method as of January 1, 2017. The inventory for December 31, 2016 was costed by the average method, and the inventory for December 31, 2017 was costed by the FIFO method. Daniel is changing its inventory method because it would result in reliable and more relevant information.

6. Daniel has guaranteed the payment of interest on the 20-year first mortgage bonds of Bonbee Inc., an affiliate. Outstanding bonds of Bonbee Inc. amount to $150,000 with interest payable at 6% per annum, due June 1 and December 1 of each year. The bonds were issued by Bonbee Inc. on December 1, 2013, and the company has met all interest payments except for the payment due December 1, 2017. Daniel states that it will pay the defaulted interest to the bondholders on January 15, 2018.

7. During 2017, Daniel Corporation Ltd. was named as a defendant in a lawsuit for damages by Anand Shahid Corporation for breach of contract. The case was decided in favour of Anand Shahid Corporation, which was awarded $80,000 damages. At the time of the audit, the case was under appeal to a higher court.

Instructions

(a) Describe fully how each item should be reported in the financial statements Financial Statements
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial... of Daniel Corporation Ltd. for the year 2017.

(b) Determine if any of the treatment given under IFRS in part (a) would be different if ASPE had been used.

Answer 1

Answer:

(a)

1.     This is a change in estimate and should be applied to the calculations for 2017 on a prospective basis. If the impact of the change on depreciation expense is material, note disclosure explaining the change in estimate and the effect on earnings is required.

2.     Since income tax is self-assessed by companies, additional assessments of prior years’ amounts occasionally happen. This is considered a revision of an estimate and the additional amount of income tax is expensed in 2017. If the additional income tax stems from an error in the preparation of the tax return, such as unreported revenues or over-estimation of deductions, the assessment would be treated as an accounting error. A prior year’s accounting error is recorded as an adjustment to opening retained earnings. Comparative financial statement amounts are restated and note disclosure explaining the nature of the error and the statement items adjusted and restated would be included.

3.     The overstatement of 2016 officers’ salaries is an accounting error. Any impact on 2017 expenses would be corrected in the current year and the opening balance of retained earnings would be adjusted net of any related income tax effect. Comparative financial statement amounts and earnings per share amounts are restated and note disclosure explaining the nature of the error and the statement items adjusted would be included.

4.     The stock dividend reduces retained earnings on the date of declaration. It would therefore be shown on the 2017 statement of changes in shareholders’ equity. Since the stock dividend is not issued before year-end, there would also be a Stock Dividend Distributable balance included in the Share Capital section of Shareholders’ Equity.

Earnings per share would be adjusted as if the shares had been outstanding throughout the year 2017 and any EPS figures provided for earlier periods would also have to be restated for comparative purposes. This is a requirement even if the stock dividend was distributable in the New Year. As long as it is before the financial statements are issued, these adjustments are required.

5.       This is a voluntary change in accounting policy as a result of switching to a policy that provides reliable and more relevant information. Daniel will need to record an adjustment to opening retained earnings for the change in policy, net of any related income tax effect and restate the comparative statements. Note disclosure is required explaining the change in policy and the reason for the change. The method of applying the change (full or partial retrospective) must be disclosed as well as the impact of the change on individual statement items.

6.       The guarantee should be (and should have been) disclosed in the notes to the financial statements as a significant commitment. Bonbee Inc. has defaulted on an interest payment and Daniel has stated that it will pay the defaulted interest to the bondholders on January 15, 2018. This is a subsequent event that provides evidence of a condition that existed at year end, and if Bonbee does not pay the interest by January 15, 2018, the interest should be shown as a current liability and an expense or loss charged to income (with a receivable set up if it is considered that an asset exists in terms of collectability from Bonbee). If Daniel considers the possibility of having to honour the principal amount of the bonds of Bonbee likely and measurable, then a loss and liability should be accrued in the 2017 financial statements.

          If the probability of additional loss is not determinable, Daniel may still have to disclose the risk of additional loss. In either case, Daniel will have to examine the underlying cause of Bonbee’s missed interest payment to determine the likelihood of the guarantee being enforced against Daniel.

7.     The accounting treatment depends on Daniel’s legal counsel’s evaluation of the likelihood of loss on appeal. If the company’s legal counsel estimates that it is not probable or undeterminable that they will lose the appeal then no accrual is required. This position would be doubtful however since the company has already been found in breach of contract. The company would have to accrue the loss and liability. Additional note disclosure would be required to describe the liability and whether any un-accrued additional exposure to loss exists.

(b)      Under ASPE, most of the treatment given under IFRS would be the same with a few exceptions:

           For the stock dividend under item 4, the declaration of the dividend would be reported in the statement of retained earnings instead of the statement in changes in shareholders’ equity.

           For the change in accounting policy, under item 5, ASPE does not require the entity to meet the test of providing more relevant and reliable information.

           Lastly, for the accrued damages from the lawsuit under item 7, the threshold for recognition under ASPE would be “likely”, instead of “probable”, making it a more conservative assessment for recognition