Sources and References

Primary textbook — Introductory Accounting for Private and Public Companies (Top Hat interactive e-text, ISBN 978-1-77412-900-5; Top Hat Pro ISBN 978-0-9866151-0-8). This text covers both AFM 191 (private company focus) and AFM 182 (public company focus).

Supplementary — Robert Libby, Patricia Libby, and Frank Hodge, Financial Accounting, 10th Edition (McGraw-Hill, 2020); Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield, Intermediate Accounting, IFRS Edition, 3rd Edition (Wiley, 2018).

Standards — IFRS Foundation full standards suite: IAS 16 (Property, Plant and Equipment), IAS 36 (Impairment of Assets), IAS 37 (Provisions), IAS 38 (Intangible Assets), IFRS 9 (Financial Instruments), IFRS 15 (Revenue from Contracts with Customers), IFRS 16 (Leases), IAS 33 (Earnings per Share), IAS 7 (Statement of Cash Flows).

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Chapter 1: Accounting for Public Companies — Conceptual Framework

From Private to Public Company Accounting

AFM 191 introduced financial reporting in the context of private companies operating under Accounting Standards for Private Enterprises (ASPE). AFM 182 extends this foundation to public companies, which must comply with International Financial Reporting Standards (IFRS) in Canada. Understanding why the standards differ requires understanding the stakeholder landscape.

Private companies have a limited, identifiable set of stakeholders — owners and their banks. Information asymmetry is manageable; the owner often manages the firm. ASPE is therefore less onerous and permits more cost-benefit trade-offs in disclosure.

Public companies have diffuse, anonymous shareholders who cannot individually monitor management. This separation of ownership and control (the principal-agent problem) creates demand for rigorous, standardized financial reporting that allows shareholders to assess stewardship and make informed investment decisions.

The Conceptual Framework Under IFRS

The IASB’s Conceptual Framework for Financial Reporting provides the foundation for developing and evaluating accounting standards. It establishes:

Objective: Financial statements should provide information about a reporting entity’s financial position, financial performance, and cash flows that is useful to a wide range of users in making economic decisions.

Qualitative Characteristics: The framework distinguishes fundamental from enhancing characteristics.

Type	Characteristic	Meaning
Fundamental	Relevance	Information that makes a difference to users’ decisions (materiality is an aspect of relevance)
Fundamental	Faithful representation	Information that is complete, neutral, and free from error
Enhancing	Comparability	Users can compare across firms and across time
Enhancing	Verifiability	Independent observers can reach the same conclusion
Enhancing	Timeliness	Information is available to decision-makers before it loses capacity to influence decisions
Enhancing	Understandability	Information is comprehensible to users with a reasonable knowledge of business

The pervasive constraint is cost-benefit: the benefits of providing information must justify the costs.

Underlying Assumption: The going concern assumption presumes the entity will continue operating for the foreseeable future, which justifies deferring expense recognition and valuing assets above liquidation value.

Recognition, Measurement, and Disclosure

Recognition is the process of including an item in financial statements when it meets the definition of an asset, liability, income, or expense and can be measured reliably. Under the revised 2018 Conceptual Framework, recognition is appropriate when it provides relevant information that faithfully represents the asset, liability, income, or expense, and when the benefits of the information justify the cost.

Measurement bases under IFRS include:

• Historical cost: the amount paid at the time of acquisition. Simple and verifiable.
• Fair value: the price that would be received to sell an asset (or paid to transfer a liability) in an orderly transaction between market participants at the measurement date.
• Net realisable value: estimated selling price less estimated costs of completion and selling.
• Amortised cost: historical cost adjusted for amortisation and impairment.
• Value in use: the present value of future cash flows expected from an asset or cash-generating unit.

IFRS uses fair value more extensively than ASPE, reflecting the information needs of capital market investors. The choice of measurement basis involves trade-offs between relevance (fair value is more current) and faithful representation (historical cost is more verifiable).

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Chapter 2: Property, Plant and Equipment — IAS 16

Initial Recognition and Cost

Property, plant and equipment (PP&E) are tangible assets held for use in producing or supplying goods or services, for rental to others, or for administrative purposes, and are expected to be used for more than one period. IAS 16 governs their recognition, measurement, and derecognition.

Cost at initial recognition includes all amounts directly attributable to bringing the asset to the location and condition necessary for its intended use:

• Purchase price, net of trade discounts and rebates
• Import duties and non-refundable purchase taxes
• Costs of site preparation, initial delivery and handling
• Installation and assembly costs
• Professional fees (e.g., architects, engineers)
• Initial estimate of dismantling, removal, and site restoration costs (IAS 37 provision)

Subsequent costs (repairs, maintenance, overhauls): Routine maintenance is expensed as incurred. Costs that extend useful life, increase capacity, or improve quality beyond the originally assessed standard are capitalized. Under IAS 16’s component approach, major inspections or overhaul costs are capitalized and the carrying amount of any replaced component is derecognized.

Depreciation Methods

Key terms:

• Depreciable amount = Cost − Residual value
• Residual value: the estimated amount the entity would receive from disposal at end of useful life, net of disposal costs, if the asset were already of the age and condition expected at end of its useful life
• Useful life: either the period over which the asset is expected to be available for use, or the number of production units expected to be obtained

Straight-Line Method (SL)

\[ \text{Annual Depreciation} = \frac{\text{Cost} - \text{Residual Value}}{\text{Useful Life (years)}} \]

Declining Balance Method (DB)

The declining balance method applies a fixed percentage rate to the carrying amount at the beginning of each period, producing a higher depreciation charge in early years.

\[ \text{Annual Depreciation} = \text{Carrying Amount (beginning of year)} \times \text{DB Rate} \]

The double-declining balance (DDB) rate = 2 × (1 / Useful Life). In the final year, the asset is depreciated to the residual value.

Units-of-Production Method (UoP)

This method is appropriate when the pattern of consumption is better correlated with output than with time — for example, mines, oil wells, or heavy machinery with variable usage.

\[ \text{Dep. per unit} = \frac{\text{Cost} - \text{Residual Value}}{\text{Total Estimated Production Units}} \]\[ \text{Annual Depreciation} = \text{Dep. per unit} \times \text{Units produced in the year} \]

Component Depreciation

IAS 16 requires that when a tangible asset has components with significantly different useful lives, each component must be depreciated separately. This is the component approach and is mandatory under IFRS (not required under ASPE).

Subsequent Measurement Models

After initial recognition, IAS 16 permits two models:

Cost Model

The asset is carried at cost less accumulated depreciation and accumulated impairment losses.

\[ \text{Carrying Amount} = \text{Cost} - \text{Accumulated Depreciation} - \text{Accumulated Impairment Losses} \]

Revaluation Model

The asset is carried at its revalued amount, which is fair value at the date of revaluation less subsequent accumulated depreciation and impairment. Revaluations must be made with sufficient regularity to ensure the carrying amount does not differ materially from fair value.

Revaluation decrease: If the carrying amount is reduced, the decrease is recognized in profit or loss, except to the extent that it reverses a previous revaluation surplus for the same asset, in which case it reduces OCI.

Impairment of PP&E — IAS 36

IAS 36 requires that at each reporting date, management assess whether there is any indication that an asset may be impaired. Indicators include:

External indicators: decline in market value; adverse changes in technology, markets, economy, or laws; increase in market interest rates affecting the discount rate used in VIU. Internal indicators: physical damage; obsolescence; plans to discontinue or restructure; evidence that economic performance is or will be worse than expected.

Cash-Generating Units (CGUs)

When it is not possible to estimate the recoverable amount of an individual asset, the entity identifies the cash-generating unit (CGU) to which the asset belongs — the smallest identifiable group of assets that generates cash inflows that are largely independent of cash inflows from other assets.

Impairment reversal: An impairment loss recognized for an asset (other than goodwill) is reversed if there has been a change in the estimates used to determine the recoverable amount. The reversal is recognized in profit or loss and increases the carrying amount, but not above what the carrying amount would have been had the original impairment not been recognized (i.e., the depreciated historical cost ceiling). Goodwill impairment losses are never reversed.

Derecognition of PP&E

An item of PP&E is derecognized on disposal or when no future economic benefits are expected from its use or disposal.

\[ \text{Gain/Loss on Disposal} = \text{Net Proceeds} - \text{Carrying Amount at Disposal Date} \]

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Chapter 3: Intangible Assets — IAS 38

Definition and Recognition

An intangible asset is recognized only when:

1. It is probable that future economic benefits attributable to the asset will flow to the entity; and
2. The cost of the asset can be measured reliably.

Intangibles acquired separately or in a business combination are typically recognized. Internally generated goodwill, brands, mastheads, publishing titles, customer lists, and similar items are never recognized as assets.

Research and Development — The Phase Distinction

IAS 38 draws a critical distinction between the research phase and the development phase of an internal project.

Goodwill

Goodwill is not amortized under IFRS. Instead, it is tested for impairment annually or more frequently if indicators exist. Impairment losses on goodwill are never reversed (IAS 36.124).

Finite vs. Indefinite Life Intangibles

Finite useful life: Amortized over the useful life using a method that reflects the pattern of economic benefits (usually straight-line). Residual value is assumed to be zero unless a third party has committed to purchase the asset or an active market exists.

Indefinite useful life: No foreseeable limit to the period over which the asset is expected to generate net cash inflows. These are not amortized but are tested for impairment annually.

Type	Amortization	Impairment Test
Finite-life intangible	Yes — systematic, over useful life	When indicators exist
Indefinite-life intangible	No	Annually (mandatory)
Goodwill	No	Annually at CGU level

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Chapter 4: Leases — IFRS 16

The IFRS 16 Model

IFRS 16 (effective January 1, 2019) replaced IAS 17 and introduced a fundamentally different lessee accounting model: virtually all leases are recognized on the balance sheet. The old distinction between operating and finance leases for lessees was eliminated.

Lessee Accounting

Initial Recognition

At the commencement date, a lessee recognizes:

1. A right-of-use (ROU) asset — measured at the present value of lease payments plus initial direct costs plus prepaid lease payments plus estimated dismantling costs.
2. A lease liability — measured at the present value of lease payments not yet paid, discounted at the rate implicit in the lease (or if that cannot be readily determined, the lessee’s incremental borrowing rate).

Short-Term and Low-Value Exemptions

IFRS 16 provides two practical expedients that permit lease payments to be recognized as an expense on a straight-line basis instead of recognizing an ROU asset and lease liability:

1. Short-term leases: Lease term is 12 months or less at commencement (including any renewal options). The election is made by class of underlying asset.
2. Low-value assets: Individual underlying asset is of low value when new (typically under US $5,000). The election is made on a lease-by-lease basis.

Lessor Accounting

Lessors continue to classify leases as either finance leases or operating leases under IFRS 16 (same as IAS 17).

Finance Lease (lessor): A lease that transfers substantially all the risks and rewards of ownership to the lessee. The lessor derecognizes the underlying asset and recognizes a net investment in the lease (the present value of lease receivables). Revenue is recognized as interest income using the effective interest method.

Operating Lease (lessor): The lessor retains the underlying asset on its balance sheet and continues to depreciate it. Lease income is recognized on a straight-line basis or another systematic basis over the lease term.

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Chapter 5: Financial Instruments — IFRS 9

Classification of Financial Assets

IFRS 9 classifies financial assets based on two criteria: (1) the entity’s business model for managing the assets, and (2) the cash flow characteristics of the instrument (whether cash flows represent solely payments of principal and interest — the SPPI test).

Category	Business Model	SPPI?	Measurement
Amortized Cost (AC)	Hold to collect	Yes	Effective interest; no fair value changes in P&L
Fair Value through OCI (FVOCI)	Hold to collect and sell	Yes	FV changes in OCI; reclassified to P&L on disposal
Fair Value through P&L (FVTPL)	Other	No (or elected)	All fair value changes in P&L

Financial liabilities are generally measured at amortized cost using the effective interest method.

Effective Interest Method on Bonds

IFRS 9 Simplified Expected Credit Loss (ECL) for Trade Receivables

Under IFRS 9, entities apply an expected credit loss (ECL) model for impairment — a forward-looking approach that requires recognition of expected losses rather than incurred losses. For trade receivables without a significant financing component, IFRS 9 permits (and most entities use) the simplified approach: a lifetime ECL provision matrix based on historical loss rates, adjusted for forward-looking information.

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Chapter 6: Provisions and Contingencies — IAS 37

Provisions — Recognition Criteria

Best estimate: The amount recognized as a provision is the best estimate of the expenditure required to settle the present obligation. Where there is a large population of items (warranties, returns), the expected value approach is used. Where a single obligation, the most likely outcome is typically used.

Discounting: Provisions are discounted to present value where the time value of money is material.

Contingent Liabilities vs. Provisions

Treatment	Condition
Recognize as provision	Probable outflow + reliable estimate
Disclose as contingent liability	Possible (not remote) outflow, OR probable but cannot reliably measure
No recognition or disclosure	Remote possibility of outflow

Warranty Provision — Full Example

Environmental Obligations and Decommissioning

When an entity has an obligation to dismantle an asset or restore a site (e.g., an oil company’s platform removal), IAS 16 and IAS 37 require:

1. A provision is recognized at the present value of the decommissioning cost.
2. The same amount is added to the cost of the related PP&E asset.
3. The provision grows each year (unwinding of discount) as interest expense (using the same rate as used in discounting).
4. The PP&E component is depreciated over the asset’s useful life.

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Chapter 7: Long-Term Debt — Bonds Payable

Bond Terminology and Pricing

A bond is a formal debt instrument in which the issuer (borrower) promises to pay the holder (lender) periodic interest (coupon) payments plus the face (par) value at maturity.

Key terms:

• Face/Par Value: the principal amount repaid at maturity
• Coupon Rate: stated annual interest rate × face value = periodic coupon payment
• Market (Effective) Rate: rate that equates present value of cash flows to issue price (yield to maturity)
• Issue Price: present value of coupon annuity + present value of face value, discounted at market rate

\[ \text{Issue Price} = \text{Coupon} \times \text{PVIFA}(r, n) + \text{Face} \times \text{PVF}(r, n) \]

Relationship	Result
Coupon rate = Market rate	Bond issued at par
Coupon rate < Market rate	Bond issued at discount (below par)
Coupon rate > Market rate	Bond issued at premium (above par)

Full Bond Amortization — Discount Example

Bond Issued at Premium — Amortization Table

Convertible Bonds

A convertible bond gives the holder the right to convert the bond into a specified number of common shares. Under IFRS, a convertible bond is a compound financial instrument (IAS 32): the liability component and equity component (the conversion option) must be presented separately.

Bifurcation method:

1. Calculate the fair value of the liability component: PV of cash flows discounted at the market rate for equivalent non-convertible debt.
2. The equity component = Issue price − Liability component.

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Chapter 8: Shareholders’ Equity

Components of Shareholders’ Equity

Under IFRS, shareholders’ equity comprises:

1. Share capital — contributed amounts from issuance of shares
2. Retained earnings — cumulative net income less dividends declared
3. Accumulated Other Comprehensive Income (AOCI) — cumulative OCI items (revaluation surplus, FVOCI unrealized gains/losses, pension remeasurements)
4. Other reserves — equity component of convertible bonds, share-based payments

Share Issuance

Treasury Shares

Under IFRS, a company’s repurchase of its own shares (treasury shares) results in a reduction of equity. Treasury shares are measured at cost and presented as a deduction from equity. No gain or loss is recognized in profit or loss on treasury share transactions.

Dividends

Cash dividends: Recognized as a liability (reduction of retained earnings) when declared.

Stock dividends (bonus issues): An entity issues additional shares to existing shareholders pro rata. The debit is to retained earnings (at fair value per share under IFRS where the dividend is discretionary), and the credit is to share capital.

Accumulated Other Comprehensive Income (AOCI)

OCI (Other Comprehensive Income) comprises items of income and expense that IFRS excludes from profit or loss. Common items include:

• Gains/losses on financial assets classified at FVOCI
• Revaluation surpluses under the IAS 16 revaluation model
• Remeasurements of defined benefit pension plans
• Foreign currency translation differences on foreign operations
• Effective portion of gains/losses on hedging instruments in cash flow hedges

AOCI is the cumulative amount of OCI recognized in prior periods. It is presented as a separate component of equity.

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Chapter 9: Earnings Per Share — IAS 33

Basic EPS

\[ \text{Basic EPS} = \frac{\text{Net Income} - \text{Preferred Dividends}}{\text{Weighted Average Common Shares Outstanding}} \]

Weighted average shares: Shares are weighted by the fraction of the period they are outstanding. Bonus issues (stock dividends, stock splits) are treated as if they occurred at the beginning of the earliest period presented.

Diluted EPS

Diluted EPS reflects the effect of all dilutive potential ordinary shares — those that, if converted or exercised, would decrease EPS. Dilutive instruments include convertible debt, stock options, and warrants.

Options/warrants: Treated using the treasury stock method (IFRS: the buyback method). Proceeds from assumed exercise are assumed to be used to repurchase shares at average market price.

\[ \text{Incremental Shares (options)} = \text{Options outstanding} - \frac{\text{Options} \times \text{Exercise Price}}{\text{Average Market Price}} \]

Convertible debt: The “if-converted” method assumes conversion at the beginning of the period. Net income is adjusted to add back after-tax interest saved; shares are increased by shares issuable on conversion.

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Chapter 10: Statement of Cash Flows — IAS 7

Purpose and Structure

The statement of cash flows shows the historical changes in cash and cash equivalents, classified into three activities:

1. Operating: Cash flows from the primary revenue-producing activities (and other activities not classified as investing or financing). The indirect method begins with profit and adjusts for non-cash items and working capital changes.
2. Investing: Cash flows from acquisition and disposal of long-term assets and investments.
3. Financing: Cash flows from changes in equity and borrowings.

Indirect Method — Step-by-Step

Under the indirect method, operating cash flows are derived by adjusting net income for:

• Non-cash expenses: add back depreciation, amortization, impairment
• Non-cash income: subtract gains on disposal of assets; add back losses
• Working capital changes: increases in current assets are deducted; decreases are added; increases in current liabilities are added; decreases are deducted

Comprehensive Cash Flow Example

Key Adjustments — Summary Table

Item	Treatment in Indirect Method
Depreciation / Amortization	Add back (non-cash expense)
Impairment loss	Add back (non-cash expense)
Gain on disposal of asset	Subtract (investing cash flow captures proceeds)
Loss on disposal of asset	Add back
Increase in current asset	Subtract
Decrease in current asset	Add
Increase in current liability	Add
Decrease in current liability	Subtract
ROU asset depreciation	Add back (non-cash)
Lease liability reduction	Subtract from financing (principal)

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Chapter 11: Financial Statement Analysis and Ratio Analysis

Framework for Analysis

Financial statement analysis uses quantitative ratios and qualitative assessment to evaluate an entity’s liquidity, solvency, profitability, efficiency, and market performance. Ratios are meaningful only in the context of: (1) industry benchmarks, (2) the entity’s own historical trend, and (3) the entity’s business model.

Liquidity Ratios

Solvency (Leverage) Ratios

Profitability Ratios

Efficiency (Activity) Ratios

Market Ratios

Comprehensive Ratio Analysis Example

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Chapter 12: Integrative Review and Journal Entry Reference

Consolidated Journal Entry Reference

This section consolidates the key journal entry patterns from all chapters for examination preparation.

PP&E (IAS 16)

Transaction	Debit	Credit
Asset acquisition	PP&E (cost)	Cash / Payable + Decommissioning Provision
Annual depreciation	Depreciation Expense	Accumulated Depreciation
Revaluation increase	PP&E / Acc. Dep.	OCI — Revaluation Surplus
Revaluation decrease (no surplus)	Impairment Loss (P&L)	Accumulated Depreciation
Disposal at gain	Cash; Acc. Dep.	PP&E; Gain on Disposal
Disposal at loss	Cash; Acc. Dep.; Loss on Disposal	PP&E

Intangibles (IAS 38)

Transaction	Debit	Credit
Capitalized development costs	Development Costs (Intangible Asset)	Cash / Payable
Annual amortization	Amortization Expense	Accumulated Amortization
Impairment	Impairment Loss	Accumulated Impairment — Intangibles
Purchase of patent	Patent (Intangible Asset)	Cash

Leases — Lessee (IFRS 16)

Transaction	Debit	Credit
Commencement	ROU Asset	Lease Liability
Annual lease payment (interest)	Interest Expense	Lease Liability
Annual lease payment (principal)	Lease Liability	Cash
Annual depreciation of ROU	Depreciation Expense — ROU	Accumulated Depreciation — ROU

Bonds Payable

Transaction	Debit	Credit
Issue at discount	Cash; Discount on BP	Bonds Payable (face)
Issue at premium	Cash	Premium on BP; Bonds Payable (face)
Annual interest (discount bond)	Interest Expense	Cash; Discount on BP
Annual interest (premium bond)	Interest Expense; Premium on BP	Cash
Maturity repayment	Bonds Payable	Cash

Provisions (IAS 37)

Transaction	Debit	Credit
Initial recognition	Expense (Warranty/Legal etc.)	Provision
Settlement	Provision	Cash / Payable
Unwinding of discount	Interest Expense	Provision
Reversal (excess provision)	Provision	Expense (reversal)

Shareholders’ Equity

Transaction	Debit	Credit
Share issuance	Cash	Share Capital
Treasury share repurchase	Treasury Shares	Cash
Treasury share reissuance (above cost)	Cash	Treasury Shares; Contributed Surplus
Cash dividend declaration	Retained Earnings	Dividends Payable
Cash dividend payment	Dividends Payable	Cash
Stock dividend	Retained Earnings	Share Capital
OCI — revaluation surplus	PP&E or FV of Asset	OCI — Revaluation Surplus

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Key IFRS Standards Summary

Standard	Topic	Key Requirements
IAS 7	Cash Flows	Indirect/direct method; classify O/I/F
IAS 16	PP&E	Cost or revaluation model; component depreciation
IAS 33	EPS	Basic and diluted; weighted average shares
IAS 36	Impairment	Recoverable amount = max(FVLCD, VIU); CGU
IAS 37	Provisions	Probable + reliable; no recognition of contingent liabilities
IAS 38	Intangibles	Research = expense; development = capitalize (if criteria met)
IFRS 9	Financial Instruments	AC / FVOCI / FVTPL; ECL model
IFRS 15	Revenue	5-step model; satisfaction of performance obligations
IFRS 16	Leases	Lessee: ROU + lease liability; lessor: finance vs. operating

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Conceptual Connections Across Topics

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Practice Problem Set

Problem 1 — PP&E and Impairment

Granite Corp. acquires a building on January 1, Year 1, for $2,400,000 (useful life 40 years, residual $400,000). On December 31, Year 5, indicators of impairment exist. Management estimates FVLCD = $1,600,000 and VIU = $1,750,000. Determine: (a) carrying amount at December 31, Year 5; (b) whether an impairment loss exists and its amount; (c) the journal entry.

Problem 2 — Lessee Accounting

On January 1, Year 1, Metro Logistics leases a warehouse under a 5-year lease. Annual payments: $80,000 due December 31 each year. Incremental borrowing rate: 6%. Required: (a) PV of lease liability; (b) Year 1 interest expense; (c) Year 1 depreciation on ROU asset; (d) journal entries for Year 1.

Problem 3 — Basic and Diluted EPS

For Year 1, Apex Ltd. reports net income of $1,200,000. Preferred dividends = $100,000. Weighted average shares = 500,000. In addition, there are 60,000 outstanding options with exercise price $10; average market price = $15. There are also $400,000 of 6% convertible bonds outstanding; if converted, 40,000 shares would be issued. Tax rate = 25%.

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