The
past few years have seen numerous changes in Canadian accounting standards,
such as for investments, asset retirement obligations, and stock options.
Assume that IFRS has been adopted.
Instructions
For
each accounting situation listed below, identify any related cash flows, and
explain how the statement of cash flows is affected for companies with this
type of transaction.
(a)
Investments of securities purchased for trading held by a company are classified
as fair value through net income. The investments do not meet the definition of
cash equivalents, but are used to earn a return on excess cash until the cash
is needed for operations. Small amounts of gains and losses on disposal,
interest and dividends received, and changes in their fair values are reported
in income.
(b)
A company holds equity investments that are classified as fair value through
OCI (without recycling). One security was disposed of at a gain during the year
and the others have fair values that are higher than they were at the previous
year end. Dividends have been received and reported in income.
(c)
An investment in another company's bonds is recorded at amortized cost. The
investment was acquired at a premium because the bond pays a higher rate of
interest than the market rate.
(d)
A company began development activities for a new mine site. As a result, it
incurred an obligation related to the mine's eventual retirement, reporting it
as an asset retirement liability and as a portion of the mine's cost on its balance
sheet. The following year, the obligation was increased due to expanded mine
activity as well as the accretion of the amount that was recognized in the
preceding year representing interest.
(e)
Stock options with a two-year vesting period were issued to the top executive
team at the beginning of the current fiscal period. The fair value of the stock
options was determined using the Black-Scholes formula.
(f)
Stock options that were granted three years ago were exercised in the current
year when the fair value of the company's shares was at an all-time high. The
option or strike price was approximately half of the market share price when
the options were exercised.
(a) Income earned as interest and dividends from these investments that are
purchased for trading purposes and have been classified at fair value through
net income is included in income for the year.
Under IFRS , the interest
received and dividends received should be disclosed separately on the statement
of cash flow and shown as an operating activity as this income relates to
investments held for trading purposes.
If the indirect approach is used, then the interest income and dividend
income will be deducted from net earnings and the actual amount of interest and
dividends received will be shown separately.
In addition, assuming the indirect method is used, gains on disposals
will have to be deducted from income, just as losses will need to be added
back. Any gains or losses from disposals
of these investments would be left out of the cash flow statement, if the
direct method were adopted. Amounts
accrued for unrealized gains and losses will require adjustment to income as
they do not involve cash. Any proceeds
from sale or cash spent on these investments would be reported as cash flows in
the operating activities section of the cash flow statement as these
investments were acquired for trading purposes.
(b) Income earned from dividends on equity investments classified as fair
value through OCI would be included in net income for the year. However, the
amount of dividends received must be separately disclosed and can be shown as
either an operating or investing activity.
Therefore, if the indirect method is used, dividend income will be
deducted from net income in the operating activities and the dividends received
can be shown as either operating or investing.
Any proceeds from the sale or purchase of these investments are treated
as investing flows. Amounts accrued for unrealized gains and losses or gains or
losses on disposal will not require adjustment to income as they are not
included in income on the income statement; they are taken to OCI and never
recycled to net income.
(c) An investment in bonds reported at amortized cost will have the interest
earned reported on the income statement using the effective interest
method. This amount will be deducted
from net earnings under operating activities if the indirect method is
used. The actual amount of the interest
received can then be either reported as an investing or an operating
activity. Any cash used to buy these
bonds will be reported as an investing activity.
(d) Development costs incurred and paid would be reported as investing
activities outflows on the cash flow statement. The obligation for the mine’s
retirement increases both the mine’s carrying amount and the asset retirement
liability. This amount is a non-cash investing and financing transaction and
would be disclosed in the notes. The interest expense for the year (that
increased the liability) would have to be added back to net income in the
operating activities section (under the indirect method) as it was a non-cash
expense.
(e) Stock options granted as compensatory rewards to top executives would
require a charge on the income statement and a corresponding increase in
equity, although no cash was given up or received. Since the amount appears on the income
statement as an expense, the expense will be added back to income as an
adjustment if the indirect format of the cash flow statement is used to report
cash flows from operations. Details of
the transaction would nonetheless be reported in the notes to the financial
statements.
(f) The total compensation expense would have been calculated on the grant
date, based on the fair value, and recognized during the service period. At
exercise date, there will be a cash inflow amounting to the option price per
share multiplied by the number of shares issued. This would be reported as cash
inflows in financing activities. Additional disclosures regarding the stock
options, such as values of options exercised, would be made.
