AFM 291: Study Plan

Name the four measurement bases in the IFRS Conceptual Framework and classify each as an entry value or an exit value. Which one does your textbook label inconsistently, and what is the practical consequence of the inconsistency?

A: Historical cost (entry) · current/replacement cost (entry) · fair value, labelled "realizable value" in Exhibits 2-3 and 2-9 (exit) · value in use / fulfilment value (exit). The inconsistency is fair value vs realizable value, see AFM 291, Reconciliation. Consequence: net realizable value deducts costs to sell; IFRS 13 fair value excludes transaction costs entirely. They diverge by the selling costs. This is an open instructor question, not a settled point.

A manufacturer bundles a one-year defect warranty with every unit, and separately sells a two-year accidental-damage plan. Which standard governs each? What is the test that separates them, and what does not separate them?

A: Assurance-type (the bundled defect warranty) guarantees the product meets the quality already promised → not a separate performance obligation → IAS 37 provision, warranty expense/warranty liability. Service-type (the optional damage plan) → separate performance obligation under IFRS 15, transaction price allocated to it, recognised over time as deferred revenue is released. The test: does the warranty go beyond guaranteeing the product matches the quality already promised in the contract? Duration and dollar size do not distinguish them.

A fixed-price contract is 20% complete. You now expect total costs of $43M against a $40M price. How much loss do you recognise, and when? Contrast with how a profit would be treated.

A: Recognise 100% of the $3M expected loss immediately, in the period you identify the contract as onerous, not 20% of it. Profits prorate with progress; losses do not. Worked in the course's Kennedy Construction LT Contract Onerous Contract.xlsx ($697,122.30 provision) and the Week 4 deck's Kool Transportation case ($270,000 expected loss → $111,515 additional provision).

Distinguish a change in accounting estimate, a change in accounting policy, and a prior period error: treatment for each, and the two defined terms IAS 8 uses. Which term goes with which?

A: Estimate → prospective, current and future periods only. Policy → retrospective application (apply as if the policy had always been applied). Prior period error → retrospective restatement (correct as if the error had never occurred). Both terms are defined in IAS 8 ¶5, confirmed against ifrs.org and AASB text, though still [VERIFY] against the Handbook. Using the error term for a policy change is a written-communication penalty. Mnemonic: RestatEment = Error.

Fixed manufacturing overhead is $300,000; normal capacity is 2,000 units. Compute the per-unit allocation and the amount capitalised into inventory at production of (a) 1,000 units, (b) 2,000 units, (c) 3,000 units. What happens to any residue?

A: (a) Rate stays at $150 (normal, not actual) → capitalise $150,000; the $150,000 idle-capacity portion is expensed. (b) $150 → $300,000 capitalised, nothing expensed. (c) Rate falls to $100 → $300,000 capitalised across 3,000 units. The asymmetry is the trap: the rate never rises below normal volume, but it must fall above it.

A 0.085% shareholding, not held for trading, with the irrevocable OCI election made at initial recognition. Are transaction costs capitalised or expensed? Do dividends go to NI or OCI? On disposal, is the accumulated OCI recycled?

A: Costs capitalised into the carrying amount (contrast FVPL, where they are expensed). Dividends still go to net income. On disposal there is no recycling, the accumulated gain transfers within equity to retained earnings, never through P&L. The measurement trap: the fair-value adjustment is measured against carrying amount, not against the change in price, so capitalised costs sit in the base.

A bond is bought at a discount. Is periodic interest income greater or less than the cash coupon? What happens to the carrying amount over the bond's life, and what is total lifetime interest income?

A: Interest income (effective rate × carrying amount) exceeds the cash coupon; the difference amortises the discount. Carrying amount accretes up to face. Lifetime interest income = total coupons + the discount. Course anchor: Robson/Hydro One: $100,000 face, $4,000 coupon per period, 5% effective, priced $92,278.27, discount $7,721.73, lifetime interest income $47,721.73 = $40,000 + $7,721.73. Mirror it for a premium and check the signs reverse.

$3,000,000 is borrowed specifically at 5% to construct a warehouse; surplus funds are temporarily invested during the first month, earning $1,667. What is capitalised? Name the three commencement conditions and the cessation trigger.

A: For a specific borrowing, capitalise actual borrowing costs less temporary investment income → $137,500 − $1,667 = $135,833 for that period. (General borrowings instead use a weighted-average capitalisation rate, capped at actual costs incurred, with no investment-income netting.) Commencement requires all three: expenditures are being incurred, borrowing costs are being incurred, and activities to prepare the asset are in progress. Cessation: when substantially all activities necessary to prepare the asset for its intended use are complete. AFM 291 convention: "substantial period of time" means more than 6 months, the markers said so explicitly.

Define recoverable amount. In a CGU containing goodwill, what is the order of write-down? What is the floor on any individual asset, and what happens to the amount the floor blocks? State the reversal rules for goodwill versus other assets, IFRS and ASPE.

A: Recoverable amount = higher of fair value less costs of disposal and value in use. Order: goodwill absorbs the loss first, then pro rata across identifiable assets. Floor (IAS 36.105): do not reduce an asset below the highest of FVLCD (if measurable), VIU (if determinable), and zero, and the blocked amount is reallocated pro rata to the other assets of the unit, which can cascade. Reversals: other assets yes, capped at what carrying amount would have been with no impairment; goodwill never; ASPE never, for anything.

An asset is revalued up, then later down below original cost. Where does each movement go? Do the elimination and proportional restatement methods produce the same carrying amount, and does the choice change income or equity?

A: Increase → OCI, revaluation surplus, unless it reverses a prior decrease that went through P&L, in which case reverse through P&L first. Decrease → P&L, unless a surplus exists for that asset, in which case it clears the surplus in OCI first. Both methods reach the identical net carrying amount, identical income, identical equity; they differ only in the gross cost and accumulated depreciation presentation. Elimination is what the lecture and the Landmark PBL use.