With the transition to Accounting Standards for Private Enterprises (ASPE) and International Financial Reporting Standards (IFRS) now underway, for private and public entities, we are noticing common areas of concern. To better prepare your financial statements, we will address some of these recurring issues and attempt to answer your questions in this article. This discussion is general in nature, and the list is not exhaustive; therefore, please consult your Soberman advisor should you require further clarification.

1. Under ASPE, do I have to disclose management compensation and liabilities for government remittances?

Management compensation is NOT a required disclosure under ASPE, but must be disclosed under IFRS. Liabilities for government remittances (other than income taxes) include, for example, federal and provincial sales taxes, payroll taxes, health taxes, and workers' safety insurance premiums and must be disclosed in your financial statements. The reason is that users noted that some of these liabilities receive super-priority status over other creditors and, accordingly, the users are interested in such amounts. This disclosure may be made on the face of the balance sheet or in a note to the financial statements.

2. How should fees and transaction costs incurred in connection with debt financing arrangements be accounted for?

Under both ASPE and IFRS, financing fees and transaction costs that are directly attributable to a loan or other debt financing arrangement that will be measured at amortized cost are deducted, in determining the initial measurement of the liability. On the balance sheet, this is shown as a single amount. The debt is not shown gross, and the fees and costs are not shown as a separate asset.

Fees and transaction costs associated with a line of credit or a revolving loan are recognized as prepaid interest and amortized over the term of the arrangement. This treatment is required because the fee represents the cost of having the ability to draw and repay the loan throughout its term; it is similar in nature to an insurance premium. Note that financing fees and transaction costs related to any financial liability that will be subsequently measured at fair value are expensed as incurred.

Under ASPE, financing fees and transaction costs may be amortized on any rational basis over the term of the arrangement, including the effective interest method, or straight-line. Under IFRS, only the effective interest method is available. The amortization period is often determined by the nature of the fee. For example, a fee that is charged annually will be amortized over one year, and a fee charged at inception for a term loan will be amortized over its stated term. A lender's right to demand payment does not affect the amortization of fees and costs. The amortization period is always based on the expected life of the related liability.

3. When can a financial asset or liability be designated at fair value, and is disclosure of the fact required?

Under IFRS, an entity may designate a financial asset or liability at fair value if certain criteria are met. Generally, it's allowed if doing so will result in information that is more relevant because it eliminates measurement or recognition inconsistency, or a group of financial assets, liabilities or both are managed and evaluated on a fair value basis. For example, if an investment property is measured at fair value then you can elect to measure the corresponding mortgage payable at fair value so that both the asset and liability are measured on the same basis. Changes in fair value are reflected in the income statement, and additional disclosures of the designated asset/liability are required. Keep in mind that there are costs associated with determining the fair value of these financial instruments.

Under ASPE, an entity may elect to measure any financial asset or liability at fair value upon initial recognition without any preconditions. The designation is irrevocable until disposed or otherwise derecognized.

With the transition to ASPE and IFRS underway, not-for-profit organizations are also gearing up for their transition to NPO standards, which are effective for fiscal periods beginning on or after Jan. 1, 2012. Should you require any assistance, please contact your Soberman advisor

SOO-LING HUANG

Soo-Ling is a senior manager with the firm's Professional Practice Group and assists in the monitoring of accounting and assurance standards, as well as standards regarding professional conduct and quality control.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.