This preview shows page 1. Sign up to view the full content.
Unformatted text preview: testing confirms that the assertions are addressed and controls are effective.
42 QUESTION 2 (10 marks)
Differential Reporting (CICA 1300)
For CA to maintain objectivity it is important to ensure that Mr. Horten understands that he must
make the decisions on accounting policies, not CA.
HPL and HHI are "qualifying enterprises" under CICA 1300, the differential reporting section, as
they are both non-publicly accountable enterprises owned by Mr. Horten exclusively and unanimous
consent will not be an issue. The new rules are effective for fiscal years beginning on or after
January 1, 2002 so it must be decided if differential reporting will be used for the next reporting
period. Initial application of one or more of the differential reporting options is a change in
accounting policies requiring retroactive application in accordance with CICA 1506 on Accounting
Changes. Fees will not necessarily decrease in the first year of adoption due to implementation costs
related to the time and effort for retroactive application. However, there may be savings in the
future. Mr. Horten should select which of the available differential reporting options to apply in
preparing its financial statements. Differential reporting does not need to be applied for all areas.
A choice must be made between the future income taxes (liability method under CICA 3465) and the
taxes payable method to account for income taxes. The current use of the deferred income tax
method is no longer an option. The extensive disclosure requirements for the taxes payable method
may erode any efficiencies. It is not clear which method would be least costly for HPL since the
deferred income tax and future income tax methods would be similar if the only differences are
related to property, plant and equipment.
HHI can account for the investment in HPL using the cost, equity or consolidation method. The
preference shares can continue to be classified as equity, and not liabilities, under CICA 3860.
For both companies:
The disclosure requirements for share capital can be limited to the details on the shares issued. There
are also disclosure exemptions for the fair value of financial instruments where the fair value is not
readily determinable. (CICA 3860.99)
Other guidance on the implementation of Differential Reporting:
HPL and HHI should select only one set of accounting policies, including differential reporting
options, in any particular year. When an enterprise prepares an additional set of financial statements
using different accounting policies for tax or other purposes, those financial statements should
include a reference to the owners' financial statements. If HPL and HHI choose to apply a
differential reporting option it should apply that option to all similar items or transactions. If HPL or
43 HHI choose not to apply differential reporting it should follow all of the requirements in the relevant
pronouncement that apply to enterprises not qualifying for differential reporting. If in the future it no
longer qualifies for differential reporting, it should cease to apply all differential reporting. Any
resulting change is a change in an accounting policy that should be applied retroactively in
accordance with CICA 1506, Accounting Changes. HPL or HHI should apply the provisions of
CICA 1506 in the future, when it remains eligible for differential reporting, but ceases to apply an
individual differential reporting option, or elects to apply an option it did not previously select or a
newly available option.
If HPL or HHI applies one or more differential reporting options, it should:
(a) disclose in its summary of accounting policies the fact that, with the unanimous consent of its
owners, its financial statements have been prepared in accordance with differential reporting
(b) identify in the financial statements the differential reporting options it has applied.
Factors to consider in the decision:
In deciding if differential reporting should be adopted, the needs of the users should be considered.
The bank has requested an audit or review, indicating that it has specific needs and wants assurance
as indicated by the nature of the engagements. The needs and wishes of Mr. Horten should also be
considered. Another factor is the cost to implement changes compared to continuing with the
existing accounting policies.
Impact on audit or review engagement:
The audit report or review engagement report would be modified to indicate that differential
reporting was applied. It is not a qualification. The bank may not find it acceptable if it wanted "big
GAAP". 44 QUESTION 3 (7 marks)
Severance and Termination Benefits (CICA 3461)
Severance benefits are generally cash payments in lieu of notice to employees whose employment
is involuntarily terminated, other than as a result of a specified event e.g. such as a plant closing.
Severance benefits are normally provided by reference to either the entity...
View Full Document
This note was uploaded on 10/27/2013 for the course LAW 10-100 taught by Professor Parsons during the One '10 term at Bond College.
- One '10