WEEK 2

Measurement Uncertainty

Inventory Valuation (LIFO,FIFO, Weighted Average)

Depreciation Method (Straight-line, diminishing balance, double diminishing balance,
Unit of Production)
Allowance for Bad Debts
Impairment
Fair Value
Warranty claims
Sales Returns

IFRS is more stringent than GAAP where professional judgement is required in matters of
uncertainty.
Contingency
ASPE
A contingency is a situation
involving uncertainty regarding a
gain or loss to an enterprise which
will be resolved on the basis of a
future outcome.
A contingent liability is recognized
and accrued against income if
a) It is probable that an asset had
been impaired or a liability
incurred AND
b) The amount of the loss can be
reasonably measured
A contingent asset is NOT
recognized
A contingent liability is measured
based on the minimum amount if a
better measure is not available. If
there is a contingent amount in
excess of the probable measure then
it is disclosed in the notes.

IFRS
A contingent liability is either an
expected obligation that will be
resolved based on the occurrence or
non-occurrence of a future event OR
a present obligation that is not
recognized because it is improbable
or unmeasurable.
A provision is a liability which has an
uncertain amount or timing.
Under IFRS, a contingent liability will
NOT be recognized and will only be
disclosed if its probability of
occurrence is likely.
A provision will be recognized
provided that
a) The provision arises due to a
past event
b) The provision is probable
c) The provision is measurable
Under IFRS, a contingent asset will
NOT be recorded unless its
probability and measurability is
certain in which case it is NOT a
contingent asset.
A provision will be measured based
on the statistic probabilities of
occurrence.
A past event may be
a) A legal obligation
b) A constructive obligation

Impairment

ASPE
Cost Recovery Model
Impairment test is conducted if
there indications of impairment
Recoverability test is conducted
Asset is impaired if the carrying
amount of the asset exceeds its
undiscounted cash-flows
The amount of impairment is the
difference between carrying
amount and fair value.
Reversal of impairment may only
be done for inventory and
investments NOT PPE
Impairment is applied to an asset
group which is defined as the
lowest level of assets and
liabilities that generates cash
inflows.

IFRS
Rational Entity Model
Impairment test is conducted at
the end of each financial period
and if there are any indications of
impairment
Asset is impaired if the carrying
value of the asset exceeds its
recoverable amount
Recoverable amount is the higher
of value-in-use (discounted cash
flows) and fair value
Impairment is applied to a cash
generating unit at the lowest
level and proportionally allocated
to each item.
Reversal of Impairment may only
be done up-to the carrying
amount of the asset had the
initial impairment not taken
place.

Methods to determine Fair Value

Market vs Models
1- Market Approach: Stock Exchange, Real Estate, Kijiji
2- Income Approach: Discounted future cash flows
3- Cost Approach: replacement cost what would it cost to replace the asset
Quality of Earnings (QoE): related to how well the earnings of a firm capture the
underlying economic reality, and how well earnings serve as a basis for predicting
future earnings. Affected by
Accounting Policy
Transparency in Reporting (Representation faithfulness, completeness,
materiality, note disclosure, relevance)
Changes in accounting principles are treated retrospectively, whereas, the
changes in accounting estimates are treated prospectively.
Accounting for discontinued operations
IFRS (5) =ASPE

There must be an active plan to sell the asset

The asset is being marketed at fair value
The asset is available for sale immediately

The sale is probable within the next twelve months

There is no indication of a reversal of managements decision