Casb Mod 5

Front 1

What are the six main categories of factors to consider going public

Back 1

o Ownership/decision making
o Financing
o Regulatory Costs
o Disclosures
o Management skill sets/advisors
o Preparedness

Front 2

Describe challenges in Ownership/Decision making after going public

Back 2

An intensive review of all senior management must be conducted to ensure that they have the necessary qualifications to perform their responsibilities in the public company. Senior management in Public Companies is subject to greater risk, and as such, should have a record of integrity and a spotless record.

Front 3

Describe challenges in Regulatory Frameworks after going public

Back 3

o Vision will be subject to heightened regulatory requirements once it has gone public. It will need to comply with all IFRS disclosures for its financial statements. It will also need controls to be properly implemented throughout the company to reduce the chance that a material misstatement or fraud could be conducted

Front 4

Describe challenges in Financing after going public

Back 4

Going public will provide a large sum of cash to the company if it sells new shares, or to owners if they sell their shares. If Vision is selling new shares it should form a plan for its use of the cash it receives from the IPO

Front 5

Describe challenges in Preparing for going public

Back 5

Before going public, a company should ensure that it is in good financial health and that it has a good record it can show investors in order to maximize its share price. Before going public Vision should be able to show a good earnings history and balance sheet, and show that its board and management are able to meet regulatory requirements

Front 6

Describe challenges in Financial Disclosures after going public

Back 6

Public companies must file financial statements, management’s discussion and analysis, and an annual information form with the stock exchange they are listed on. The requirements for these forms are more onerous than the financial statements that your bank would have demanded, and will include discussion and analysis of forward looking information as well as analysis on past performance. Furthermore, Vision must now report under IFRS rather than ASPE with two comparative years of data. This will require a substantial dedication of time in converting prior year financial information to the correct accounting policies under IFRS

Front 7

Describe challenges in Governance after going public

Back 7

A public company requires a high-quality board of directors. The board are publicly accountable for the actions of the company, and as such, it is very important that proper governance procedures be put in place before going public. The majority of the board should be independent, including the chairman. The board must be separated into smaller functional committees, such as an audit committee, or compensation committee. Other board best practices should also be implemented, such as minimum quarterly meetings, and board involvement in important decisions and strategic planning

Front 8

What are the tax implications of going public?

Back 8

o A deemed tax year end creating two prorated tax year ends in one calendar year
o Lost benefits of being a private business in Canada
 • Small Business Deduction
 • SRED credit decreased from 35% to 25%
 • RDTOH balance will be lost; companies should pay out the balance of the RDTOH account in dividends before going public
 • LRIP – businesses will have to pay out non-eligible dividends arising from lower-tax income before paying eligible dividends as a public companies
o Acquisition of control resulting in loss of Capital Losses Carried Forwards

Front 9

What are the classes of internal control weaknesses with an example of each?

Back 9

o General ITC – No backups
o Input – Manual calculations on forms
o Processing – Not reviewing standard costs
o Output – Reports are not reviewed

Front 10

What must be included in an audit planning memo

Back 10

o Overall Financial Statement Risk
o Factors that increase risk
• Key Users
• History of accounting errors
o Factors that decrease risk
• Second year audit
• History of profit
o Control Environment
• Management willingness to address control deficiencies
o Assessment of Fraud Risk
o Assessment of Materiality
 Identify all users
o Inherent risk in accounts by assertion
o Control risk
 Assess deficiencies and the account/assertion impacted
o Audit approach determination
o FS Analytics

Front 11

How are Preferred Shares accounted for under ASPE

Back 11

Under ASPE the entity can disclose the preferred shares as wholly equity, unless they are issued under a tax planning arrangement and have been called for redemption, in which case the entire amount should be reported as a financial liability. Tie to case facts

Front 12

How are Preferred Shares accounted for under IFRS

Back 12

Under IFRS the company must present the preferred shares based on the underlying nature of the commitment; as such, the issuance of a preferred share could result in a debt component and an equity component. If a preferred share is redeemable at the option of the holder only then it is considered to be completely debt. Tie to case facts

Front 13

What must be included in quantitative analysis sections of memos?

Back 13

o Key take away
o Key assumptions
o Key exclusions (ie sunk costs)
o Factors that could affect analysis/bias
o Tie to users

Front 14

What must be included in qualitative analysis sections of memos?

Back 14

o Risk factors
o Opportunities
o Overall tied to users
o Consider management bias

Front 15

What are a company’s options for accounting for Construction Revenue under ASPE?

Back 15

o Percentage of Completion – using costs, time, estimates, billing
o Substantial Completion
o A company should use an accounting method that most appropriately matches revenue the completion of work. The company must also be able to reliably and consistently calculate its percentage of completion

Front 16

What are a company’s options for accounting for Construction Revenue under IFRS?

Back 16

o Percentage of Completion – using costs, time, estimates, billing
o A company should use an accounting method that most appropriately matches revenue the completion of work. The company must also be able to reliably and consistently calculate its percentage of completion

Front 17

What is the definition of a related party

Back 17

In general, a related party exists whenever one party to a transaction has more than insignificant influence on the decision making of the other party. For example, transactions between two companies owned by the same investor would be considered related party transactions. The definition also extends to blood relations, ie, the immediate family of management. Furthermore, Key management personnel are considered to be related parties

Front 18

What are the required IFRS disclosures for related parties?

Back 18

IFRS requires disclosures of key management personnel remuneration, including all employment benefits and stock compensation. It also requires the disclosure of the nature of all related party transactions during the year, including the total value of those transactions and amounts outstanding at year end, including commitments. Furthermore, a company is required to disclose all control relationships even in the absence of actual transactions. Refer to IFRS 24.13 for a full listing of related party disclosures.

Front 19

What are the required balance sheet / Income statement disclosures for a pension?

Back 19

Pension liability & pension expense

Front 20

What are the required note disclosures for a pension?

Back 20

o Type of pension plan
o Reconciliation of the pension liability
o Reconciliation of the pension obligation
o Reconciliation of the plan assets
o Significant actuarial assumptions, such as discount rate, employee life
o Components of pension expense and financing expense
o Key management personnel compensation
o Expected contributions for subsequent year
o Net actuarial gain/loss in OCI

Front 21

What type of report would we use to evaluate management’s service organization

Back 21

o Report on the Controls of a Service Organization
o Objective is to gain reasonable assurance over the design and implementation of processes/controls

Front 22

Who is responsible for ensuring information prepared by management’s expert is reasonable?

Back 22

o The audit team has sole responsibility for ensuring that information is free of material misstatement, regardless of who created it
o The auditor is required to ensure the expert’s findings support the relevant financial statement assertions
o The auditor must gain an understanding of the scope of work prepared by the expert; and if questions are arisen, potentially view working paper support

Front 23

Summarize our responsibility as an auditor of work prepared by management’s expert

Back 23

o In order to rely on the actuary’s report as audit evidence, we must perform work on ensuring the expert is competent, capable, and objective, and that the report he prepares is adequate for the purposes of our audit. We should confirm in writing with the expert that this is true, and assess his report and how it fits in with our knowledge of the client

Front 24

What is a Specified Procedures engagement?

Back 24

o Auditors complete procedures provided by management and report on the factual results
o Timely and cheap
o No assurance provided

Front 25

What is an Audit of Specific Financial Information?

Back 25

o Auditors audit cutout sections of FS as they normally would a full audit
o Provides assurance
o Less timely and more expensive

Front 26

Discuss regulations on auditors of publicly accountable enterprises

Back 26

o Must be a Participating Auditor with CPAB and have an agreement with CPAB stating as such. (Subject to practice inspections by CPAB)
o Auditor must be independent from the company
o Cannot provide consulting or valuation services for the entity
o Cannot provide bookkeeping
o If there is a familial relationship with management
o Remain free of undue influence to a reasonable observer

Front 27

Discuss Financial Statement issuances for publicly accountable enterprises

Back 27

o Annual statements must be released within 90 days of fiscal year end
o Interim quarterly statements must be released within 45 days of fiscal quarter end
o Must release a statement of financial position, statement of profit/loss, statement of other comprehensive income, statement of changes in equity, and a statement of cash flows

Front 28

Discuss the Financial Statement Requirements at the date of a prospectus

Back 28

o Annual Financial Statements for three comparative periods
 Income Statement: December 2013, December 2012, December 2011
 Balance Sheet: December 2013, December 2012
 Changes Equity: December 2013, December 2012
 Cash Flows: December 2013, December 2012, December 2011
o Most recently reviewed quarterly statements (only if most recent statements are interim rather than annual)
 Three month & YTD period with comparative

Front 29

How is an operating segment determined under IFRS?

Back 29

o In general, an operating segment
 engages in business activities that earn revenue/expenses,
 whose results are regularly reviewed by decision makers
 for which discrete financial records are available
o An operating segment does not necessarily have to earn revenue
o Operating segments exist for product lines and geographical areas

Front 30

What are the quantitative thresholds for disclosing an operating segment?

Back 30

o The segment accounts for at least 10% of either Revenue, Profit, or Assets
o Segments disclosed must account for at least 75% of total Revenue, Profit, or Assets

Front 31

What are the required Operating Segment disclosures?

Back 31

o What metrics were used to determine Operating Segments
o A description of the revenue streams/products that drive its revenue
o Separate statement of financial position and proft/loss if regularly reviewed by decision makers
o Significant customers (10% of total revenue)

Front 32

Where are actuarial gains/losses put through the income statement?

Back 32

OCI

Front 33

What pension amounts are deductible for tax purposes?

Back 33

Only actual contributions; as such, there will be a deferred tax asset on the pension

Front 34

What are the three mod 5 disclosures that are always tested?

Back 34

• Pension disclosures for public companies are more onerous (see above)
• Segment Accounting
• Capital Disclosures
o Structure of and how an entity’s capital is managed
o Externally imposed requirements
o Consequences of non-compliance

Front 35

IF there is an intentionally vague recognition criteria, what is the appropriate response

Back 35

Calculate the financial statement impact under both conditions

Front 36

What are the steps to undertake if the case company has a new type of transaction?

Back 36

o Criteria for accounting – is it being accounted for correctly?
o Intentional Vagueness – Go in multiple directions using if (If A, then B; if C, then D)
o Audit Implications
 Risk
 Procedures
 Tax
• If a response concludes with us having to communicate with management, ensure the response gives alternate steps if management does not comply
• When you’re deciding which accounting policy to use or a decision for a company, ensure your answer aligns with their objectives

Front 37

Discuss eligible and non eligible dividends

Back 37

• A Non-Eligible Dividend is paid out of Low Rate Income, and AII (and receives a small dividend credit).
o Gross up = 25% (18% after 2013)
o Tax Credit = 2/3 * Gross Up
• An Eligible Dividend is paid out of High Rate Income and Dividends (and receives a large dividend credit)
o Gross Up = 38%
o Tax Credit = 6/11 * Gross Up

Front 38

Discuss the LRIP account

Back 38

• LRIP account – A CCPC must track its Low-Rate Income net of dividends so that when it goes public it drains the balance of Low Rate Income through non-eligible dividends
o When a company goes public the dividends it pays must still be integrated, which means prior retained earnings on low-rate income must be paid out as a non-eligible dividend
o This is required; a newly public company cannot issue eligible dividends until it has drained its LRIP

Front 39

Discuss the GRIP account

Back 39

• High rate Active Business Income is included in GRIP at 72%

Front 40

What is the minimum expected composition of an audit committee?

Back 40

3 members, all financially literate, independent

Front 41

What are the communication responsibilities for an audit committee?

Back 41

o Fraud and misstatements from error
o Illegal or possible illegal acts
o Significant deficiencies in IC
o RP transactions
o Qualitative aspects of accounting principles used in reporting
o Management judgments and accounting estimates
o Involvement with annual report
o Misstatements
o Disagreements with management
o Difficulties during the audit
o Consultation by management with other accountants
o Major issues discussed that influence auditor retention
o Confirmation of independence
o Disclose all relationships that may bear on independence
o Must disclose total fees charged for audit and non-audit services during the last year

Front 42

Provide some general IT controls

Back 42

o Password
o Encryption
o Anti-Virus
o Backups
o Need to separate programming from application
o Authorization of transactions
o Hiring and firing policies
o Policies to train users
o Personal use policy
o Physically segregate hardware / restricted access
o Passwords
o Log unsuccessful access attempts
o Install Firewalls
o Virus protection
o Offsite backup

Front 43

Discuss the three types of IT Application Controls

Back 43

o Input controls; processing controls; and output controls
o Master file data controls
o Processing controls = very relevant to standard costing
o Output controls are like reviewing the reports/work of the process. As reports get more and more complex, input and processing controls need to be stronger

Front 44

What should you look for in IT Control cases?

Back 44

o Be cognizant of negatively worded sentences – “we don’t do xyz”
o Be cognizant of errors of omission – they tell you the symptom, and you need to determine the weakness

Front 45

Provide some sample Input Controls

Back 45

o Check digits – Input Masks
o Field checks
o Validity check
o Sign check
o Limit/reasonability
o Sequence checks (numerical integrity)
o Completeness checks
o Default values
o Verification – entry data twice – both inputs are checked
o Prepprinted form / website – easy to understand
o POS interface with GL Package

Front 46

Provide a sample processing control

Back 46

o Check payroll deduction tables,
o Standard costs correct?

Front 47

Provide some sample Output Controls

Back 47

o Visual review of report/data
o Error reviews
o Log reviews
o Distribution controls – who gets the data and when

Front 48

How is control over a business determined in the tax act?

Back 48

Greater than 50% ownership

Front 49

What occurs during an acquisition of control?

Back 49

1. A deemed taxation year end
2. Loss of all capital losses carry forwards
a) However, there is an opportunity to have a deemed disposition of capital property at the time of the acquisition of control in order to capture these capital losses that would otherwise be lost

Front 50

What are the tax implications of going public?

Back 50

• The CDA account will be lost; so pay that out straight away
• The RDTOH account will be lost; so pay that out as well
• Public companies do not pay part 4 tax
• No more small business deduction
• Public companies pay the high rate of tax
• Tax credit of the SRED is 35% for private; 20% for public

Front 51

What is an insight we gain from EPS/Diluted EPS?

Back 51

A valuable insight into EPS is comparing the spread between the basic and diluted EPS; a large spread means there is a large potential dilution wave

Front 52

How is OCI incorporated into EPS calculations?

Back 52

It isn't, which is why management would prefer to put Losses through OCI

Front 53

How are Non-Capital losses carried forwards after an acquisition of control?

Back 53

Non-capital business losses may be carried forward, after the deemed year end, but are only
deductible to the extent of income earned from a same or similar business where the business is
carried on with a reasonable expectation of a profit.

Front 54

If one company acquires a loss-making company, can the parent use the loss-making subsidiary's losses?

Back 54

If one corporation acquires control of another corporation, the corporation acquiring control cannot use the
acquired corporation’s losses because each are separate legal entities for tax purposes. Loss utilization
strategies after acquisition of control include the following:
1. Inter-corporate charges such as rent or management fees
2. Section 85 rollover of income producing assets from the gain company to the loss company
3. Through a reorganization (Section 87 or Section 88)

Front 55

Provide 5 duties of an audit committee

Back 55

1. Act as a liaison between the auditors and management
2. Review the entity's policies around hiring auditors as employees/officers of the company
3. Recommend an external auditor to the board
4. Pre-approve all non-audit services provided by the auditor
5. Review all FS, MD&A, and Interim financial statements

Front 56

Why is it important that a taxpayer owning shares in a CCPC take the section 48.1 election on their shares before the company goes public?

Back 56

It allows the taxpayer to take advantage of the lifetime capital gains deduction on private company shares without actually having to sell any shares. The LCG is not available on public company shares

Front 57

Discuss how Users should be incorporated into a case response

Back 57

1. Identify all Users and their objectives;
2. Discuss conflicting objectives and their impact on the task at hand

Front 58

Discuss three allowable methods for calculating the percentage of completion under IFRS

Back 58

1. Costs incurred to date as a proportion of total expected costs at completion
2. Surveys of work performed
3. Completion of significant milestones

Front 59

What are the required construction contract disclosures?

Back 59

1. The method for determining percentage of completion
2. The method for determining Contract Value
3. The amount of revenue recognized in the period
4. The amount of retentions & advances