Currently issued ROMRS MUST be re-classified from equity to financial liability under the following scenarios:
Scenario #1 – ROMRS issued prior to January 1, 2018 AND;
Scenario #2 – ROMRS issued on or after January 1, 2018 AND;
1) One or more criteria for equity classification is NOT met (ASPE 3856.23):
2) Entities can elect to classify as a financial liability as an accounting policy change.
If the ROMRS must be classified as liabilities or the entity makes a policy choice to classify as liabilities, there are two approaches allowed under the standard:
Option #1: Restate at the transition date (the first day of the earliest comparative period on the balance sheet). For an entity with a calendar year, this would likely be January 1, 2020.
Option #2: Apply the change at the date the amendment to the standard is adopted (i.e. January 1, 2021 for calendar year).
Whether or not the holder of the ROMRS retains control of the enterprise is NOT a straightforward determination.
Re-assessment of the classification of equity classified ROMRS:
Examples in the standard are provided as to the types of events or transactions that may trigger a change in classification:
(i) on the face of the balance sheet, the total redemption amount for all classes of such shares outstanding;
(ii) the aggregate redemption amount for each class of such shares; and
(iii) a description of the arrangement that gave rise to the shares
This decision tree will guide you in determining if shares are to be classified as equity or a financial liability.
No substantive changes to the standard, except where sections reference section 3856 when financial instrument element is in scope.
View changes to the standard
1. Fair value (without adjustment)
2. Cost of the financial instrument (undiscounted cash flows excluding interest and dividend payments, less impairment losses recognize prior to transfer)
3. Cost of financial instrument (determined using the cost of consideration transferred; “exchange amount”)
i. Monetary or non-monetary transaction with commercial substance
ii. Change in ownership interest in items transferred is substantive
iii. Amount of consideration paid/received is established and agreed to by the parties and supported by independent evidence
*Cost determined using the exchange amount
4. Cost of the financial instrument (using carrying amount of the consideration transferred)
This is used ONLY if none of the three above scenarios apply
View different measurement scenarios
*Image originally published by CPA Canada in the April 2019 publication: “Financial Reporting Alert: Accounting Standards for Private Enterprises (ASPE), Appendix II.”
The measurement is generally the same as for financial instruments arising in arm’s length transactions with the following exceptions:
1. Equity component measured as nil, with all proceeds allocated to liability component
2. Liability component measured as the sum of undiscounted cash flows with residual value allocated to the equity component
Amendments applied retrospectively with the following transitional relief for financial instruments originating in a related party transaction that occurred prior to the effective date of January 1, 2021:
*If calendar year end, beginning of earliest comparative period would be January 1, 2020, unless more than two fiscal periods are presented, or not both 12 month periods.
Amendments to ASPE 3400 provide guidance on how to identify the “unit of account” in revenue transactions.
Additional guidance is also provided for specific revenue recognition topics:
(a) percentage of completion method;
(b) multiple-element arrangements;
(c) reporting revenue gross or net;
(d) bill and hold arrangements; and
(e) upfront non-refundable fees / payments.
There are no changes to the principles already contained in section 3400, however, additional guidance has been added to existing concepts in the appendices to the section.
The amendments significantly narrow the potential diversity in practice by entities reporting under ASPE with complex revenue recognition arrangements. Entities with long-term contracts, contracts with multiple deliverables, etc. will need to review their revenue recognition practices as a result to ensure they are compliant with the amendments.
There was a significant diversity in practice with respect to revenue recognition as the pre-amended standards lacked guidance in a number of areas, and encouraged a principles based “risk and reward” model.
Entities had to refer to other source GAAP (IFRS, US GAAP, Part V) in order to determine how to apply guidance. IFRS and US GAAP have moved from a “risk and reward” model towards a control-based model, therefore these sources of GAAP were seen to be principally inconsistent with the goals of ASPE 3400.
a) Are negotiated as a package in the same economic environment with an overall profit margin objective;
b) Constitute in essence an agreement to do a single arrangement with a single customer;
c) Are so closely interrelated that they are, in effect, part of a single arrangement with an overall profit margin; and
d) Are performed concurrently or in a continuous sequence.
When there is a revenue arrangement with multiple deliverables, deliverables are considered separate units of account when both of the following criteria are met:
a) If the arrangement includes a general right of return relative to the deliverable(s), delivery or performance of the remaining deliverable(s) is considered probable and substantially in the control of the vendor; and
b) The deliverable(s) have value to the customer on a stand-alone basis.
Allocation is ONLY performed at the inception of the arrangement, arrangement cannot be re-assessed subsequently.
1) Consideration to be allocated on a relative stand-alone selling price UNLESS a stand-alone selling price is not directly observable, otherwise;
2) Stand-alone selling price for one or more deliverables in the arrangement can be estimated using one or more methods:
a) Adjusted market assessment approach
b) Expected cost plus margin approach
*Otherwise, such contracts are accounted for using the completed contract method.
Decision Tree 1: Identifying Units of Account for All Revenue Arrangements and Allocation of Revenue
*Image originally published by CPA Canada in the May 2021 publication: “ASPE Briefing: Additional Guidance Added to Section 3400, Revenue.”
Decision Tree 2: Recognition of Revenue for Each Unit of Account
Agricultural producers: defined in section 3041 as “enterprises that undertake agricultural production, such as those that engage in agriculture, apiculture, aquaculture, floriculture or horticulture”
Agricultural production: is defined as “the development and harvest of biological assets for sale or for use in a productive capacity”
If an entity does NOT fall under the definition of an agricultural producer, it is NOT within the scope of this section, and would apply other sections to the accounting for biological assets (i.e. Section 3031 Inventories), refer to flowchart below.
Examples of types of activities not covered under section 3041 as they are not considered agricultural production: forestry, ocean fisheries, hunting, and trapping etc.
View Scope of Section 3041 Decision Tree
**Image originally published by CPA Canada in the May 2020 publication: “Accounting Standards for Private Enterprises Briefing on Section 3041, Agriculture, Appendix 1”
Biological assets (living animals or plants)
Agricultural inventories (biological assets, or harvested products of biological assets for sale or use in a productive capacity).
Refer to further criteria in decision tree below.
Examples of types of assets not within the scope of section 3041 because they are end-use products derived from biological asset or agricultural inventories through a “secondary production” process (such assets accounted for as inventories under 3031):
View Recognition and Measurement of Agriculture Inventories Decision Tree
**Image originally published by CPA Canada in the May 2020 publication: “Accounting Standards for Private Enterprises Briefing on Section 3041, Agriculture, Appendix 2”
i. The product has a readily determinable and realizable market price (i.e. a commodity product);
ii. The product has reliably measurable and predictable costs of disposal (i.e. variability of cost estimates not significant); and
iii. The product is available for immediate delivery (i.e. can be solid in current condition, or insignificant activities required).
Policy choice within cost model to determine cost of inventories using either:
a) Full cost (comprise input cost and other costs of agricultural production incurred in bringing to present location/condition); or
b) Only input costs.
a) the cost less salvage value over the life of the asset; and
b) the cost less residual value over the useful life of the asset.
a) a change in the extent that the asset is used;
b) a change in the manner in which the asset is used;
c) removal of the asset from production for an extended period of time;
d) disease or physical injury; or
e) a change in the law, environment, or consumer preferences and tastes affecting the period of time over which the asset can be used.
View Recognition and Measurement of Production Biological Assets Decision Tree
**Image originally published by CPA Canada in the May 2020 publication: “Accounting Standards for Private Enterprises Briefing on Section 3041, Agriculture, Appendix 3.”
Required to be applied retrospectively with the following relief provisions:
This article has been published for general information. You should always contact your trusted advisor for specific guidance pertaining to your individual tax needs. This publication is not a substitute for obtaining personalized advice.
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