The Private Enterprise Advisory Committee assists the Accounting Standards Board (AcSB) with maintaining and improving accounting standards for private enterprises (ASPE) in Part II of the CPA Canada Handbook – Accounting and with identifying the need for non-authoritative guidance about the standards. The Committee makes recommendations to the AcSB but is not authorized to interpret or provide authoritative guidance on ASPE.
The AcSB staff has prepared this document based on discussions held during the Committee’s meeting. The meeting notes do not necessarily represent the AcSB’s views, and nothing in them constitutes authoritative guidance on acceptable or unacceptable application of ASPE. Only the AcSB can make such a determination.
Related Party Combinations
The Private Enterprise Advisory Committee discussed feedback on the AcSB’s Exposure Draft, “Improvements to Accounting for Common Control Combinations”. The Committee advised on the proposals to address key issues identified by respondents, including:
- the scope of Section 1582, Business Combinations and definition of a business combination;
- the optionality of restatement and period of restatement when the option is chosen; and
- the measurement of financial instruments acquired in a combination under common control.
The AcSB will consider the Committee’s feedback at the May 2023 Board meeting.
Revenue – Upfront Non-refundable Fees or Payments
The Private Enterprise Advisory Committee received an update on the AcSB’s recent discussions and tentative decisions to address concerns with accounting for upfront non-refundable fees or payments.
The Committee provided feedback on the Board’s tentative decision to issue an exposure draft to indefinitely defer the effective date of these amendments, with early application permitted, until the Evaluating the Preface project is complete. The Committee also provided feedback on the Board’s tentative decision to propose a new disclosure requirement in this exposure draft for entities recognizing non-refundable initiation and life membership fees in revenue up front.
The AcSB will consider this feedback and that of the Not-for-Profit Advisory Committee at the June 2023 Board meeting.
International Tax Reform
The Private Enterprise Advisory Committee considered the impact of the Pillar Two Model rules on Canadian accounting standards for private enterprises. Staff acknowledged that this is an evolving area. The Committee also considered whether additional guidance was needed. Members did not have significant comments.
The AcSB will consider next steps at the May 2023 Board meeting.
Other Topics
The Private Enterprise Advisory Committee discussed application questions related to the amendments to Section 3400, Revenue, issued November 2021, which were effective as of January 1, 2022.
Applicability of the percentage of completion method guidance to service contracts when revenue is recognized on a straight-line basis
The Committee discussed a scenario where an enterprise enters into a two-year contract for a total fee of $3,000. After the first year, actual costs incurred are $1,000 and the estimated remaining costs are $1,400. The enterprise applies a straight-line method of revenue recognition, and the scenario assumes this was determined to be appropriate in accordance with Revenue, paragraph 3400.17.
The Committee discussed the costs to recognize in each year. Some members thought that the straight-line approach is a simplification and the guidance included in Appendix A of Section 3400 relating to the percentage of completion method does not need to be considered. Therefore, the costs recognized in the first year are the actual costs incurred of $1,000.
Other members noted that Revenue, paragraph 3400.A24 requires estimation of gross profit first, before the amount earned on the contract for a period can be determined. Members interpreted this to mean that there should be a consistent gross profit recognized throughout the contract. Therefore, if 50% of the revenue is recognized in the first year using a straight-line approach, then 50% of the estimated costs should be recognized as well. This means the enterprise would recognize $1,200 in costs in the first year.
Application of disclosure requirements for service contracts
The second application question discussed was concerning Revenue, paragraph 3400.32A(b). The application of this paragraph requires that enterprises disclose the aggregate amount of costs incurred and recognized profits (less recognized losses) at the end of a reporting period for contracts in progress.
Members noted that there is diversity in practice in the application of this disclosure requirement. Some members noted that this disclosure requirement can be challenging for enterprises such as professional service firms that may not track costs by each customer and may not estimate the total costs they will incur for each contract.
Accounting for losses on contracts with multiple deliverables
The Committee discussed a scenario where an enterprise enters into a long-term contract for a custom item that includes the design, manufacturing, and delivery. The enterprise completes the design phase and recognizes the associated revenue. During the manufacturing phase, the enterprise realizes that costs have increased and the total costs for manufacturing will exceed the consideration allocated to the manufacturing phase. The enterprise expects to earn a profit on delivery, and if considered on a total basis, the remainder of the contract is profitable. The Committee discussed whether a loss would need to be recognized during manufacturing.
Most members thought that the loss should be assessed on a total contract basis and therefore, since the contract will be profitable, no loss would be recognized. Some members thought the enterprise should assess whether there is a loss on each deliverable, and therefore, a loss would be recognized on manufacturing.
The Private Enterprise Advisory Committee recommended the AcSB consider these application questions and provide clarifications to address the diversity in application.
The AcSB will discuss the application questions and consider feedback from the Committee at its June 2023 Board meeting.