Glossary
Notes:



Note 1: CICA Part I applies to publicly accountable enterprises, CICA Part II ASPE
applies to private enterprises; CICA Part III ASNFPO applies to not-for-profit
organizations. CICA Part IV ASPP applies to pension plans; CICA Part V contains the
pre-changeover accounting standards. For governments and government organizations,
see under Public Sector Accounting (PSA) Handbook for details of what applies.
Note 2: Part II and V Definitions may not be identical — check the CICA Handbook —
Accounting.
Note 3: Part V reference is in square brackets if different from Part II reference for
same definition — for example, [3865.07(h)], 3856.05.
A B C D E F G H I
J K L M N O P Q R S T U V W X Y Z
Abnormal earnings
Also referred to as unexpected earnings. Differences between the expected value of earnings
and the actual realized.
Absorption costing
Absorption costing is a method of assigning costs to inventory. It includes fixed overhead costs in
addition to variable overhead costs added to direct materials and direct labour to calculate unit
cost.
Accelerated amortization
Accelerated amortization is a method of allocating the cost of an asset in which the annual
amortization amounts are larger in an asset’s early years and decrease over time. An example of
accelerated amortization would be the double-declining balance method.
Access controls
Procedures designed to restrict access to online terminal devices, programs, and data. Access
controls consist of ”user authentication” and ”user authorization.”
Account
Place within an accounting system where the increases and decreases in a specific asset, liability,
owner’s equity, revenue, or expense are recorded and stored.
Account analysis
An account analysis is the identification of each important item and amount in an account
followed by document vouching and inquiry to determine whether amounts should be classified
elsewhere.
Account balance
An account balance is the difference between the increases (including the beginning balance)
and decreases recorded in the account. An account balance is the beginning balance plus or
minus all increases and decreases recorded in the account.
Account balance audit program
An account balance audit program is a specification of procedures designed to produce evidence
about the assertions in financial statements.
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Account form statement of financial position
An account form statement of financial position is a statement of financial position that is
arranged with the assets listed on the left side and the liabilities and owners’ equity listed on the
right.
Exhibit 1
ACCOUNT FORM CO. LTD.
Statement of Financial Position
December 31, 2011
Assets Liabilities
Cash
$ 12,365.71
Accounts payable
Accounts receivable
5,471.83
Salaries and wages payable
Prepaid expenses
1,247.81
Mortgage payable
Inventory
45,789.82
Total liabilities
Automobiles
32,741.67
Accumulated depreciation
(1,281.97) Owners’ equity
Plant and equipment
123,758.91
Accumulated depreciation
Total assets
(20,626.49)
$ 199,467.29
Ordinary shares
Retained earnings
Total owners’ equity
$
3,247.12
2,345.71
95,000.00
$ 100,592.83
$
1,000.00
97,874.46
98,874.46
Total liabilities and
owners’ equity
$
199,467.29
Account groups
Account groups are used by not-for-profit organizations (NFPOs) that have two-year average
annual revenues less than $500,000 to track capital assets that are not capitalized. A capital
asset (or fixed asset) account group can be used to provide a record of the assets that an
organization holds at any time. See Capital asset, Memorandum accounts, Not-for-profit
organization.
Accountability
Person A is accountable for wrongdoing X if there is (or should be) some other person B to whom
A ought to render an accounting.
Accounting
Accounting is a service activity that provides useful information to people who make rational
investment, credit, and similar decisions to help them make better decisions.
Accounting (as a control objective)
A general category of objective concerned with ensuring that the accounting process for a
transaction is performed completely, correctly and in conformity with GAAP.
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Accounting cycle
The accounting cycle is a chronological series of steps that begins with the identification of the
transactions to be recorded to financial statement preparation. The steps are:
1. Identifying the events or transactions to be recorded.
2. Journalizing the transactions or events.
3. Posting the journals to the ledger.
4. Preparing an unadjusted trial balance.
5. Journalizing and posting adjusting journal entries.
6. Preparing an adjusted trial balance.
7. Preparing financial statements.
8. Journalizing and posting closing entries.
9. Preparing a post-closing trial balance.
10. Journalizing and posting reversing journal entries, if required.
Accounting equation
The accounting equation is a description of the relationship between the elements of the
statement of financial position. The equation is expressed as Assets = Liabilities + Owners’
Equity. This is also known as the balance sheet equation.
Accounting estimate
An accounting estimate is a guess or approximation made by management that is used in
compiling financial statements. An example would be accruing for warranties. See Change in
accounting estimate.
Accounting (translation) exposure (FX)
Accounting, or translation, exposure is the amount of the gain or loss produced by translating the
financial statements of a foreign subsidiary to their Canadian currency equivalent amounts. It is
the number that ensures that translated statements balance. Caution must be used in
interpreting accounting exposure because the amount of translation gains or losses can differ
substantially depending on which accounting method is chosen to translate foreign financial
statements. Also called translation exposure.
See Foreign currency risk.
Accounting for hedges
Accounting for hedges involves recording the purchase and sale of hedging items and the
resultant gain or loss. Not the same as hedge accounting. See Hedge accounting.
Accounting income
Accounting income is an increase (or decrease if a loss) in the reported wealth of a corporation
based on actual transactions completed. It is a measure of income based on the accounting
model and reported in accordance with accrual-based accounting principles.
Accounting information systems
An accounting information system is designed to record accurate financial data in a timely
manner, to facilitate retrieval of that data in a form useful to management (chronologically
based), and to ease periodic preparation of financial statements for external use.
Accounting period
The accounting period is a length of time that divides the life of a business for the purpose of
preparing periodic financial statements.
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Accounting policies (CICA Part I IFRS)
Specific principles, bases, conventions, rules and practices applied by an entity in preparing and
presenting financial statements. IAS 8.5
Accounting policies (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Accounting policies encompass the specific principles and the methods used in their application
that are selected by an entity in preparing financial statements. 1100.02, 1506.05. See
Prospective application, Retrospective application.
Accounting profit (CICA Part I IFRS)
Profit or loss for a period before deducting tax expense. IAS 12.5
Accounting rate of return
The accounting rate of return is a method of assessing the value of a company’s investments on
the basis of profitability. It relates the firm’s accounting statements to an expenditure analysis
method. When comparing plans and using expected results, instead of average increase in
annual net income you can use average increase in expected operating income. The calculation
of the accounting rate of return is as follows:
ARR 
Aver age
i ncr ease
i nannua
l neti ncom e
Net or i gi nal
i nvest mout
entl ay
or
ARR 
Av e r a gien c r e ai snae n n u anle ti n c o m e
Av e r a gien v e s t m e n t
where
Or i gi nal
i nves t m
sent
al vage
Aver age
i nves t m
 ent
2
Accounting Standards Board (AcSB)
Independent body with the authority to develop and establish standards and guidance governing
financial accounting and reporting in Canada.
Accounting system
The accounting system, as an element of a control structure, is an organization of policies and
procedures for the proper recording of transactions.
Accounts payable
Accounts payable is an account where the liabilities created by buying goods and services on
credit are recorded. It is usually a control account for a sub ledger that contains a separate
account for each vendor that grants credit to the entity.
Accounts payable ledger
An accounts payable ledger is a subsidiary ledger containing a separate account for each vendor
that grants credit on account to the entity.
Accounts payable turnover
The accounts payable turnover is the length of time it takes a company to meet its obligations to
its suppliers. It is a liquidity measure that shows how quickly management is at paying trade
creditors. It is calculated as Cost of goods sold divided by average accounts payable.
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Accounts receivable
Accounts receivable, also known as trade receivables, is cash due to a company from their
customers because of purchases from the company of goods or services on credit.
Accounts receivable ageing schedule
A schedule categorizing accounts receivable by the length of time they have been outstanding.
The standard is by 30-day increments.
Accounts receivable lapping
A manipulation of the accounts receivable entries to hide a theft or fraud.
Accounts receivable ledger
An accounts receivable ledger is a subsidiary ledger that contains a separate account for each
credit customer.
Accounts receivable subsidiary ledger
A detailed listing of outstanding accounts receivable balances by individual customer that adds up
to the total balance in the general ledger accounts receivable “control” account.
Accounts receivable turnover
The frequency that a company collects its average accounts receivable balance in the year in
relation to total credit sales; a measure of its efficiency in collecting accounts receivable. The
accounts receivable turnover is calculated as follows:
Ne t s a l e( so r e v e n u e )
Ac c o u n rt es c e i v at bulr en o ve r
Av e r a gnee ta c c o u nrtesc e i v a b l e
Accretion of discount
The increase in value of an asset over time, determined by the present value multiplied by the
implied interest rate.
Accretion expense (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Increase in the carrying amount of an asset retirement obligation due to the passage of time.
3110.03
Accrual
An accrual is the transaction that results in a statement of financial position account because
cash flows occur after expense or revenue recognition.
Accrual accounting rate of return (AARR)
See Accounting rate of return.
Accrual basis of accounting (NFPOs)
The accrual basis of accounting recognizes revenues when they are earned. Expenses are
subsequently matched with the revenues they generate. Cash inflows and outflows may occur
before or after related revenues and expenses are realized and recognized in accrual accounting
statements.
Some NFPOs use a modified accrual basis whereby the cash basis is used for inflows but
payables are accrued for outflows. Another common version of the modified accrual basis is to
use accruals for inflows and outflows but not to record amortization on capital assets.
See Cash basis of accounting, Modified accrual basis of accounting.
Accrual method of recording income taxes
The accrual method of recording income taxes, also known as the liability method of recording
income taxes, records the future tax impact of temporary difference by using the tax rate that
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will be in effect in the year of reversal; the future tax impact is recorded on the statement of
financial position as a liability, and is updated as the tax rates change.
Accrued benefit asset (CICA Part II ASPE)
Amount of any asset recognized on an entity's statement of financial position in respect of
employee future benefits before deducting any valuation allowance that may be required. It is
the sum of the entity's accumulated cash contributions less the sum of the current and prior
years' benefit costs (before any change in valuation allowance). 3461G
Accrued benefit liability (CICA Part II ASPE)
Amount of any liability recognized on an entity's statement of financial position in respect of
employee future benefits. It is the sum of the current and prior years' benefit costs less the
entity's accumulated cash contributions. 3461G
Accrued benefit methods (CICA Part II ASPE)
Family of actuarial valuation methods in which a distinct unit of future benefit is attributed to
each year of credited service and the actuarial present value of that unit of benefit is computed
separately for the period during which it is presumed to have accrued. Two accrued benefit
methods are:

(i) accumulated benefit method — benefits earned to date are based on the plan formula,
the employee's history of pay, service and other factors, as of the date of determination;

(ii) projected benefit method prorated on services — generally, an equal portion of the total
estimated future benefit (that is, with salary projection or cost escalation, when
appropriate) is attributed to each year of service in the attribution period.
Some plans define different amounts of benefits for different years of service. For such plans, this
method will not necessarily attribute an equal portion of the total estimated future benefit to
each year of service in the attribution period (see paragraph 3461.055). 3461G
Accrued benefit obligation (CICA Part II ASPE)
Actuarial present value of benefits attributed to employee services rendered to a particular date.
As of a particular date prior to an employee's full eligibility date, an entity's accrued benefit
obligation in respect of the employee is the portion of the obligation for employee future benefits
attributed to that employee's service rendered to that date. On and after the full eligibility date,
the accrued benefit obligation and obligation for employee future benefits for an employee are
the same. 3461G
Accrued expense
An accrued expense is an expense incurred during an accounting period but that, prior to end-ofperiod adjustments remains unrecorded because payment has not been made.
Accrued revenues
Accrued revenues are revenues earned during an accounting period that, prior to end-of-period
adjustments, remain unrecorded because payment has not been received.
Accumulated amortization or depreciation
Accumulated amortization (CICA Part V Pre-changeover accounting standards) or depreciation
(CICA Part I IFRS) is the cumulative amount of the original cost of an asset that has been
amortized to date.
Accumulated benefit method
The accumulated benefit method is a method of calculating employer contributions for defined
pension plans; funding is based on the years of service to date and on the current salary.
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Accumulated other comprehensive income [CICA Part V Pre-changeover accounting
standards]
Accumulated balance of all components of other comprehensive income — revenues, expenses,
gains, and losses that are recognized in comprehensive income in accordance with primary
sources of GAAP (see section 1100) but excluded from net income (see section 1530). [3251.03]
Accuracy
Accuracy, as a control objective, refers to ensuring that dollar amounts are figured correctly.
Acid-test ratio
The acid-test ratio, also called the quick ratio, is used to test the ability of the firm to meet its
short-term obligations. It is calculated by dividing the current quick assets (cash, temporary
investments, and net current receivables) by the company’s current liabilities.
Acquiree (CICA Part I IFRS) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Business or businesses that the acquirer obtains control of in a business combination. IFRS 3.A,
1582.03
Acquirer (CICA Part I IFRS) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Entity that obtains control of the acquiree. 1582.03, IFRS 3.A
Acquisition date (CICA Part I IFRS) (CICA Part II ASPE) [CICA Part V Prechangeover accounting standards]
Date on which the acquirer obtains control of the acquiree. 1582.03, IFRS 3.A
Acquisition differential (AD) (CICA Part I IFRS)
Acquisition differential is calculated as follows:

Add the fair value of the consideration given.

Deduct the book value of the ordinary shares of the acquiree.
The difference between the amount paid and the book value of the equity acquired is the
acquisition differential.
The acquisition differential is allocated first to the difference between the fair value and book
value of the identifiable assets and liabilities. This can include items that are not recorded on the
acquiree’s balance sheet. (They have a fair value, but not a book value.)
The difference between the acquisition differential and the allocation of fair value increments (or
addition of fair value decrements) is allocated to goodwill. Goodwill is an asset, so it cannot have
a credit balance (that is, negative goodwill).
Pre-changeover, acquisition differential was known as purchase price discrepancy (PPD).
Acquisition method (business combination) (CICA Part I IFRS)
Method of accounting for a business combination. Applying the acquisition method requires:

(a) identifying the acquirer;

(b) determining the acquisition date;

(c) recognizing and measuring the identifiable assets acquired, the liabilities assumed, and
any non-controlling interest in the acquiree; and

(d) recognizing and measuring goodwill or a gain from a bargain purchase. IFRS 3.5.
See Acquisition differential, Business combination, New entity method, Pooling of interests
method, Purchase method.
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AcSB
See Accounting Standards Board.
Active business carried on by a corporation
Active business is any business carried on by the corporation other than a specified investment
business or a personal services business, and includes an adventure or concern in the nature of
trade. Active business income includes “incidental” income pertaining to the active business, such
as interest collected on accounts receivable or interest on temporary cash deposits.
Active business income (ABI)
Active business income (ABI) of the corporation includes any income from an active business
carried on by it, including any income for the year pertaining to or incidental to that business.
Such incidental income includes interest collected on accounts receivable or interest on
temporary cash deposits.
ABI does not include income from a source in Canada that is a property held for investment.
Furthermore, income received from an associated corporation that was deductible by that
associated corporation in determining its ABI is considered to be ABI.
Active market (CICA Part I IFRS)
Market in which all the following conditions exist:

(a) the items traded within the market are homogeneous;

(b) willing buyers and sellers can normally be found at any time; and

(c) prices are available to the public.
IAS 36.6, IAS 38.8, IAS 41.8
Activity
An activity is any event or transaction that is a cost driver. An activity is any event that causes
the incurrence of cost in an organization.
Activity base
An activity base is a measure of whatever causes the incurrence of a variable cost.
Activity centre
An activity centre is a part of the production process for which management wants a separate
reporting of the cost of the activity involved.
Activity variance
An activity variance is the net income gained or lost through failure to achieve the budgeted sales
in units for the period. To calculate this variance, multiply the difference between budgeted sales
and actual sales by the budgeted contribution margin per unit.
Activity-based costing
Activity-based costing is a two-stage costing method that creates a cost pool for each major
activity in an organization (such as setups required, purchase orders issued, and so on).
Overhead costs are assigned to products and services on the basis of the number of iterations of
each activity involved in manufacturing the product or providing the service.
Activity-based management
Activity-based management is an approach developed out of activity-based costing in response to
the competitive pressures of today’s global market. The purpose of ABM is to provide
organizations with a thorough understanding of the tasks, activities, and processes carried out in
pursuit of their organizational goals.
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Actuarial assumptions (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Estimates of future events that will affect an entity's costs and obligation for employee future
benefits. Examples of these estimates are rates of return on plan assets, administration expenses
and taxes (other than income taxes), termination rates, disability claim rates, rates of employee
turnover, retirement age, mortality, dependency status, per capita claims costs by age and by
type of benefit, health care cost trend rates, discount rates to reflect the time value of money,
and future salary and benefit levels. [3461.09] 3461G
Actuarial gains and losses (CICA Part I IFRS)

(a) Experience adjustments (the effects of differences between the previous actuarial
assumptions and what has actually occurred); and

(b) the effects of changes in actuarial assumptions. IAS 19.7
Actuarial gains and losses (CICA Part II ASPE)
Changes in the value of the accrued benefit obligation and the plan assets resulting from:

(i) experience different from that assumed; or

(ii) changes in an actuarial assumption. 3461G
Actuarial gains and losses (pension plan)
Actuarial gains and losses, with respect to a pension plan obligation, arise from changes in
estimates due to actual experience or from changes in assumptions.
Actuarial present value (CICA Part II ASPE)
Discounted value of an amount or series of amounts payable or receivable at various times,
determined as of a given date by the application of a particular set of actuarial assumptions.
3461G
Actuarial present value of promised retirement benefits (CICA Part I IFRS)
Present value of the expected payments by a retirement benefit plan to existing and past
employees, attributable to the service already rendered. IAS 26.8
Actuarial revaluation
An actuarial revaluation is where an actuary restates the accrued pension obligation on the basis
of evaluations of the actual performance factors since the preceding revaluation and factors
affecting the future outlook.
Actuarial valuation [CICA Part V Pre-changeover accounting standards]
Assessment of the financial status of a benefit plan. It includes the valuation of plan assets, if
any, and the accrued benefit obligation. [3461.09]
Actuary
An actuary is a person who calculates statistical risks, life expectancy, and payout probabilities
for various purposes. In accounting, actuaries are most often used for determining pension
funding.
AD
See Acquisition differential.
Additional information
Additional information in an accounting context means the introduction of new information
systems to report on matters not covered by the historical cost system. Examples would be fair
value accounting or FOFI.
Additional markup
An additional markup is any increase in the sale price above the original sale price.
Page 9 of 266
Additional markup cancellation
An additional markup cancellation is the cancellation of all or some of an additional markup.
Additions
Additions are extensions, enlargements, or expansions of an existing capital asset.
Adjustable rate mortgage (ARM)
A mortgage that features predetermined adjustments of the loan interest rate at regular intervals
based on an established index. The interest rate is adjusted at each interval to a rate equivalent
to the index value plus a predetermined spread, or margin, over the index, usually subject to perinterval and to life-of-loan interest rate and/or payment rate caps.
Adjusted basic earnings per share
Adjusted basic earnings per share is basic EPS recalculated as though actual conversions of
senior securities that have occurred sometime during the year had occurred at the beginning of
the year, giving the full year effect of part-year conversions to recognize the capital structure of
the company going forward.
Adjusted benefit asset (CICA Part II ASPE)
Accrued benefit asset less the amount, if any, by which the aggregate of any unamortized past
service costs, unamortized actuarial losses exceeds any unamortized actuarial gains. 3461G
Adjusted cost base (ACB)
For depreciable property, the adjusted cost base (ACB) of a specific asset is its original cost.
However, in the case of non-depreciable property, the ACB is the cost of the property plus or
minus specified adjustments provided for in the ITA under subsections 53(1) and 53(2). Note
that for property owned on December 31, 1971, its ACB is the Valuation Day value provided in
the ITAR.
Adjusted trial balance
An adjusted trial balance is a trial balance prepared after adjusting journal entries. These are
usually the basis for preparing the financial statements.
Adjusting journal entries
Adjusting journal entries are entries used to record resource changes that occur continuously and
must be recorded to accurately reflect the financial results and position of an entry. Examples are
the expiry of prepaid insurance premiums and amortization or depreciation of capital assets.
Administrative control
Administrative control is the plan of organization and all methods and procedures that are
concerned mainly with operational efficiency and adherence to managerial policies, and usually
relate only indirectly to financial records.
Administrative fees
Administrative fees are an initial processing and service fee charged up front by lenders when
granting a loan.
Advance Pricing Agreement (APA)
In order to assist taxpayers in determining transfer prices acceptable for the purpose of the ITA
and the tax conventions, CRA has introduced an Advance Pricing Agreement (APA) program for
major transfer pricing issues and corporations. Multinational corporations would most likely use
this process due to its prohibitive cost. An APA is considered to be a binding agreement between
a taxpayer and CRA. The idea is to promote voluntary compliance by assuring taxpayers that the
transfer pricing methodology they use to establish transfer prices is acceptable.
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Advance Tax Rulings
Advance Tax Rulings are established through CRA’s rulings division, which provides binding
advanced tax rulings for contemplated transactions. As long as the eventual transaction is
completed in accordance with the terms outlined in the ruling request, CRA is bound by its
determination of the tax treatment. Those cases deemed to be of interest to the tax community
are published by CRA.
Adverse opinion
An adverse opinion is a type of modification to the auditor’s opinion; it is issued when the
auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements,
individually or in the aggregate, are both material and pervasive to the financial statements.
Adverse selection
Adverse selection is the tendency of individuals with private information that affects a potential
trading partner’s benefits to make offers detrimental to the trading partner. The classic example
is life insurance, in which if a medical is not required, people with serious illnesses tend to select
life insurance policies with high payout to the detriment of the life insurance company.
Aged A/R trial balance
A list of all outstanding accounts receivable balances organized by how long they have been
outstanding; used to manage collection and assess the accounting requirement to provide an
allowance for possible uncollectible accounts.
Ageing method
The ageing method is a method of estimating uncollectible accounts receivable by applying
probability estimates of non-collection to specific balances that have been classified by age.
Agent
A person representing and acting on behalf of a principal in dealings with third parties.
Agency costs
Agency costs are defined as the decline in firm value that results from agents pursuing their own
interests to the detriment of the principal’s interests.
Agency theory
Agency theory is a branch of game theory that studies the design of contracts to motivate a
rational agent to act on behalf of a principal when the agent’s interests would otherwise conflict
with those of the principal. According to agency theory, people in employment or other
contractual relationships where they are agents providing goods or services to a principal, seek to
maximize their own benefit (referred to as utility maximization).
Aggregate investment income
The aggregate investment income of a corporation is the total of:

the eligible portion of its taxable capital gains for the year in excess of the total of the
eligible portion of its allowable capital losses and the net capital loss carryovers deducted in
the year
(Note that the eligible portion is the total of the gains or losses that accrued while the property
giving rise to the gain or loss was held by a CCPC or certain special corporations.)
and

the income from property, excluding:

exempt income

dividends deductible in calculating taxable income

property income from a trust
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less

the corporation’s losses for the year from a property.
Aggregation (CICA Part I IFRS)
Financial statements result from processing large numbers of transactions or other events that
are aggregated into classes according to their nature or function. The final stage in the process
of aggregation and classification is the presentation of condensed and classified data, which
form line items in the financial statements. If a line item is not individually material, it is
aggregated with other items either in those statements or in the notes. An item that is not
sufficiently material to warrant separate presentation in those statements may warrant separate
presentation in the notes. (IAS 1.29-.30) See Materiality.
Agricultural activity (CICA Part I IFRS)
Management by an entity of the biological transformation and harvest of biological assets for sale
or for conversion into agricultural produce or into additional biological assets. IAS 41.5.
Agricultural activity covers a diverse range of activities — for example, raising livestock; forestry;
annual or perennial cropping; cultivating orchards and plantations; floriculture; and aquaculture
(including fish farming). Certain common features exist within this diversity:

(a) capability to change — living animals and plants are capable of biological
transformation;

(b) management of change — management facilitates biological transformation by
enhancing or at least stabilizing conditions necessary for the process to take place (for
example, nutrient levels, moisture, temperature, fertility, and light). Such management
distinguishes agricultural activity from other activities. For example, harvesting from
unmanaged sources (such as ocean fishing and deforestation) is not agricultural activity;
and

(c) measurement of change — the change in quality (for example, genetic merit, density,
ripeness, fat cover, protein content, and fibre strength) or quantity (for example, progeny,
weight, cubic metres, fibre length or diameter, and number of buds) brought about by
biological transformation or harvest is measured and monitored as a routine management
function. IAS 41.6
Agricultural produce (CICA Part I IFRS)
Harvested product of the entity's biological assets. IAS 41.5
AGs
See Application Guidelines.
Alignment
In positive accounting theory, the problem of ensuring that management’s best interests are
aligned with those of shareholders.
Allocation base
An allocation base is any measure of activity (such as labour-hours, number of employees or
square metres of space) that is used to charge service department costs out. The allocation
bases are used to charge service department costs to other departments.
Allowable business investment loss (ABIL)
An allowable business investment loss (ABIL) is equal to 50% of the taxpayer’s business
investment loss for the year and it is deductible against all other sources of income because the
general rules applicable to capital gains and losses do not apply to an ABIL.
Allowable capital loss
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A taxpayer’s allowable capital loss for a taxation year from the disposition of any property is 50%
of the taxpayer’s capital loss for the year from the disposition of the property.
Allowance for doubtful accounts
An allowance for doubtful accounts is a contra account to accounts receivable that represents the
portion of outstanding receivables whose collection is doubtful. When the contra account is
netted against the receivable account in the financial statements, the balance should reflect the
best estimate of the amount that will actually be collected.
Allowance method for doubtful accounts
The allowance method for doubtful accounts is an accounting procedure that:

(a) estimates and reports bad debts expense from credit sales for the period of the sales,
and

(b) reports accounts receivable at the amount of cash proceeds that is expected from their
collection.
Alpha risk
The risk that the auditor will incorrectly reject an account balance that is not materially
misstated; a type of sampling risk.
Alternative minimum tax (AMT)
The alternative minimum tax (AMT) is a structure for computing a basic minimum amount of tax
payable. AMT prevents a taxpayer from significantly reducing or eliminating his tax obligation as
a result of investing in tax shelters and making excessive use of tax incentives. Basically, AMT
ensures that all taxpayers, particularly relatively high income individuals, pay a fair share of
taxes. Note that there are few taxpayers that are affected by the AMT.
Alternative service delivery
Service-delivery model that departs from full public production of the public service and involves
private-sector parties (P3s) in the production or delivery of the service.
Amalgamation
An amalgamation involves the complete merging of the assets, liabilities, and shareholdings of
two or more corporations. All the former corporations cease to exist and a new corporation is
born. In effect, all the amalgamated corporations have disposed of their assets to a new
corporation and all the shareholders have disposed of their shares in the former corporations in
exchange for shares in the new corporation.
Amortizable costs
The amortizable cost is the total amount of amortization or depreciation to be recognized over
the useful life of the asset. Generally, this cost will be cost less residual value.
Amortization (CICA Part I IFRS) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Systematic allocation of the depreciable amount of an intangible asset over its useful life. IAS
38.8, 3064.08. Under IFRS, called depreciation.
See Depreciation, Useful life.
Amortization period of loans
The amortization period of loans is a hypothetical period over which a loan is to be repaid; it is
used as a basis for calculating periodic repayments. Note that the amortization period may be
longer than the actual term of the loan.
Page 13 of 266
Amortized cost (CICA Part I IFRS) [CICA Part V Pre-changeover accounting
standards]
Amount at which the financial asset or financial liability is measured at initial recognition minus
principal repayments, plus or minus the cumulative amortization using the effective interest
method of any difference between that initial amount and the maturity amount, and minus any
reduction (directly or through the use of an allowance account) for impairment or uncollectibility.
IAS 39.9 [3855.19(k)]
Amortized cost (CICA Part II ASPE)
Amount at which a financial asset or financial liability is measured at initial recognition minus
principal repayments, plus or minus the cumulative amortization of any difference between that
initial amount and the maturity amount, and minus any reduction (directly or through the use of
an allowance account) for impairment (see paragraphs 3856.A3-.A6). 3856.05
Amortized cost [pre-IFRS GAAP]
Amount at which the financial asset or financial liability is measured at initial recognition minus
principal repayments, plus or minus the cumulative amortization using the effective interest
method of any difference between that initial amount and the maturity amount, and minus any
reduction (directly or through the use of an allowance account) for impairment or uncollectability.
[3855.19(k)]
Analytical procedures
Procedures used in the audit evaluation of financial statement accounts by studying and
comparing relationships among financial and non-financial data.
Analytical procedures risk
Analytical procedures risk is the probability that analytical procedures will fail to detect material
errors.
Announcement date (options)
The announcement date is the date on which the issue of options is announced.
Annual gains limit
With respect to the CGD, the annual gains limit is:
the lesser of:

taxable capital gains from dispositions of capital property minus allowable capital losses in
excess of ABILs
and

the amount that would be determined above if the only gains and losses were from
qualified farm property and QSBCS
minus

net capital losses of other years claimed, and

allowable business investment losses
Annuity
An annuity is a series of regular payments (or receipts) that occur at uniform time intervals.
Annuity due
An annuity due is a payment or receipt stream in which the payments (or receipts) occur at the
beginning of each interest-compounding period.
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Anticipated transaction (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Any transaction expected to occur in the future that has not yet given rise to a recognized asset
or liability. [3865.07(h)], 3856.05
Antidilution (CICA Part I IFRS)
Increase in earnings per share or a reduction in loss per share resulting from the assumption that
convertible instruments are converted, that options or warrants are exercised, or that ordinary
shares are issued upon the satisfaction of specified conditions. IAS 33.5. See Dilution.
Anti dilutive element
An anti dilutive element, in the calculation of fully diluted EPS, is a security or option that would
have the effect of increasing EPS if converted; such instruments are excluded from the
calculation of fully diluted EPS.
Application description (computer systems)
The application description, in computer systems documentation, consists of systems flowcharts,
description of all inputs and outputs, record formats, lists of computer codes, and control
features.
Application Guidance (AGs)
A component of the Restructured CICA Handbook.
Appraisal costs
Appraisal costs are costs incurred in detecting which of the individual units in a production run do
not conform to specification. This is a section of the quality costing report.
Appropriated retained earnings
Appropriated retained earnings is a subaccount of retained earnings caused by a discretionary
management decision to apportion retained earnings for a specific purpose.
Arbitrage
Arbitrage is the act of buying in one market and selling in another to take advantage of
differences in prices between the two markets to earn a profit. For example, the value of an
ounce of gold in Hong Kong, measured in Hong Kong dollars, should equal the value of an ounce
of gold in London, measured in pounds sterling, if the two currencies are converted at the
prevailing exchange rate. If major imbalances existed, it would be profitable to buy gold in one
location and simultaneously sell it in the other.
Articles of incorporation
A corporation’s legal documents that set out its purpose, classes or shares that can be issued,
number of directors, and so on.
ASPE
Accounting Standards for Private Enterprises, Part II of the CICA Handbook.
Assertions
Claims that management makes on financial statements.
Assessable dividend
An assessable dividend is an amount received by a private corporation on account of a taxable
dividend, which is deductible under section 112 or 113 in computing the recipient corporation’s
taxable income.
Asset (CICA Part I IFRS)
Resource:

(a) controlled by an entity as a result of past events; and
Page 15 of 266

(b) from which future economic benefits are expected to flow to the entity. IAS 38.8
Asset group (CICA Part II ASPE)
Lowest level (smallest combination) of assets and liabilities for which identifiable cash flows are
largely independent of the cash flows of other assets or groups of assets and liabilities. 3063.03.
See Long-lived asset.
Asset retirement cost (CICA Part II ASPE)
Amount that is capitalized and increases the carrying amount of a long-lived asset when a liability
for an asset retirement obligation is recognized. 3110.03
Asset retirement obligation (CICA Part II ASPE)
Legal obligation associated with the retirement of a tangible long-lived asset that an entity is
required to settle as a result of an existing or enacted law, statute, ordinance, or written or oral
contract or by legal construction of a contract under the doctrine of promissory estoppel. 3110.03
Asset turnover
Asset turnover is the proportion of revenues to assets; the level of sales generated per dollar of
investment.
As s et t ur nover
Net s al es(or r evenue)
Aver age t ot alas s et s
Assignment (of accounts or notes receivable)
In an assignment of accounts or notes receivable a company promises that the proceeds of its
accounts and/or notes receivable will be used to pay a loan through a finance company. The
receivables do not actually change hands, but the finance company does have recourse.
Associate (CICA Part I IFRS)
Entity, including an unincorporated entity such as a partnership, over which the investor has
significant influence and that is neither a subsidiary nor an interest in a joint venture. IAS 28.2
Associated corporation
Whether a corporation is associated with another corporation is a question of fact under the ITA.
Each association rule in subsection 256(1) contemplates a control test, a related test, and/or a
cross-ownership test. Two corporations are associated where:

one of the corporations controls, directly or indirectly, the other corporation;

both of the corporations are controlled, directly or indirectly, by the same person or group
of persons;

each of the corporations is controlled by a person and the person who controls one of the
corporations is related to the person who controls the other, and either of those persons
owns not less than 25% of the shares of any class, other than a specified class, of each
corporation;

one of the corporations is controlled by a person and that person is related to each member
of a group of persons that controls the other corporation, and that person owns not less
than 25% of the shares of any class, other than a specified class, of the other corporation;

each of the corporations is controlled by a related group and each of the members of one
of the related groups is related to all the members of the other related group, and one or
more persons who are members of both related groups own not less than 25% of the
shares of any class, other than a specified class, of the other corporation.
Associated with financial statements
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Accountants are said to be associated with financial statements when a public accountant’s name
is used in connection with financial statements, or a public accountant has prepared the
statements, even if the public accountant’s name is not used in any written report.
Assumptions of accounting
The four assumptions of accounting are:

Separate-entity assumption (or business entity principle)

Going-concern assumption (or going-concern principle)

Unit-of-measure assumption (or monetary unit principle)

Time period assumption (or time period principle, also known as periodicity)
Assurance
Verifying the truthfulness of an assertion by an accountable party with independent corroborating
evidence.
Assurance engagement
An engagement in which the auditor adds either reasonable (high) or moderate (negative) levels
of assurance.
Attest function (attestation engagement)
The attest function is the common reference to independent audits of financial statements, but
can also refers to review services, association with forecasts and projections, and compilation
services where lack of independence is not noted.
Attestation standards
Attestation standards are general sets of standards intended to guide attestation work in areas
other than audits of financial statements.
Attributes sampling
Attributes sampling is another name for test of control audit sampling. It is a sampling procedure
used to produce evidence about the effectiveness of client controls.
Attribution period (CICA Part II ASPE)
Period of an employee's service to which an obligation for employee future benefits is assigned.
3461G
Attribution problem
The attribution problem is associated with identifying the strength of a causal relationship
between a program activity and a desired outcome of the program.
Attribution rules
Attribution rules are intended to prevent income splitting between members of a family in order
to benefit from the progressive tax rates and apply only to property income earned on property
transferred to a spouse or a minor child. They do not apply to business income earned from the
property transferred or loaned and only apply to capital gains realized on the disposition by a
spouse of transferred property. Under these rules, the person who transferred or loaned the
property is taxed on the property income or capital gain.
Audit
An audit is a thorough check of an organization’s accounting systems and records that adds
credibility to the financial statements. The specific goal is to determine whether the statements
are prepared in accordance with generally accepted accounting principles and reasonably reflect
the company’s financial position and operating results.
Audit committees
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Audit committees monitor management’s financial reporting responsibilities, including meeting
with the external auditors and dealing with various audit and accounting matters that may arise.
Audit objective
An audit objective is the expression of a financial statement assertion for which evidence needs
to be obtained.
Audit of balances
An audit of balances is a series of ordinary and extended substantive procedures designed to find
signs of errors, irregularities, and frauds in account balances and classes of transactions.
Audit of internal control over financial reportings
The engagement that results in an audit report on the effectiveness of a client’s internal control
over financial reporting.
Audit procedures
Audit procedures are particular and specialized actions which auditors take to obtain evidence for
a specific audit engagement to ensure the efficiency of evidence that will serve as the basis of
the audit report. Audit procedures include recalculation, physical observation, confirmation,
verbal inquiry, document examination, scanning, and analytical review.
Audit program
An audit program is a list of the audit procedures believed necessary to obtain sufficient,
competent evidence to serve as the basis for the audit report.
Audit risk (account level)
Audit risk at the account level is the probability that an auditor will fail to find misstatement equal
to, or greater than, the tolerable misstatement assigned to a given account.
Audit risk (global)
The audit risk is the probability that an auditor will give an inappropriate opinion on financial
statements.
Audit sampling
Testing less than 100 percent of a population (items in an account balance or class of
transactions) to form a conclusion about some characteristic of the balance or class of
transactions.
Audit standards
Audit standards are the audit quality guides that remain the same through time and all audits,
including audits of computerized accounting systems. These are also known as generally
accepted audit standards or GAAS.
Auditee
The auditee is the company or other entity whose financial statements are being audited.
Auditing around the computer
Auditing around the computer is when auditors attempt to isolate the computer and to find audit
assurance by vouching data from output to source documents and by tracing from source
documents to output.
Auditing through the computer
Auditing through the computer entails the auditors’ actual evaluation of the hardware and
software to determine the reliability of the operations that cannot be viewed by the human eye.
Auditing with the computer
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Auditing with the computer involves audit techniques such as the use of the client’s computer
hardware and software to process real or simulated transactions or the use of specialized audit
software to perform audit tasks.
Auditing without the computer
Auditing without the computer involves using visible evidence such as the input source data, the
machine produced error listings, the visible control points, and detailed printed output.
Auditor general
The auditor general is the person responsible for the audit of a government’s public accounts and
usually reports to the government’s legislative body. The auditor general’s mandate usually
extends beyond this basic audit function to the expression of opinions regarding a government’s
internal controls, to economy and efficiency audits, and to other duties as spelled out in an
Auditor General Act.
Auditor’s expert
An individual or organization possessing expertise in a field other than accounting or auditing,
whose work in that field is used by the auditor to assist the auditor in obtaining sufficient
appropriate audit evidence. An auditor’s expert may be either an auditor’s internal expert (who is
a partner or staff, including temporary staff, of the auditor’s firm or a network firm), or an
auditor’s external expert.
Authorization (as a control objective)
Authorization as a control objective involves ensuring that transactions are approved before they
are recorded.
Authorization of shares
The authorization of shares is the number of shares a company is permitted to issue as governed
by its articles of incorporation.
Automobile
An automobile is a motor vehicle designed or adapted primarily to carry individuals and their
personal luggage that has a seating capacity of not more than the driver and eight passengers,
but does not include an ambulance, a taxi, a bus used in a business to transport passengers, a
hearse, and any motor vehicles acquired to be sold, rented, or leased in the course of carrying on
a business of selling, renting, or leasing motor vehicles. Furthermore, an automobile does not
include any motor vehicles that are vans, pick-up trucks, or similar vehicles that have a seating
capacity of not more than the driver and two passengers and are used primarily (more than
50%) for the transportation of goods or equipment in the course of gaining or producing income
in the taxation year they were acquired, or in the year of acquisition are used all or substantially
all (generally 90%) for the transportation of goods, equipment, or passengers in the course of
gaining or producing income.
Automobile operating expenses
This taxable benefit is determined by reference to the number of kilometres driven for personal
use during the period of the year in which the automobile is made available by the employer or a
person related to the employer. The operating expenses benefit is determined by the formula:
A–B
where
A = either
one-half the standby charge if the automobile is used primarily for employment purposes,
that is, more than 50%
or
Page 19 of 266
15 cents per kilometre driven for personal purposes
B = the reimbursement to the employer in respect of operating expenses for the year
made during the year or within 45 days after the end of the year
Automobile standby charge
This taxable benefit results from the employer making an automobile available to an employee
and is based only on acquisition or lease costs paid by the employer. The automobile standby
charge is determined according to the following formulae depending on whether the employer
owns or leases the automobile:
If the automobile is owned by the employer:
A/B  [2%  (C  D)]
If the automobile is leased by the employer:
A/B  [2/3  (E  F)]
where
A = the lesser of:
the total kilometres driven for personal use, if the automobile is used 50% or more for
business purposes (otherwise, only the second amount applies as no reduction in the
standby charge is allowed)
or
1,000 kilometres  the number of days the automobile was available in the year  30
(Note that the result obtained must be rounded to the nearest whole number, that is,
12,000 km for the whole year.)
B = 1,000 kilometres  the number of days the automobile was available in the year  30
(12,000 km for the whole year)
C = the original cost of the automobile including taxes
D = the number of days the automobile was available in the year while the automobile
was owned by the employer  30
(Note that the result obtained must be rounded to the nearest whole number.)
E = the lease costs of the automobile during the periods (in days) it was available to the
employee, including taxes
F = the insurance costs of the automobile included in the lease costs
Autonomy
Show respect for all persons.
Available for sale financial assets (CICA Part I IFRS)
Non-derivative financial assets that are designated as available for sale or are not classified as:

(a) loans and receivables;

(b) held to maturity investments; or

(c) financial assets at fair value through profit or loss. IAS 39.9
Available for sale financial assets [CICA Part V Pre-changeover accounting
standards]
Non-derivative financial assets that are designated as available for sale, or that are not classified
as loans and receivables, held to maturity investments, or held for trading. [3855.19(i)]
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Average collection period of accounts receivable
Average collection period of accounts receivable is the average number of days that a company
needs to collect the funds from sales made on credit. It is the accounts receivable turnover
stated in days.
Average collection period 
365
365

Receivable turnover
Net sales (or revenue) / Average receivable s
Average remaining service period (ARSP)
The average remaining service period (ARSP) is the length of time that the current employee
group is expected to stay on the job before retirement; it may correspond to EPFE or the
expected period to full eligibility. This period is used for pension amortization.
Average sampling interval (ASI)
The average sampling interval (ASI) is the recorded dollar amount of a population being sampled
divided by the sample size.
Avoidance transaction
An avoidance transaction is defined as a transaction or series of transactions that results in a tax
benefit unless the transaction was arranged primarily for bona fide purposes other than to obtain
the tax benefit.
Award (stock option) (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Multiple instruments with the same terms granted at the same time either to a single employee
or to a group of employees. An award may specify multiple vesting dates, referred to as graded
vesting, and different parts of an award may have different expected lives. In appropriate
circumstances, the term award may also refer to transactions with non-employees. 3870.07
Backup
A backup is a retention system for files, programs, and documentation so that master files of
computers can be reconstructed in case of accidental loss and processing can continue at another
site if the computer centre is lost to fire or flood.
Bad debts
Bad debts are accounts receivable from customers that are not collected. The amount is an
expense of selling on credit.
Balance column account
A balance column account is an account with debit and credit columns for recording entries and a
third column for showing the balance of the account after each entry is posted.
Balance sheet
Financial statement listing the type and amount of the assets, liabilities, and shareholders’ equity
of an entity at a specific date. Under CICA Part I IFRS, it is called the statement of financial
position.
Balance sheet equation
The balance sheet equation is the same as the accounting equation. It is a description of the
relationship between a company’s assets, liabilities, and equity. It is expressed as Assets =
Liabilities + Owners’ Equity.
Balance sheet expenditure
A balance sheet expenditure is another name for a capital expenditure. It is an expenditure that
results in an asset or an increase in an asset on the balance sheet.
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Balanced scorecard
A document that assists in assessing an organization’s ability to implement its mission and
strategy by focusing on a comprehensive set of performance measures.
Balloon payment
A balloon payment is a final large lump sum payment at the end of a loan term.
Bank discount
A bank discount is the amount of interest a financial institution deducts in advance at the time it
grants a loan.
Bank rate
The bank rate is the interest rate charged by the Bank of Canada for advances made to chartered
banks.
Bank reconciliation
A bank reconciliation is a schedule that analyses the firm’s cash account and the bank’s reported
cash amount to ensure that transaction recording is complete and accurate. This is one means of
internal control.
Bankers’ Acceptances
Bankers’ Acceptances are short-term debt (promissory notes) issued by a firm on which a bank
guarantees payment. They are traded on the money markets.
Bargain purchase (CICA Part I IFRS) (CICA Part II ASPE) [CICA Part V Prechangeover accounting standards]
Occasionally, in a business combination, an acquirer will make a bargain purchase, which is a
business combination in which the consideration exceeds the net of the fair value of assets
acquired and the fair value of the liabilities assumed (goodwill calculation). If that excess remains
after applying the requirements in paragraph 36, the acquirer recognizes the resulting gain in
profit or loss on the acquisition date. The gain is attributed to the acquirer. 1582.34, IFRS 3.34.
See Acquirer, Goodwill, Negative goodwill.
The acquirer recognizes goodwill as of the acquisition date measured as the excess of (a) over
(b) below:


(a) the aggregate of:
o
(i) the consideration transferred measured in accordance with this IFRS, which
generally requires acquisition-date fair value (see paragraph 37);
o
(ii) the amount of any non-controlling interest in the acquiree measured in
accordance with this IFRS; and
o
(iii) in a business combination achieved in stages (see paragraphs 41 and 42), the
acquisition-date fair value of the acquirer's previously held equity interest in the
acquiree.
(b) the net of the acquisition-date amounts of the identifiable assets acquired and the
liabilities assumed measured in accordance with this IFRS.
Bargain purchase option (lease) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Provision allowing the lessee, at its option, to purchase the leased property for a price that is
sufficiently lower than the expected fair value of the property at the date the option becomes
exercisable. This ensures that exercise of the option appears, at the inception of the lease, to be
reasonably assured. 3065.03
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Bargain renewal option (lease) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Provision allowing the lessee, at its option, to renew the lease for a rental that is sufficiently
lower than the expected fair rental of the property at the date the option becomes exercisable.
This ensures that exercise of the option appears, at the inception of the lease, to be reasonably
assured. Fair rental means the going rate for rental of equivalent property under similar terms
and conditions. 3065.03
Barter transaction
A barter transaction is an exchange of goods or services for other goods or services such that no
money changes hands.
Basic earnings per share
Basic earnings per share is earnings per share calculated as net income available to ordinary
shareholders (earnings less preferred share claims or other prior claims) divided by the weightedaverage ordinary shares outstanding.
Basket sales of share capital
A basket sale of share capital is the sale of different types and/or classes of shares by a company
as a bundled package. Since two or more classes and/or types of shares may be issued for a
single lump sum amount, the consideration received must be allocated between the classes.
Batch control totals
Batch control totals are totals of dollar numbers, nonsense numbers, or count of documents used
to check the accuracy of a transaction entry in a batch.
Batch processing
Batch processing is a process where all records to be processed are collected into groups
(batches) of like transactions before input into a computer for processing.
Batch-level activities
Batch-level activities are activities that are performed each time a batch of goods is handled or
processed. Such activities would include purchase orders, set-ups of equipment, and shipments
to customers.
Bayes’ Theorem
Bayes’ theorem is a mathematical formula that calculates conditional probabilities. The formula
allows prior probabilities to be adjusted for new information. For example:
P(H/ GN) 
P(H) P(GN / H)
P(H) P(GN / H)  P(L) P(GN / L)
where
P(H/GN) = the posterior probability of the high state given the good-news financial
statements
P(H) = the prior probability of the high state
P(L) = the prior probability of the low state
P(GN/H) = the probability that the financial statements show good news given that the
firm is in the high state
P(GN/L) = the probability that the financial statements show good news given that the
firm is in the low state
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Bearer bonds
Bearer bonds are bonds that are made payable to whoever holds them (called the bearer); these
bonds are not registered.
Benchmarking
Benchmarking involves a firm searching for the best way of doing something by finding the best
outside firm at doing a specific task and then isolating the practices of the outside firm with
respect to that task. The firm then works at implementing those practices in their own
organization. Benchmarking involves a process of planning, researching, observing, analyzing,
adapting, and improving.
Beneficence
Beneficence includes preventing harm, removing harm, and doing good.
Benefit plan (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Any arrangement that is mutually understood by an entity and its employees whereby the entity
undertakes to provide its employees with benefits after active service in exchange for their
services. Benefits may commence immediately upon termination or suspension of active service
or may be deferred until an employee attains a specified age. Generally, a written plan provides
the best evidence of the terms of the benefit plan. However, the terms of a benefit plan may also
be discernible from a well-defined, although unwritten practice of paying benefits or from oral
representations made to employees. For example, an indication that the terms of a benefit plan
differ from the written plan may be discerned from an entity's past practice of providing regular
increases in certain monetary benefits. An entity could have a present commitment to amend the
benefit plan, either in writing or through practice or oral representations. Evidence of an entity's
commitment to amend the benefit plan includes its past practices of amending the plan,
identification of strategies to effect future changes, and the assessment of the feasibility and
likelihood of making those changes in light of the expected economic and social costs.
Anticipated amendments that are subject to negotiations do not constitute terms of a benefit
plan until such amendments have been negotiated and agreed to by the entity and its
employees. 3461G [3461.09]
Benefits that accumulate (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Benefits for which the right to the benefit is earned but unused and may be carried forward to
one or more periods subsequent to that in which they are earned, even though there may be a
limit to the amount that can be carried forward. 3461G [3461.09]
Bequest
Gift of personal property by will.
Best estimate assumptions for actuarial valuations
The best estimate assumptions for actuarial valuations are the set of actuarial assumptions where
each assumption reflects management’s judgment of the most likely set of conditions affecting
future events. Key assumptions include interest rates, salary increase rates, mortality rates, and
so on.
Page 24 of 266
Beta
In finance, beta measures the co-movement between changes in the price of a security and
changes in the market value of the market portfolio. Beta, therefore, is a value of the firmspecific risk.
Bet a   A 
Cov (A, M)
Var (M)
where
Cov (A, M) = covariance between the return on security A and the return on the market
portfolio
Var (M) = variance of the return of the market portfolio
Beta risk
The risk that the auditor will incorrectly accept an account balance that is materially misstated; it
can result in audit failure and so is considered to be a more serious problem for the audit than
incorrect rejection; a type of sampling risk.
Betterment
A betterment is a cost incurred to enhance the service potential of a capital asset through the
purchase and or installation of a significantly improved component.
Bill of materials
A bill of materials is a specification of the materials authorized for production of a specific item. It
is used as the source of authorization for the preparation of materials requisitions.
Billings on contract
Billings on contract is a contra account to the construction in progress inventory account for longterm construction contracts. It represents cumulative billings to the final customer.
Biological asset (CICA Part I IFRS)
Living animal or plant. IAS 41.5
Biological transformation (CICA Part I IFRS)
Processes of growth, degeneration, production, and procreation that cause qualitative or
quantitative changes in a biological asset. IAS 41.5 Biological transformation results in the
following types of outcomes:

(a) asset changes through:
(i) growth (an increase in quantity or improvement in quality of an animal or plant);
(ii) degeneration (a decrease in the quantity or deterioration in quality of an animal
or plant); or
(iii) procreation (creation of additional living animals or plants); or

(b) production of agricultural produce such as latex, tea leaf, wool, and milk. IAS 41.7
Blended payments
Blended payments are payments on debt whereby the interest rate is fixed at the beginning of
the loan term and regular equal annuity payments are made which include both a portion of the
principal amount owing and accrued interest.
Block sampling
Block sampling is a system of sampling that involves choosing segments of contiguous
transactions for a sampling application.
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Blocked communication
Blocked communication is information that is costly to communicate.
Bogey
A bogey is the threshold level of performance below which no bonus is paid.
Bona fide business transaction
A bona fide business transaction is one that is made on the same terms and conditions as would
apply to an arm’s length individual. Generally, bona fide is tested based on open market terms
and conditions.
Bond
A bond is an interest-bearing debt of long maturity that is secured by specific assets.
Bond indenture
A bond indenture is a formal bond agreement specifying the terms of the bond and the rights
and duties of both the issuer and the bondholder.
Bond issue costs
Bond issue costs include legal, accounting, and underwriting costs incurred in connection with
bond issuance. They may be deducted from net proceeds and thus are part of premium/discount
or are treated as a separate asset amortized over the life of the bond.
Bonus plan hypothesis
The bonus plan hypothesis states that all other things being equal, managers of firms with bonus
plans are more likely to choose accounting procedures that shift reported earnings from future
periods to the current period.
Book of final entry
The book of final entry, also known as the ledger, is the collection of all accounts used by a
business.
Book of original entry
The book of original entry, also known as a journal, is a record in which the effects of
transactions are first recorded; amounts are posted from the journal to the ledger.
Book value
Book value, for each ordinary share, equals the net worth of a firm as shown on the statement of
financial position, less the par value of outstanding preferred shares, divided by the number of
ordinary shares outstanding.
Book value per preferred share
Book value per preferred share = Equity applicable to preferred shares
Number of preferred shares outstanding
Bookkeeping
Bookkeeping is the part of accounting that records transactions and other events, either manually
or with computers.
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Borrowing costs (CICA Part I IFRS)
Interest and other costs that an entity incurs in connection with the borrowing of funds. IAS
23.5. Borrowing costs may include:

interest expense calculated using the effective interest method as described in IAS 39
Financial Instruments: Recognition and Measurement;

finance charges in respect of finance leases recognized in accordance with IAS 17 Leases;
and

exchange differences arising from foreign currency borrowings to the extent that they are
regarded as an adjustment to interest costs. IAS 23.6.
An entity capitalizes borrowing costs that are directly attributable to the acquisition, construction
or production of a qualifying asset as part of the cost of that asset. An entity recognizes other
borrowing costs as an expense in the period in which it incurs them. IAS 23.8.
See Qualifying asset.
Borrowing opportunity rate (BOR)
The borrowing opportunity rate (BOR) is the rate that the borrower would have to pay the
financial institution (or other lender) to borrow the same amount for the same period of time. It
is also referred to as the market rate of interest.
Borrowing rate (lease) (CICA Part I IFRS) (CICA Part II ASPE) [CICA Part V Prechangeover accounting standards]
The lessee's incremental borrowing rate of interest is the rate of interest the lessee would have
to pay on a similar lease or, if that is not determinable, the rate that, at the inception of the
lease, the lessee would incur to borrow over a similar term, and with a similar security, the funds
necessary to purchase the asset. 3065.03, IAS 17.4
Breach of contract
Failure to live up to conditions of a contract.
Breach of contract (auditing)
A breach of contract, in auditing, is a claim that accounting or auditing services were not
performed in the manner agreed.
Break-even point
The break-even point is the level of activity at which an organization neither earns a profit nor
incurs a loss. The break-even point can also be defined as the point where total revenue equals
total costs (fixed and variable) and as the point where total contribution margin equals total fixed
costs.
Broker
A broker is an individual who brings together buyers and sellers, and collects a commission for
his efforts. Financial securities are normally traded through brokers who act on behalf of their
clients.
Budget
A budget is a detailed plan for the future, usually expressed in formal quantitative terms.
Budget plan
As used in the Government of Canada executive budget, this is the document that lays out the
government’s plan for the upcoming fiscal year.
Budget variance
A budget variance is a measure of the difference between the budgeted fixed overhead costs (as
contained in the overhead flexible budget) and the actual fixed overhead costs incurred during a
period.
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Budgetary orientations
The purposes of the budgetary process.
Budgetary slack
Budgetary slack is the difference between a budget set below an unbiased estimate of potential
performance and the actual or estimated potential actual performance.
Budgeting
Budgeting is the process of developing formal plans for future activities, which then serve as a
basis for evaluating actual performance.
Business (CICA Part I IFRS) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Integrated set of activities and assets that is capable of being conducted and managed for the
purpose of providing a return in the form of dividends, lower costs, or other economic benefits
directly to investors or other owners, members, or participants. 1582.03, IFRS 3.A
Business combination (CICA Part I IFRS) (CICA Part II ASPE) [CICA Part V Prechangeover accounting standards]
Transaction or other event in which an acquirer obtains control of one or more businesses.
Transactions sometimes referred to as true mergers or mergers of equals are also business
combinations as that term is used in this IFRS/section. 1582.03, IFRS 3.A
Business combinations occur when one company obtains control of the assets of another
company in either of the following ways:

One company purchases the net assets (assets less liabilities) that constitute a business
directly from another organization.

One company purchases all or a significant percentage of the voting shares of another
company such that control over that company is achieved.
Business combinations are intercorporate investments only in the second case — when one
company buys the shares of another company.
The most common way for a company to obtain control over the assets of another company is to
buy a controlling block of voting shares. In general, a company can obtain control with a lower
capital investment than by buying the assets directly, since it does not have to buy 100% of the
outstanding shares.
Four methods of gaining control of another company:

purchasing the net assets of the acquiree for cash

issuing shares to the acquiree in exchange for their net assets

purchasing the shares of the acquiree for cash

paying for the shares of the acquiree by issuing additional shares in the acquirer
See Acquisitions method, New entity method, Pooling of interests method, Purchase method.
Business entity principle
The business entity principle requires that every business is perceived to be and is treated as an
entity, separate and distinct from its owner(s) and from every other business. An entity could be
all of the TELUS Communications, Inc. stores in Canada, or one particular TELUS store in an
Edmonton shopping mall. The basic idea is that economic events must be identified with a
particular unit of accountability. The records of one entity should not be mingled with the records
of other entities for the purpose of determining its performance.
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Business investment loss
A business investment loss is a special capital loss that results from the disposal of an arm’s
length or deemed arm’s length sale of shares or debts of a small business corporation (SBC),
which is not carrying on business and where it is reasonable to expect that the corporation will
be dissolved or wound up and will not restart business operations.
Business papers
Business papers, sometimes called source documents, are various kinds of documents and other
papers that companies use when they conduct their business.
Business process
A business process is a series of steps that are followed in order to carry out some task in a
business.
Business risk
The chance a company takes when it engages in any economic activity, such as taxes increasing
or customers buying from competitors.
Business segment
A business segment is a portion of a company that can be separately identified by the products
or services that it provides or a geographic market that it serves.
By-Laws
The internal working rules of a corporation.
Calculated value (stock option) (CICA Part II ASPE)
Measure of the value of a share option or similar instrument determined by substituting the
historical volatility of an appropriate industry sector index for the expected volatility of an entity's
share price in an option-pricing model. 3870.07
Call (on loan)
A call feature on a loan allows the lender to demand immediate repayment of a loan. The lender
is usually responding to violation of debt covenants.
Call feature
A call feature is a provision that allows a corporation to redeem outstanding securities at a
specified price before the stated maturity. The feature is common with fixed-income securities
such as debt or preferred shares.
Call option
A call option is the ability to purchase a security at a specified price on a specified date.
Call premium
A call premium is the amount to be paid over and above the face value if the issuing company
calls a security for redemption before maturity.
Call price
The call price is the price set by the company at which investors can be required to submit bonds
for redemption.
Callable bonds
Callable bonds are bonds that give the issuer an option of retiring them before they mature.
Callable preferred shares
Callable preferred shares are preferred shares that the issuing corporation, at its option, may
retire by paying a specified amount (the call price) to the preferred shareholders plus any
dividends in arrears.
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Canada Pension Plan (CPP)
The Canada Pension Plan (CPP) is a national retirement pension scheme. It is a contributory plan
based on employment income and operated through the payroll deduction system.
Canada Revenue Agency (CRA)
Canada Revenue Agency (CRA), which used to be called Canada Customs and Revenue Agency,
and before that, Revenue Canada, is responsible for the administration and enforcement of the
income tax system.
Canadian Auditing Standards (CAS)
Canadian auditing standards result from the adoption of International Standards on Auditing
(ISAs), developed and issued by the IAASB, that are consistent with the International Framework
for Assurance Engagements and are to be applied in the audit of financial statements and other
historical financial information. CAS are effective for audits of financial statements for periods
ending on or after December 14, 2010.
Canadian corporation
A Canadian corporation is a resident corporation that was incorporated in Canada or has been
resident in Canada continuously since June 18, 1971. This includes those corporations formed by
the amalgamation or merger of two or more corporations provided that the reorganization took
place under the laws of Canada or a province and each of those corporations was, immediately
before the reorganization, a Canadian corporation.
Canadian dollar equivalent method
Method of stating exchange rates in which the number of Canadian dollars required to purchase
one unit of foreign currency is provided; also referred to as a direct quotation. See Direct
quotation, Foreign currency equivalent method.
Canadian Public Accountability Board (CPAB)
The board that oversees auditors of public companies in Canada, created by the CICA.
Canadian tax system
The Canadian tax system is founded on differential taxation, which is based on source and type
of income and on the integration of corporate earnings with individual taxation.
Canadian-controlled private corporation (CCPC)
A Canadian-controlled private corporation (CCPC) is a Canadian private corporation that is not
controlled by one or any combination of public corporations or non-resident persons.
Cancelled cheques
Cancelled cheques are cheques that the bank has paid and deducted from the customer’s
account during the month.
Cap
The cap is the upper limit to a compensation plan.
Capital account
The capital account is the account used to record the owner’s investments in the business plus
any more or less permanent changes in owner’s equity.
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Capital asset pricing model (CAPM)
The capital asset pricing model (CAPM) is a formalized description of the relationship between
the efficient market price of a security, its risk, and the expected rate of return on that security.
The model assumes that there is a risk-free asset in the economy, with return Rf and that
security markets are efficient and transaction costs are zero.
According to the CAPM, the expected return E(Rj) on share j is calculated:
E(Rj) = Rf + j[E(RM) - Rf]
where
E(Rj) = expected return for security j
Rf = risk-free rate
E(RM) = expected return for the market portfolio
ßj = the beta of security j
Capital asset pricing model ex ante equation
CAPM shows that the expected return E(R jt) on share j for period t can be calculated as follows:
where
E(Rjt)
=
βj
RMt
=
=
Rf(1 – βj) + βjE(RMt)
the beta of share j
the return on the market portfolio for period t
Capital asset pricing model ex post equation
The ex post or posterior view of the returns on share j for a period t provides a way of separating
the realized returns into expected and unexpected components, using the following calculation:
where
Rjt = αj + βjRMT + εjt
(αj + βjRMT) =
εjt
=
the expected return
the abnormal return
Capital asset pricing model preliminary equation
The model consists of the following equation:
where
Pjt
= the market price of firm j’s shares at the end of period t
Djt
= the dividends paid by the firm j during period t
Pj, t-1 = the market price of firm j’s shares at the beginning of period t
Capital assets (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Capital assets comprise the assets that embody the infrastructure necessary to run the business.
Capital assets can be broadly categorized as being either tangible or intangible in nature. Natural
resources such as mineral deposits, oil and gas deposits, and standing timber could be included
in this category as well. These types of capital assets are often referred to as wasting assets
because they are subject to exhaustion through extraction.
See Current assets; Intangible assets; Property, plant, and equipment; Intangible assets, as
defined in Goodwill; Intangible assets; and paragraphs 3064.08 and 3061.03.
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Capital assets (CICA Part III NFPO)
Capital assets — comprising tangible properties such as land, buildings, and equipment — and
intangible properties are identifiable assets that are held for use in the provision of services, for
administrative purposes, for production of goods or for the maintenance, repair, development, or
construction of other capital assets; have been acquired, constructed, or developed with the
intention of being used on a continuing basis; are not intended for sale in the ordinary course of
operations; and are not held as part of a collection (see section 4440). [4430.05(b)]
See Current assets; Intangible assets; Property, plant, and equipment.
Capital budgeting
Capital budgeting is the set of procedures and economic evaluation techniques used to analyze
long-term capital investments.
Capital cost
Capital cost generally means the total costs for the acquisition of the depreciable property
expressed in Canadian dollars according to the rate of exchange in effect at the time of
acquisition. It includes the price paid to acquire a property, along with costs associated with the
acquisition, such as transportation costs, installation costs, and provincial sales tax. In the case of
property manufactured by the taxpayer, the cost includes material, labour, and overhead.
Furthermore, the costs of any improvements or additions to a depreciable property are added to
the capital cost of that property, while the costs of any subsidies or inducement payments reduce
the capital cost of the depreciable property. The capital cost of depreciable property is the
amount on which CCA may be claimed.
Capital cost allowance (CCA)
Capital cost allowance (CCA) is the tax depreciation allowed by the ITA to reflect the loss in value
over time of a capital expenditure  a capital asset  due to wear and tear, declining utility, and
obsolescence. Thus, CCA is allowed as a deduction in computing income and is usually calculated
on the declining balance of the capital asset. Basically, if there are no acquisitions or dispositions,
CCA is:
UCC of the particular class  the prescribed rate for that class.
However, the computation of CCA when there are acquisitions or dispositions during the year or
when the half-year rule applies is:
Prescribed rate  UCC at the end of year, before CCA for the year,
Less: 50%  (capital cost of additions for the year  dispositions for the year)
with the reduction of 50% only applicable if acquisitions exceed dispositions.
Capital dividend account (CDA)
For most corporations, the computation of the capital dividend account (CDA) is relatively easy
and may be summarized as follows:

1/2 of the capital gains realized during the period less 1/2 of the capital losses incurred
during the period
Note: 1/2 represents the current non-taxable portion of net capital gains. The non-taxable
portions are based on the inclusion rates in effect when the gain or loss occurred.
plus

2/3 of the residual calculation on the disposition of an ECP
plus

proceeds received from a life insurance policy less the ACB of the life insurance policy
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plus

capital dividends received from another corporation
minus

capital dividends paid out of the CDA during the period
Note: The complex calculation is found in subsection 89(1).
Capital employed (total capitalization)
Capital employed is shareholder’s equity plus long-term debt. It is a measure of the amount of
financing used by a company.
Capital expenditure
A capital expenditure is an expenditure that is expected to yield benefits beyond the current
period. It either creates a new or adds to an existing asset account.
For the purpose of the ITA, a capital expenditure includes automobiles, buildings, capital leases,
computers, equipment, furniture and fixtures, machinery, and so on. Capital expenditures must
be added to the capital cost of a property because expenditures are deductible only to the extent
that they were incurred by the taxpayer to earn income in the current taxation year. Capital
assets generally provide a benefit over a period of years and thus the ITA allows a taxpayer to
claim capital cost allowance to reflect the used portion of the asset.
Capital gain
The ITA does not define a capital gain per se; rather, it specifies certain rules applicable to the
computation of a capital gain. However, the ITA states that a capital gain results from the
disposition of capital property except for eligible capital property (ECP), inventory, an insurance
policy, Canadian cultural property, Canadian resource property, foreign resource property, or
timber resource property if the property’s selling price (POD) exceeds the adjusted cost base
(ACB) plus the costs of disposition. It is important to note that it is not the nature of the asset
itself that causes the profit on sale to be considered a capital gain; rather, it is the use of the
asset that is the significant factor.
Capital gains deduction (CGD)
The capital gains deduction (CGD) is the capital gains exemption times the applicable capital
gains inclusion rate, which is currently at 50%. This amount is commonly known as the CGD.
Capital gains exemption
The capital gains exemption was introduced in 1985 as an incentive to stimulate investment in
capital properties and hence economic growth. Initially, legislation provided for a $500,000
lifetime capital gains exemption for individuals on gains realized after 1984 to be phased in over
six years. In 1987 the general exemption was capped at $100,000. These rules permitted an
individual who was resident in Canada throughout the year, or resident at any time during the
year and throughout all of the prior or subsequent year, to claim an exemption for the first
$100,000 of lifetime net capital gains. Any capital property was eligible and the exemption was
elective as an individual could choose to use it or not. The February 1994 budget eliminated this
$100,000 exemption; however, it did not eliminate the $500,000 capital gains exemption with
respect to the disposition of qualified shares of a small business corporation and to the
disposition of qualified farm or fishing property. This exemption limit was increased to $750,000
for dispositions after March 19, 2007.
Capital gains reserve
A capital gains reserve means taxpayers are able to spread the taxation of capital gains realized
on the disposition of the property when the proceeds are not received in whole in the year of
disposition. The taxation of a portion of the capital gain realized on the disposition may be
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deferred to subsequent taxation years by claiming a reserve on the gain calculated. This reserve
allows the capital gain to be taxed over a period not exceeding five years.
The maximum reserve permitted as a deduction from the capital gain is equal to the lesser of the
following amounts:

an amount in respect of that portion of the POD that is not payable until after the end of
the year and that is reasonable given the capital gain calculated on the disposition. The
reasonable reserve is usually computed as follows:
amo u nnt o pt ay ab lue n t i l
cap i t alg ai n aft er t h een do f t h ey ear
p ro ceed so f di sp o si t i o n
or

1/5 of the capital gain  (4 – number of preceding years ending after the disposition of the
property)
This may be restated as:

in the year of disposition: 4/5 of the capital gain

in the first year after disposition: 3/5 of the capital gain

in the second year after disposition: 2/5 of the capital gain

in the third year after disposition: 1/5 of the capital gain

in the fourth year after disposition: nil
Thus, whatever the unpaid balance of the selling price, at least one-fifth of the capital gain will
have to be recognized in each year the reserve is claimed on a cumulative basis.
Capital lease
A capital lease is a lease that conveys substantially all of the risks and rewards of ownership from
the lessor to the lessee. It is an acquisition of capital assets and a borrowing instrument. Under
CICA Part I IFRS, called a finance lease.
Capital lease (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Lease that, from the point of view of the lessee, transfers substantially all the benefits and risks
incident to ownership of property to the lessee. 3065.03.
See Direct financing lease, Finance lease.
Capital loss
The ITA does not define a capital loss per se; rather, it specifies certain rules applicable to the
computation of a capital loss. However, the ITA states that a capital loss results from the
disposition of capital property except for depreciable property, eligible capital property (ECP),
inventory, an insurance policy, Canadian cultural property, Canadian resource property, or foreign
resource property if the property’s adjusted cost base (ACB) exceeds the selling price (POD) less
the costs of disposition. It is important to note that it is not the nature of the asset itself that
causes the loss on sale to be considered a capital loss; rather, it is the use of the asset that is the
significant factor.
Capital markets
The capital markets are the markets for the firms’ securities. Managers are motivated by
reputation and contracting considerations to maximize firm value; this creates an incentive to
release full information to the capital market.
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Capital property
Capital property is depreciable property or any other property, the disposal of which would result
in a capital gain or loss. In general terms, property acquired for the purpose of providing the
owner with a long-term or enduring benefit is capital property.
Capital rationing
Capital rationing is a procedure resorted to when a firm is unable to undertake all the investment
projects that yield returns in excess of financing costs because of a limited availability of funds.
Scarce capital is allocated to the most attractive projects.
Capital structure
Capital structure is the proportions of a firm’s market value due to each of its outstanding
securities.
Capitalize
To capitalize is to record a transaction such that a statement of financial position element, usually
an asset, is created.
Carried at cost
Recognized at cost less accumulated depreciation and any accumulated impairment losses.
Assets for which fair value is difficult to determine are carried at cost. For example, shares in a
trade association. The measurement including impairment loss calculation may differ from fair
value.
Carrying amount (CICA Part I IFRS)
Amount at which an asset is recognized after deducting any accumulated depreciation and
accumulated impairment losses. IAS 16.6, IAS 36.6, AS 40.5, IAS 41.8
Carrying amount (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Amount at which an asset is recognized in the balance sheet after deducting any accumulated
amortization and accumulated impairment losses thereon. 3064.08. Carrying amount is the
amount of an item transferred, or cost of services provided, as recorded in the accounts of the
transferor, after adjustment, if any, for amortization or impairment in value. 3840.03. Carrying
amount is the recorded amount of an asset or liability after adjustment, if any, for amortization
or impairment in value. 3831.05
Cash (CICA Part I IFRS) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Cash on hand and demand deposits. IAS 7.6. Bank borrowings are generally considered to be
financing activities. However, in some countries, bank overdrafts that are repayable on demand
form an integral part of an entity's cash management. In these circumstances, bank overdrafts
are included as a component of cash and cash equivalents. A characteristic of such banking
arrangements is that the bank balance often fluctuates from being positive to overdrawn. IAS
7.8, 1540.06, 1540.10
Cash and cash equivalents
Cash equivalents is one of the components of cash on the cash flow statement. It includes cash
on hand, cash on deposit, and highly liquid short-term investments.
Cash basis of accounting (NFPO)
Method of accounting whereby cash received and cash spent appears in the statement of
operations, but no receivables or payables are accrued. Its use does not comply with GAAP.
Some NFPOs have used the cash basis of accounting whereby cash received and cash spent
appeared in the statement of operations, but no receivables or payables were accrued.
Page 35 of 266
Other NFPOs have preferred a modified accrual basis whereby the cash basis is used for inflows
but payables are accrued for outflows. Another common version of the modified accrual basis is
to use accruals for inflows and outflows but not to record amortization on capital assets.
See Modified accrual basis.
Cash basis of measurement
The cash basis of measurement recognizes revenues and expenses only when cash is received
and/or paid.
Cash discount
A cash discount is the discount on the selling price that a supplier may offer to customers who
make early payments on invoices.
Cash dividends declared
Cash dividends declared is a temporary account that serves the same function for a corporation
as does a withdrawals account for a proprietorship and that is closed to Retained earnings at the
end of each accounting period.
Cash equivalents (CICA Part I IFRS)
Short term, highly liquid investments that are readily convertible to known amounts of cash and
that are subject to an insignificant risk of changes in value. IAS 7.6 Cash equivalents are held for
the purpose of meeting short-term cash commitments rather than for investment or other
purposes. For an investment to qualify as a cash equivalent it must be readily convertible to a
known amount of cash and be subject to an insignificant risk of changes in value. Therefore, an
investment normally qualifies as a cash equivalent only when it has a short maturity of, say,
three months or less from the date of acquisition. Equity investments are excluded from cash
equivalents unless they are, in substance, cash equivalents, for example in the case of preferred
shares acquired within a short period of their maturity and with a specified redemption date. IAS
7.7
Cash equivalents (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Short-term, highly liquid investments that are readily convertible to known amounts of cash and
that are subject to an insignificant risk of changes in value. 1540.06. Cash equivalents are held
for the purpose of meeting short-term cash commitments rather than for investing or other
purposes. For an investment to qualify as a cash equivalent it must be readily convertible to a
known amount of cash and be subject to an insignificant risk of changes in value. Therefore, an
investment normally qualifies as a cash equivalent only when it has a short maturity of, say,
three months or less from the date of acquisition. Equity investments are excluded from cash
equivalents. 1540.08
Cash flow
Cash flow is the total flow of funds that occurs in a given time period.
Cash flow forecast
A cash flow forecast is a forecast that informs the board of directors and management of the
business plans, the prospects for cash inflows, and the needs for cash outflows.
Cash-flow hedge (CICA Part I IFRS)
Hedge of the variability in cash flows of financial instruments or forecasted future transactions or
unrecognized firm commitments. A common cash-flow hedge is an interest-rate swap that
effectively converts a variable-rate bond payable into a fixed-rate bond payable, or vice versa,
depending on management’s outlook for future interest rates. In this case, the hedge is intended
to protect against possible fluctuations in the actual cash flows to be received in the future that
are associated with
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
a recognized asset or liability, or

a forecasted transaction, or

a foreign currency risk in an unrecognized firm commitment that is attributable to a
particular risk and that could affect reported net income.
See Fair-value hedge, Hedge.
Cash-flow hedge [CICA Part V Pre-changeover accounting standards]
Hedge of the exposure to variability in cash flows associated with a recognized asset or liability
(such as all or a specified portion of future interest payments on variable rate debt); a forecasted
transaction (such as a forecasted purchase or sale); or a foreign currency risk in an unrecognized
firm commitment that is attributable to a particular risk and could affect reported net income.
[3865.07(f)]
For the cash-flow hedge of an unrecognized firm commitment, the exchange gains or losses are
reported in other comprehensive income and deferred as a separate component of shareholders’
equity until the committed transaction occurs. This amount is later transferred out of other
comprehensive income to become part of the cost or selling price of the item being hedged, and
is reported in income when the hedged item is reported in income.
See Fair-value hedge, Hedge.
Cash flow per share
Cash flow per share is a calculation indicating the cash flow accruing to ordinary shareholders. It
is a measure of the quality of earnings. It is generally, but not always, based on cash flow from
operations.
Cash flow risk [CICA Part V Pre-changeover accounting standards]
Risk that future cash flows associated with a monetary financial instrument will fluctuate in
amount. In the case of a floating rate debt instrument, for example, such fluctuations result in a
change in the effective interest rate of the financial instrument, usually without a corresponding
change in its fair value. [3861.37(d)]
Cash flow statement
Statement of sources and uses of cash flows over a specific period of time. The cash flow
statement used to be called the statement of changes in financial position. Now called the
statement of cash flows. See Financial statements.
Cash flows (CICA Part I IFRS) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Inflows and outflows of cash and cash equivalents. IAS 7.6. Cash flows exclude movements
between items that constitute cash or cash equivalents because these components are part of
the cash management of an entity rather than part of its operating, investing and financing
activities. Cash management includes the investment of excess cash in cash equivalents. IAS 7.9,
1540.06, and .11
Cash-generating unit (CGU) (CICA Part I IFRS)
Smallest identifiable group of assets that generates cash inflows that are largely independent of
the cash inflows from other assets or groups of assets. IAS 36.6, IFRS 5.A. See also Reporting
unit.
Cash over and short account
The cash over and short account is a statement of profit and loss account used to record cash
overages and cash shortages arising from omitted petty cash receipts and from errors in making
change for tendered petty cash receipts.
Cash-settled share-based payment transaction (CICA Part I IFRS)
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Share-based payment transaction in which the entity acquires goods or services by incurring a
liability to transfer cash or other assets to the supplier of those goods or services for amounts
that are based on the price (or value) of the entity's shares or other equity instruments of the
entity. IFRS 2.A
Causal responsibility
Person A is causally responsible for an untoward event E provided A's action or inaction brought
about E. Causal responsibility is used to explain why E occurred.
Cedant (insurance) (CICA Part I IFRS)
Policyholder under a reinsurance contract. IFRS 4.A
Ceiling test
Accounting rule whereby certain assets ( property, plant, and equipment; some other long-term
assets; intangible assets) must be written down if the net carrying value of the capital assets
exceeds the net recoverable amount.
Cell
A cell is a manufacturing workstation in which a single worker operates several machines.
Certain contract
Contract that can be settled net in cash or with another financial instrument, or by exchanging
financial instruments. These contracts are not financial instruments by nature, but have financial
instruments embedded in them. See Financial instrument.
Certain equivalent
The certain equivalent is the probabilities of a given outcome multiplied by the expected return
from that outcome.
Certainty
Certainty means that taxpayers know in advance the tax consequences of any transaction so that
they may plan their affairs accordingly.
Chain of custody
The chain of custody is a crucial link of the evidence to the suspect; it is also called the
“relevance” of evidence by lawyers and judges.
Change in accounting estimate (CICA Part I IFRS) (CICA Part II ASPE) [CICA Part V
Pre-changeover accounting standards]
Adjustment of the carrying amount of an asset or a liability, or the amount of the periodic
consumption of an asset, that results from the assessment of the present status of, and expected
future benefits and obligations associated with, assets and liabilities. Changes in accounting
estimates result from new information or new developments and, accordingly, are not corrections
of errors. 1506.05, IAS 8.5. See Accounting policies, Prospective application, Retrospective
application.
Change in accounting policy
A change in accounting policy is a change in the way a company accounts for a particular type of
transaction or event, or for the resulting asset or liability.
Change in assumptions
A change in assumptions is when an actuarial revaluation is done and forward-looking
assumptions are changed, which results in the overall pension liability increasing or decreasing.
This increase or decrease is an actuarial gain or loss.
Character-based trust
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Character-based trust is generalized to a broader group of exchanges. Characteristics such as
ethnicity, gender, age, or the school you attended are used to infer trust. They serve as
indicators of membership in a common cultural system and shared background expectations.
Charitable donations/gifts
Charitable gifts include donations to a registered charitable organization, a registered Canadian
amateur athletic association, a municipality, the United Nations, and a university outside Canada.
For individuals, charitable donations allow the taxpayer to claim a non-refundable tax credit.
Corporations may deduct the amount of the donation in computing income for tax purposes.
Other charitable donations include gifts to Her Majesty, cultural gifts to institutions, and
ecological gifts.
Chart of accounts
The chart of accounts is a list of all accounts used by a company. It includes the identification
number assigned to each account.
Check digit
A check digit is an extra number, precisely calculated, that is tagged onto the end of a basic
identification number, such as an employee number. A check digit is used to control data input
accuracy.
Cheque kiting
Cheque kiting is the illegal practice of building up apparent balances in one or more bank
accounts based on uncollected (float) cheques drawn against similar accounts in other banks.
Cheque register
A cheque register is a book of original entry for recording cash payments.
Child care expenses
Child care expenses are amounts paid to a resident of Canada to look after a child of the
taxpayer or the spouse, when they are incurred for the purpose of earning income from an office,
employment, or self-employment, to carry on research for which a grant is received, or when
attending a designated educational institution. They include payments to neighbours, friends, and
other persons, including relatives over the age of 17 for day care, nursery schools, day camps
including sports camps, and boarding schools. Note that in the case of boarding schools there are
specific rules that must be followed.
CICA Handbook
The CICA Handbook is a publication of the Canadian Institute of Chartered Accountants (CICA)
that is the primary source of generally accepted accounting principles and generally accepted
auditing standards.
Civil penalties
Civil penalties for misrepresentation by third parties are penalties that are concerned with tax
planning and valuation activities. Every person who makes or furnishes, participates in the
making of, or causes another person to make or furnish a statement that the person knows, or
would reasonably be expected to know but for circumstances amounting to culpable conduct, is a
false statement that could be used by another person for a purpose of the ITA is liable to a
penalty in respect of the false statement.
Civil penalties for misrepresentation by third parties were legislated in 2000 in response to a
concern that only criminal penalties apply to a third party that participates in tax evasion of
another person’s taxes. They are applicable to any statements made after June 29, 2000.
Class of shares
Each class of shares is differentiated by differing rights and privileges. Dividend entitlements and
voting rights are characteristics of stock that might be altered among classes.
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Class of transaction
A class of transaction is a group of transactions having common characteristics, such as cash
receipts or cash disbursements, but which are not simply added together and presented as an
account balance in financial statements.
Classification (as a control objective)
Classification, as a control objective, involves ensuring that transactions are recorded in the right
accounts, charged or credited to the right customer (including classification of sales to
subsidiaries and affiliates), entered in the correct segment product line or inventory description,
and so forth.
Classification of financial assets (CICA Part I IFRS)
All financial assets must be classified as financial assets at fair value through profit or loss, held
to maturity (HTM), loans and receivables (L&R), or available for sale (AFS). These classifications
are described below. Derivatives, including embedded derivatives that are not closely related to
the host contract, are classified as held for trading, irrespective of any other characteristic. The
financial assets at fair value through profit or loss category comprises primarily financial assets
held for trading (HFT).
Classification of financial assets (CICA Part V Pre-changeover accounting standards)
Financial assets must be classified as held for trading, held to maturity, loans and receivables, or
available for sale. Derivatives, including embedded derivatives that are not closely related to the
host contract, are classified as held for trading, irrespective of any other characteristic. See
Reclassification of financial instruments.
Classificatory smoothing
Classificatory smoothing is the process whereby management could smooth (or otherwise
manage) operating earnings by choosing to classify unusual items above or below the operating
earnings line.
Classified statement of financial position
Classified statement of financial position is a statement of financial position that shows assets
and liabilities grouped in meaningful subclasses, for example, current assets. Under IFRS, the
statement of financial position items must be classified as current and non current assets and
liabilities except when liquidity order provides more meaningful information.
Classified statement of profit and loss
A classified statement of profit and loss is a statement of profit and loss format that classifies
items in significant groups and shows detailed calculations of sales and cost of goods sold.
Clawback
Individuals may have to repay all or a part of their Old Age Security (OAS) pension benefits or
net federal supplement if their net income is greater than a certain amount. The amount of the
clawback (social benefit repayment) is the lesser of 15% of net income exceeding the threshold
or the total OAS pension benefits received.
Clean opinion
A clean opinion is an audit opinion with no qualifications by the auditor. It indicates that the
accounting policies used and the financial information prepared are in accordance with some
specified standard, usually generally accepted accounting principles.
Clean surplus theory
An Edwards-Bell-Ohlson valuation model that leads to a relatively simple procedure to compute
the fundamental values of publicly traded stocks and to estimate a firm’s market value from
fundamental statement of financial position and income statement components. The important
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issue with the clean surplus theory is that the actual earnings from the income statement must
contain all gains or losses experienced by the organization. Thus, the surplus is clean.
Client
A client is a person (company, board of directors, agency, or some other person or group) who
retains the auditor and pays the fee.
Cliff vesting
A vesting method in which the award vests at a specific point in time and the award vests all at
once. Compensation cost is recognized using the straight-line method over the service period,
which is the period of the award. The cliff method is also known as the rateable method.
Contrast cliff vesting to a graded vesting schedule.
Close members of the family of an individual (CICA Part I IFRS)
Family members who may be expected to influence, or be influenced by, that individual in their
dealings with the entity. They may include:

(a) the individual's domestic partner and children;

(b) children of the individual's domestic partner; and

(c) dependants of the individual or the individual's domestic partner. IAS 24.9
Closely held corporation
A corporation in which there are relatively few shareholders.
Closing entries
Closing entries are journal entries recorded at the end of each accounting period to prepare the
revenue, expense, and withdrawal accounts for the upcoming year and update the owner’s
capital account for the events of the year just finished.
Closing rate (CICA Part I IFRS)
Spot exchange rate at the end of the reporting period. IAS 21.8. See Spot exchange rate.
Coefficient of determination (r2)
The coefficient of determination measures the amount of variation of a dependent variable that is
explained by variation in the independent variable. The value of r2 is always between 0 and 1.
The closer to 1 r2 is, then the greater the explanatory or predictive ability the independent
variable has regarding the dependent variable.
Collateral
Goods or property used to secure a debt.
Collusion
Collusion is a set of circumstances in which two or more people conspire to conduct fraudulent
activity in violation of an organization’s internal control policies and procedures.
Columnar journal
A columnar journal is a book of original entry having columns, each of which is designated as the
place for entering specific data about each transaction of a group of similar transactions.
Commencement of the lease term (CICA Part I IFRS)
Date from which the lessee is entitled to exercise its right to use the leased asset. It is the date
of initial recognition of the lease (that is, the recognition of the assets, liabilities, income, or
expenses resulting from the lease, as appropriate). IAS 17.4. See Inception of the lease.
Commercial mortgage
A commercial mortgage is a term loan secured by tangible property. They generally are for a
period of up to five years.
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Commercial paper
Commercial paper is negotiable, unsecured promissory notes issued by major corporations to
raise short-term funds in financial markets.
Commission
Commission is a percentage fee charged for professional services in connection with executing a
transaction or performing some other business activity.
Commitment
A commitment is an agreement to enter a transaction. It does not satisfy conditions necessary to
be considered a liability until a party to the agreement performs an act stipulated in the
agreement thereby giving rise to an obligation of the other party to counteract (to repay with
cash or non-cash consideration).
Commitment accounting
Recording of obligations to make payments in the future at the time the obligations are foreseen
(the present period), rather than at the time the services are rendered and billings are received.
Such obligations may represent contractual liabilities of a department, as is the case when
purchase orders or contracts for goods or services are issued. Alternatively, they may represent
conditional liabilities, as is the case when an arrangement is made that may require the spending
of funds if conditions specified in the arrangement are met.
Committed fixed costs
Committed fixed costs are those fixed costs that are difficult to adjust and that relate to the
investment in facilities, equipment, and the basic organizational structure of the firm.
Commodity
A commodity is any article of commerce. It is often used to describe homogenous goods like
agricultural products.
Commodity futures contract
A commodity futures contract is a futures contract where the underlying asset is a commodity
such as oil, copper, or wheat. See Futures contract.
Commodity-linked debt
A commodity-linked debt is a loan that allows the investor the option of receiving, at maturity,
either the principal amount of the loan in cash, or a specific amount of a given commodity.
Common costs
Common costs, also known as indirect costs, are costs that cannot be easily and conveniently
traced to the particular cost object under consideration.
Common law
Common law is established by all the cases and precedents that govern judges’ decisions in
lawsuits for monetary damages. Common law is “common knowledge” in the sense that judges
tend to follow the collective wisdom of past cases decided by themselves and other judges in the
judgment of current cases.
Common shares
See Ordinary shares.
Common-size comparative statements
Common-size comparative statements are comparative financial statements in which each
amount is expressed as a percentage of a base amount. In the statement of financial position,
the amount of total assets is usually selected as the base amount and is expressed as 100%. In
the statement of profit and loss, net sales is usually selected as the base amount.
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Comparability
Comparability is the relationship between two pieces of information in which the data between
the two has been prepared using the same accounting policies for a corporation or for different
corporations in order that they may be logically compared.
See Conceptual Framework for Financial Reporting.
Compensating balances
Compensating balances are minimum cash balances that must be maintained as support for
funds borrowed.
Compensating control
A compensating control is a control feature used when a standard control procedure (such as
strict segregation of functional responsibilities) is not specified by the company.
Compensation (CICA Part I IFRS)
All employee benefits (as defined in IAS 19 Employee Benefits) including employee benefits to
which IFRS 2 Share-based Payment applies. Employee benefits are all forms of consideration
paid, payable or provided by the entity, or on behalf of the entity, in exchange for services
rendered to the entity. It also includes such consideration paid on behalf of a parent of the entity
in respect of the entity. Compensation includes:

(a) short term employee benefits, such as wages, salaries and social security contributions,
paid annual leave and paid sick leave, profit-sharing and bonuses (if payable within 12
months of the end of the period) and non-monetary benefits (such as medical care,
housing, cars and free or subsidized goods or services) for current employees;

(b) post employment benefits such as pensions, other retirement benefits, post
employment life insurance and post employment medical care;

(c) other long-term employee benefits, including long-service leave or sabbatical leave,
jubilee, or other long-service benefits, long-term disability benefits and, if they are not
payable wholly within 12 months after the end of the period, profit-sharing, bonuses, and
deferred compensation;

(d) termination benefits; and

(e) share-based payment. IAS 24.9.
See Employee benefits, Other long-term employee benefits, Termination benefits.
Compensatory justice
Those who injure others ought to make up for or compensate those they have injured, as fully as
they are able to.
Competent (as a characteristic of evidence)
Competent, as a characteristic of evidence, is evidence that is valid, relevant, and unbiased.
Compilation
The presentation of financial statement information by the entity without the accountant's
assurance as to conformity with Generally Accepted Accounting Principles (GAAP).
Completed-contract method (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Method of accounting that recognizes revenue only when the sale of goods or the rendering of
services under a contract is completed or substantially completed. 3400.03. See Percentage-ofcompletion method.
Completeness (as a control objective)
Completeness, as a control objective, means ensuring that valid transactions are not omitted
entirely from the accounting records.
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Complex capital structure
A complex capital structure is a capital structure that includes rights or options to purchase
ordinary shares or securities convertible into ordinary shares.
Compliance auditing
When an audit engagement is being done for the sole purpose of reporting on compliance with
laws, regulations, or rules.
Component auditor (CAS 600.09)
An auditor who, at the request of the group engagement team, performs work on financial
information related to a component for the group audit.
Component of an entity (CICA Part I IFRS)
Operations and cash flows that can be clearly distinguished, operationally and for financial
reporting purposes, from the rest of the entity. IFRS 5.A
Component searches
Component searches are possible, that is, it is possible to solve profit-maximization problems by
separating profit functions into cost and revenue functions. In other words, a problem can be
subdivided into its component problems.
Componentization
Under CICA Part I IFRS, significant components of assets with separate useful lives are
depreciated separately, after considering materiality and the practicality of estimating value and
useful life of separate components.
Composite amortization
Composite amortization is the amortization of a set of related but dissimilar assets using one
composite rate.
Composite rate
A composite rate is a rate used to estimate uncollectible receivables based on the percentage of
historical bad debts and total accounts receivable. It is also the weighted-average amortization
rate used for composite group amortization.
Compound interest
Compound interest is a method of calculating interest wherein the interest is calculated on both
the principal of the loan and on any previously accrued interest that has not been distributed or
paid.
Compound journal entry
A compound journal entry is a journal entry that affects at least three accounts.
Comprehensive income [CICA Part V Pre-changeover accounting standards]
Change in equity (net assets) of an enterprise during a period from transactions and other events
and circumstances from non-owner sources. It includes all changes in equity during a period
except those resulting from investments by owners and distributions to owners. [1530.03(a)].
See also Other Comprehensive Income.
Under CICA Part I IFRS, called Other comprehensive income and Total comprehensive income.
Comprehensive method of interperiod tax allocation
The comprehensive method of interperiod tax allocation is a method wherein all temporary
differences are allocated between current and future periods regardless of the likelihood or
timing of reversal and that gives rise to deferred income taxes on the statement of financial
position. [Changed under IFRS.]
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Comprehensive revaluation
A comprehensive revaluation is when the financial statements of a company are restated to
reflect fair values of net assets. This is only permitted after a financial reorganization or as part of
push-down accounting.
Computed upper limit (CUL)
The computed upper limit (CUL) is a statistical estimate of the population deviation rate
computed from the test of controls sample evidence.
Computer-assisted audit techniques
Applications of auditing procedures using the computer as an audit tool (also known as CAATs).
Computer network
A computer network is a system in which computers are linked with each other so that different
users on different computers can share access to the same data and the same programs.
Conceptual Framework for Financial Reporting
A component of CICA Handbook Part I IFRS addressing purpose, scope, qualitative characteristics
of useful financial information, assumptions, and objectives of general purpose financial reporting
(comparable to CICA Part V Section 1000).
Qualitative characteristics of useful financial information:
Fundamental qualitative characteristics:

Relevance – Relevant financial information is capable of making a difference in the
decisions made by users. Information may be capable of making a difference in a decision
even if some users choose not to take advantage of it or are already aware of it from other
sources.

Materiality – Information is material if omitting it or misstating it could influence decisions
that users make on the basis of financial information about a specific reporting entity. In
other words, materiality is an entity-specific aspect of relevance based on the nature or
magnitude, or both, of the items to which the information relates in the context of an
individual entity's financial report. Consequently, the Board cannot specify a uniform
quantitative threshold for materiality or predetermine what could be material in a particular
situation.

Faithful representation – Financial reports represent economic phenomena in words and
numbers. To be useful, financial information must not only represent relevant phenomena,
but it must also faithfully represent the phenomena that it purports to represent. To be a
perfectly faithful representation, a depiction would have three characteristics. It would be
complete, neutral and free from error.
Enhancing qualitative characteristics:

Comparability – Users' decisions involve choosing between alternatives, for example, selling
or holding an investment, or investing in one reporting entity or another. Consequently,
information about a reporting entity is more useful if it can be compared with similar
information about other entities and with similar information about the same entity for
another period or another date.

Verifiability – Verifiability helps assure users that information faithfully represents the
economic phenomena it purports to represent. Verifiability means that different
knowledgeable and independent observers could reach consensus, although not necessarily
complete agreement, that a particular depiction is a faithful representation. Quantified
information need not be a single point estimate to be verifiable. A range of possible
amounts and the related probabilities can also be verified. Verification can be direct or
indirect. Direct verification means verifying an amount or other representation through
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direct observation, for example, by counting cash. Indirect verification means checking the
inputs to a model, formula or other technique and recalculating the outputs using the same
methodology. An example is verifying the carrying amount of inventory by checking the
inputs (quantities and costs) and recalculating the ending inventory using the same cost
flow assumption (for example, using the first-in, first-out method).

Timeliness – Timeliness means having information available to decision-makers in time to
be capable of influencing their decisions. Generally, the older the information is the less
useful it is. However, some information may continue to be timely long after the end of a
reporting period because, for example, some users may need to identify and assess trends.

Understandability – Classifying, characterising and presenting information clearly and
concisely makes it understandable. Some phenomena are inherently complex and cannot be
made easy to understand. Excluding information about those phenomena from financial
reports might make the information in those financial reports easier to understand.
However, those reports would be incomplete and therefore potentially misleading. Financial
reports are prepared for users who have a reasonable knowledge of business and economic
activities and who review and analyse the information diligently. At times, even wellinformed and diligent users may need to seek the aid of an adviser to understand
information about complex economic phenomena.
Cost constraint on useful financial reporting:

Cost is a pervasive constraint on the information that can be provided by financial
reporting. Reporting financial information imposes costs, and it is important that those costs
are justified by the benefits of reporting that information. There are several types of costs
and benefits to consider.
Going concern:

The financial statements are normally prepared on the assumption that an entity is a going
concern and will continue in operation for the foreseeable future. Hence, it is assumed that
the entity has neither the intention nor the need to liquidate or curtail materially the scale
of its operations; if such an intention or need exists, the financial statements may have to
be prepared on a different basis and, if so, the basis used is disclosed.
Condensed financial statements
Statements that are analytical and are derived from the public accounts. They do not include all
of the required financial statement disclosures. See Summary financial statements.
Conditional controllability
Conditional controllability refers to the assertion that a given variable is controllable by a
manager if the probability of performance evaluation of the given variable given input “x”
depends nontrivially on the manager’s supply of input “x.”
Conflict of interest
A conflict of interest is any situation whereby an individual or his or her relatives may benefit
from a transaction within the individual’s business relations where he or she has influence over
the transaction or relationship.
Connected corporation (tax)
A corporation is considered to be connected with a particular corporation if at any time in the
taxation year the corporation is controlled by another corporation, or the particular corporation
owns more than 10% of the voting shares of the other corporation, which represents more than
10% of the FMV of all the outstanding shares.
Consensus
Factor in validity of a contract; both parties must objectively know and agree to its terms.
Conservatism principle
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If two or more valid alternatives exist, an accountant should select the least optimistic outcome.
When risk or uncertainty exists, the preference for possible accounting measurement errors
should be in the direction of understatement rather than overstatement of assets and income.
Although conservatism reduces net income in earlier periods, it actually increases net earnings of
later periods.
Under the restructured CICA Handbook, the conservatism principle is replaced with prudence.
Although prudence is similar to conservatism, it emphasizes that assets or income are not
overstated and liabilities or expenses are not understated” (IASB Framework, paragraph 37)
whereas conservatism suggests that it is better to understate than overstate assets and equity.
See Conceptual Framework for Financial Reporting, Prudence.
Consideration
Consideration is the economic resources given to the seller by the buyer in a transaction.
Consideration (business combination) (CICA Part I IFRS)
The consideration transferred in a business combination is measured at fair value, which is
calculated as the sum of the acquisition-date fair values of the assets transferred by the acquirer,
the liabilities incurred by the acquirer to former owners of the acquiree and the equity interests
issued by the acquirer. (However, any portion of the acquirer's share-based payment awards
exchanged for awards held by the acquiree's employees that is included in consideration
transferred in the business combination is measured in accordance with paragraph 30 rather than
at fair value.) Examples of potential forms of consideration include cash, other assets, a business
or a subsidiary of the acquirer, contingent consideration, ordinary or preference equity
instruments, options, warrants and member interests of mutual entities. IFRS 3.37
See Contingent consideration.
Consignee
The consignee is one who receives and holds goods owned by another party for the purpose of
selling the goods for the owner.
Consignment sale
A consignment sale is a sale of goods in which the customer pays only if the goods are resold to
a final customer.
Consignor
The consignor is an owner of goods who ships them to another party who will then sell the goods
for the owner.
Consistency principle
A company should use the same accounting methods period after period so that the financial
statements of prior periods are comparable. The implication of this principle is that users of
financial statements can assume that the same procedures have been used in keeping records
and preparing financial statements in previous years, so as to ensure comparability. However,
this does not mean that a company can never change from one accounting method to another.
Switching to a new method or procedure must be justified as an improvement in financial
reporting.
Consolidated financial statements (CICA Part I IFRS)
Financial statements of a group presented as those of a single economic entity. IAS 27.4, IAS
28.2
Consolidated financial statements (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Financial statements produced by aggregating the financial statements of one or more subsidiary
companies on a line by line basis (that is, adding together corresponding items of assets,
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liabilities, revenues and expenses) with the financial statements of the parent company,
eliminating intercompany balances and transactions and providing for any non-controlling interest
in a subsidiary company. Consolidated financial statements recognize that the separate legal
entities are components of one economic unit and are distinguishable from the separate parent
and subsidiary company statements and from combined statements of affiliated companies. The
distinction is based both on the nature of such statements and on the difference in circumstances
justifying their use. 1601.03
Consolidation
Consolidation is the combining of financial statements of a parent company and its
subsidiary(ies); inter-company transactions are eliminated.
Consolidation — Cost method (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Consolidation of the financial statements of a parent and its subsidiary when the parent uses the
cost method to account for its investment in the subsidiary. 1601.01(b)
Consolidation — Equity method (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Consolidation of the financial statements of a parent and its subsidiary when the parent uses the
equity method to account for its investment in the subsidiary. 1601.01(b)
Consolidation theories
There are four theoretical approaches to consolidation when a non-controlling interest exists. The
four approaches are proprietary, parent company, parent company extension (also called
identifiable net assets) and entity (also called fair value enterprise) theories. The proprietary and
parent company theories are not IFRS compliant.
Constant dollar capital maintenance
Constant dollar capital maintenance is maintaining the purchasing power of the owner’s
investment in constant dollars after inflation. No income is recognized until capital in constant
dollars is preserved.
Constituencies of accounting
The constituencies of accounting are the major grouping of accounting information users. They
are such groups as investors, lenders, managers, unions, standard setters, and governments.
Constraint
A constraint is anything that prevents an organization or an individual from getting more of what
it wants.
Constrained maximization
In game theory, a cooperative solution in which the players are transparent in their willingness to
forego the short-run benefits of the non-cooperative Nash equilibrium. The result is a long-run
perspective where the players establish a reputation that ensures the cooperative solution.
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Construction contract (CICA Part I IFRS)
Contract specifically negotiated for the construction of an asset or a combination of assets that
are closely interrelated or interdependent in terms of their design, technology and function or
their ultimate purpose or use. IAS 11.3. A construction contract may be negotiated for the
construction of a single asset such as a bridge, building, dam, pipeline, road, ship or tunnel. A
construction contract may also deal with the construction of a number of assets which are closely
interrelated or interdependent in terms of their design, technology and function or their ultimate
purpose or use; examples of such contracts include those for the construction of refineries and
other complex pieces of plant or equipment. IAS 11.4. Construction contracts include:

(a) contracts for the rendering of services which are directly related to the construction of
the asset, for example, those for the services of project managers and architects; and

(b) contracts for the destruction or restoration of assets, and the restoration of the
environment following the demolition of assets. IAS 11.5.
Construction contracts are formulated in a number of ways, which are classified as fixed price
contracts and cost-plus contracts. Some construction contracts may contain characteristics of
both a fixed price contract and a cost-plus contract, for example, in the case of a cost-plus
contract with an agreed maximum price. In such circumstances, a contractor needs to consider
all the conditions in paragraphs 23 and 24 in order to determine when to recognize contract
revenue and expenses. IAS 11.6.
See Cost-plus contract, Fixed price contract.
Constructive obligation (CICA Part I IFRS)
Obligation that derives from an entity's actions where:

(a) by an established pattern of past practice, published policies, or a sufficiently specific
current statement, the entity has indicated to other parties that it will accept certain
responsibilities; and

(b) as a result, the entity has created a valid expectation on the part of those other parties
that it will discharge those responsibilities. IAS 37.10
Contingency (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Existing condition or situation involving uncertainty as to possible gain or loss to an enterprise
that will ultimately be resolved when one or more future events occur or fail to occur. Resolution
of the uncertainty may confirm the acquisition of an asset or the reduction of a liability or the loss
or impairment of an asset or the incurrence of a liability. 3290.05 [3290.02]
Contingent asset (CICA Part I IFRS)
Possible asset that arises from past events and whose existence will be confirmed only by the
occurrence or non-occurrence of one or more uncertain future events not wholly within the
control of the entity. IAS 37.10
Contingent claim
A contingent claim is also called a derivative security. A contingent claim is an asset whose value
depends on the evolution of one or more uncertain variables. See Derivative.
Contingent consideration (CICA Part I IFRS) (CICA Part II ASPE) [CICA Part V Prechangeover accounting standards]
Obligation of the acquirer to transfer additional assets or equity interests to the former owners of
an acquiree as part of the exchange for control of the acquiree if specified future events occur or
conditions are met. However, contingent consideration also may give the acquirer the right to the
return of previously transferred consideration if specified conditions are met. 1582.03, IFRS 3.A
See Consideration.
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Contingent fee
A contingent fee is a fee established for the performance of any service in an arrangement in
which no fee will be charged unless a specific finding or result is attained, or the fee otherwise
depends on the result of the service.
Contingent lease payment
A contingent lease payment is an additional lease payment or payments based on subsequent
events.
Contingent liability (CICA Part I IFRS)

(a) Possible obligation that arises from past events and whose existence will be confirmed
only by the occurrence or non-occurrence of one or more uncertain future events not
wholly within the control of the entity; or

(b) Present obligation that arises from past events but is not recognized because:
(i) it is not probable that an outflow of resources embodying economic benefits will
be required to settle the obligation; or
(ii) the amount of the obligation cannot be measured with sufficient reliability. IAS
37.10. See Probable, Recognition threshold for provision.
Contingent rent (lease) (CICA Part I IFRS)
Portion of the lease payments that is not fixed in amount but is based on the future amount of a
factor that changes other than with the passage of time (for example, percentage of future sales,
amount of future use, future price indices, future market rates of interest). IAS 17.4
Contingent rental (lease) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Rental based on a factor other than the passage of time (for example, percentage of sales,
amount of usage, prime interest rate, price indices). 3065.03
Contingent share agreement (CICA Part I IFRS)
Agreement to issue shares that is dependent on the satisfaction of specified conditions. IAS 33.5
Contingently issuable ordinary shares (CICA Part I IFRS)
Ordinary shares issuable for little or no cash or other consideration upon the satisfaction of
specified conditions in a contingent share agreement. IAS 33.5
Continuity assumption (going-concern assumption)
Continuity assumption is the assumption that the corporation will not be liquidated, but will
continue to pursue its objectives for the foreseeable future.
Continuity schedule
A working paper that shows the movements in an account balance from the beginning to the end
of the period under audit, used to analyze the account balance changes and the other financial
statement items related to them.
Continuous improvement
A strategy whereby a budgeted cost is successively reduced over succeeding time periods.
Contra account
A contra account is one general ledger account that’s always reported on the financial statements
with its “main” account; since the two accounts will have opposite balances, their net amount will
result.
Contracts
Agreements that are perceived as binding on both parties.
Contract for services
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A contract for services exists when a person is engaged to achieve a defined objective and is
given all the freedom required to attain the desired result.
Contract of service
A contract of service exists if the person for whom the services are performed has the right to
control the amount, the nature, and the management of the work to be done and the manner of
doing it.
Contract rate (bond)
The contract rate is the interest rate specified in the bond indenture. It is multiplied by the par
value of the bonds to determine the amount of interest to be paid each year.
Contracts (construction) in progress
Contracts in progress is a statement of financial position account associated with long-term
construction contracts. It is the accumulated costs of construction to date (plus profit if
percentage of completion is used). See Construction contract.
Contractual incentive
In information production, motivations to produce information as the result of contractual
necessity. For example, debt covenants in loan agreements require that lenders receive financial
statements.
Contractual obligations
A contractual obligation is a commitment or agreement to enter into a transaction that will
become a liability once an event contemplated in the agreement has occurred.
Contractual termination benefits (CICA Part II ASPE)
Benefits required to be provided to employees under the existing terms of a benefit plan when a
specified event, such as a plant closing, occurs. 3461G. See Termination benefits, Special
termination benefits.
Contributed capital
Contributed capital is a section of the shareholders’ equity that reflects the shareholders’
investment in the corporation. It includes share capital and other contributed capital.
Contributed surplus (CICA Part II ASPE)
Amounts paid in by equity holders. Contributed surplus in the form of surplus paid in by equity
holders includes premiums on shares issued, any portion of the proceeds of issue of shares
without par value not allocated to share capital, gain on forfeited shares, proceeds arising from
shares donated by equity holders, credits resulting from redemption or conversion of shares at
less than the amount set up as share capital, and any other contribution by equity holders in
excess of amounts allocated to share capital. 3251.03
Contribution (CICA Part III ASNFPO)
Non-reciprocal transfer to a not-for-profit organization of cash or other assets or a non-reciprocal
settlement or cancellation of its liabilities. Government funding provided to a not-for-profit
organization is considered to be a contribution. [4410.02(b)]
Contribution margin
Revenue less variables costs.
Contribution margin ratio
The contribution margin ratio is the contribution margin as a percentage of total sales.
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Contributors (NFPO)
Organizations or individuals who support a not-for-profit organization (NFPO) with financial
contributions. They are one group of users of not-for-profit organizations’ financial information.
Contrast with members, creditors, and other interested users.
Contributory pension plan
A contributory pension plan is a pension plan in which the employee makes contributions to the
plan, in addition to those made by the employer. See Defined benefit plan, Defined contribution
plan.
Control (CICA Part I IFRS)
Power to govern the financial and operating policies of an entity so as to obtain benefits from its
activities. IAS 24.9, IAS 27.4, IAS 28.2, IAS 31.3, IFRS 3.A
Control, significant influence, and no significant influence are concepts that are applied to the
level of influence the investing company has over the operating, strategic, and investing
decisions of the investee company in which it has made an equity investment.
Significant influence is the power to participate in the financial and operating policy decisions of
an entity, but is not control over those policies. Significant influence may be gained by share
ownership, statute, or agreement.
There are three ways to report investments in equity instruments: investments with no significant
influence, investments subject to significant influence, and investments with control
(consolidation).
Investments with no significant influence are classified as financial instruments and are held for
trading or available for sale and regarded as other investments. No significant influence
investments fall under the reporting and recording requirements of IAS 39.
Investments with significant influence are reported using the equity method, and the value that is
reported is the ensuing carrying value. Investment in associates is governed by IAS 28.
Investments with control (consolidation) are reported using consolidation as the appropriate
method. Consolidation does not affect the accounting records of the parent or subsidiary (or
subsidiaries). The parent is free to choose either the cost method or the equity method to record
the investment. The consolidated financial statements are the same regardless of which method
of recording is used. Investments with control are reported in accordance with IAS 27.
Control (CICA Part II ASPE) [CICA Part V Pre-changeover accounting standards]
Continuing power to determine an entity's strategic operating, investing, and financing policies
without the cooperation of others. [1590.03(b)], 1625.03, 1582.03, 3840.03
Control account
A control account is a general ledger account that’s supported by a subsidiary ledger. The control
account holds the grand total and the subsidiary ledger for the many accounts that make up the
grand total.
Control block
A control block is a small number of related or affiliated shareholders having a majority of the
voting shares of an organization.
Control documentation
The audit client’s documentation of its control procedures, including computer and manual
controls, which auditors use to understand and assess a client’s internal control.
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Control environment
The control environment is a set of characteristics that defines good management control
features other than accounting policies and control procedures.
Control procedures
Control procedures are specific error-checking routines performed by company personnel.
Control risk
Control risk is the probability that a material misstatement (error or irregularity) could occur and
not be prevented or detected on a timely basis by the company’s internal control structure
policies and procedures.
Controllability principle
The controllability principle is the assertion that managers should be held responsible for only
those decisions for which they have authority.
Controlled corporation
A corporation is controlled by another corporation if more than 50% of its voting shares belong
to the other corporation, persons related to the other corporation, or the other corporation and
persons related to it.
Controlled foreign affiliate
A controlled foreign affiliate is a foreign affiliate of the taxpayer that was controlled (greater than
50% voting control) at that time, directly or indirectly, in any manner by the taxpayer, the
taxpayer and not more than four other persons resident in Canada, not more than four persons
resident in Canada other than the taxpayer, a person or persons with whom the taxpayer does
not deal at arm’s length, or the taxpayer and a person or persons with whom the taxpayer does
not deal at arm’s length.
Controlled reprocessing
Controlled reprocessing, also called parallel simulation, is a process wherein the auditors’
determine whether the output from the computer program the client actually used in processing
data produces satisfactory accounting output when compared to the output from the auditors’
controlled copy of the program.
Controller
A controller is the chief accounting officer of an organization.
Controlling
Controlling is the act of ensuring that the plan is actually carried out and is appropriately
modified as circumstances change.
Conversion cost
Conversion cost is direct labour cost plus manufacturing overhead cost.
Conversion ratio
The conversion ratio is the number of ordinary shares to be received in exchange for a
convertible security.
Convertible bonds
General debt obligation of a corporation that can be exchanged for a set number of ordinary
shares of the issuing corporation at a pre-stated conversion price is termed a convertible bond.
Convertible debt
Convertible debt is a debt instrument issued by a company that allows the investor to exchange
the debt for shares in the company at some stipulated conversion ratio.
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Convertible preferred shares
Convertible preferred shares are preferred shares that can be exchanged for shares of the issuing
corporation’s ordinary shares at the option of the preferred shareholder.
Cooperative games
Cooperative games are games in which the parties can enter into a binding agreement for mutual
benefit.
Copyright
Exclusive right to reproduce, publish, sell, and control a musical, literary, or artistic work. The
right is normally for the lifetime of the author plus 50 years. Many copyrights have a much
shorter economic life; their costs should be amortized over the shorter period. Often these costs
are nominal and are written off in the period of expenditure. For accounting purposes, 40 years is
usually the maximum.
Corporate assets (CICA Part I IFRS)
Assets other than goodwill that contribute to the future cash flows of both the cash-generating
unit under review and other cash-generating units. IAS 36.6
Corporate governance
Corporate governance is the system set up to hold a corporation accountable to its capital
providers, employees, communities, the environment, and similar broader social concerns.
Corporation
A corporation is a business chartered, or incorporated, as a separate legal entity under federal or
provincial law.
Corporation (for tax purposes)
A corporation is defined in the ITA as an incorporated company. A corporation is an entity
created by law having a legal personality and existence separate and distinct from the personality
and existence of those who caused its creation or those who own it (the shareholders). It
possesses its own capacity to acquire rights and to assume liabilities, and any rights acquired or
liabilities assumed by the corporation are not the rights or liabilities of those who control or own
the corporation. As long as an entity has such separate identity and existence, CRA considers
such an entity to be a corporation.
Correction of an accounting error
The correction of an accounting error is the retroactive correction of an error in a prior period,
generally with restatement.
Corrigible
Subject to correction in light of new information, evidence, and argument.
COSO (Committee of Sponsoring Organizations of the Treadway Commission)
An organization that investigated corporate fraud and developed a control framework that has
become the standard for the design of controls by companies and evaluation of controls by
auditors. The COSO control framework is cited by the PCAOB in its auditing standards on internal
control as an acceptable framework against which control design and effectiveness should be
evaluated.
Cost (CICA Part I IFRS) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Amount of cash or cash equivalents paid or the fair value of the other consideration given to
acquire an asset at the time of its acquisition or construction or, where applicable, the amount
attributed to that asset when initially recognized in accordance with the specific requirements of
other IFRSs (for example, IFRS 2 Share-based Payment). 3064.08, IAS 16.6, IAS 38.8, IAS 40.5
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Cost (property, plant, and equipment) (CICA Part II ASPE) [CICA Part V Prechangeover accounting standards]
Amount of consideration given up to acquire, construct, develop, or better an item of property,
plant, and equipment and includes all costs directly attributable to the acquisition, construction,
development or betterment of the asset including installing it at the location and in the condition
necessary for its intended use. Cost includes any asset retirement cost accounted for in
accordance with Asset Retirement Obligations (section 3110). 3061.03
Cost accounting
Cost accounting is a managerial accounting activity designed to help managers identify, measure,
and control operating costs.
Cost behaviour
Cost behaviour is the way in which costs react or respond to changes in the level of business
activity.
Cost (benefit) of current income taxes (CICA Part II ASPE) [CICA Part V Prechangeover accounting standards]
Amount of income taxes payable (recoverable) in respect of the period. 3465.02
Cost of disclosure
Proprietary information has a cost of disclosure.
Cost (benefit) of future income taxes (CICA Part II ASPE) [CICA Part V Prechangeover accounting standards]
Change during the period in future income tax liabilities and future income tax assets. 3465.02
Cost centre
Cost centre describes the organizational architecture in which the management is delegated
decision rights over input mix. They control costs like labour, material, and supplies, but output is
determined at a higher level.
Cost constraint on useful financial reporting
Cost is a pervasive constraint on the information that can be provided by financial reporting.
Reporting financial information imposes costs, and it is important that those costs are justified by
the benefits of reporting that information.
See Conceptual Framework for Financial Reporting.
Cost driver
A cost driver is machine-hours, direct labour-hours, or a singular base that is a causal factor in
the incurrence of overhead costs, or is closely correlated to the incurrence.
Cost formula
A cost formula is a formula relating cost to activity. The cost formula expression is generally in
the form of the linear equation Y = a + bX, where Y is the total cost, a is the fixed cost, b is the
variable cost rate, and X is the activity level.
Cost function
An equation that expresses the relationship between mixed cost and level of activity.
Y = a + bx
Where:
Y = total mixed cost
a = total fixed cost
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b = variable cost per unit of activity
X = the level of activity
Cost leadership
Cost leadership is classified as one of the generic strategies. By maintaining low cost through
efficiency relative to competitors, a company will be able to make superior profits at current
industry prices. Alternatively, the company can become a price leader because other firms are
unable to undercut their prices or new firms are unable to enter the market.
Cost method of accounting for investments (CICA Part II ASPE) [CICA Part V Prechangeover accounting standards]
Basis of accounting for investments whereby the investment is initially recorded at cost and
revenue is recorded as time passes (interest) or as declared (dividends). Earnings from such
investments are recognized only to the extent received or receivable. 3051.03. See Recording.
Cost method of consolidation
See Consolidation – cost method.
Cost object
A cost object is anything for which cost data is desired. Examples of possible cost objects are
products, product lines, or organizational subunits like divisions.
Cost of capital
The cost of capital is an estimate of a firm’s financing cost. It is considered the minimum
acceptable rate of return (usually on an after-tax basis) required by the firm to be earned by a
capital expenditure. In making this determination, the level of risk is considered. The higher the
risk, the higher the required rate of return. The cost of capital is also referred to as the required
rate of return.
Cost of goods manufactured
Cost of goods manufactured is the manufacturing costs associated with the goods that were
finished during the period.
Cost of goods sold
Cost of goods sold includes costs such as materials, labour, overheads, freight, and so on, that
are necessary to get goods to the state when they can be sold. It is calculated as the beginning
inventory plus costs added during the period less the ending inventory.
Cost of not carrying enough inventory
The cost of not carrying enough inventory involves those costs that result from not having
enough inventory in stock to meet customers’ needs. Such costs include customer ill will, quantity
discounts foregone, erratic production, added transportation charges, and lost sales.
Cost principle
The cost principle is the accounting principle that requires financial statement information to be
based on actual costs incurred in business transactions. It requires assets and services to be
recorded initially at the cash or cash-equivalent amount given in exchange.
Cost reconciliation
A cost reconciliation is the part of a production report that shows what costs a department has to
account for during a period and how those costs are accounted for.
Cost recording method
The investor may use this method for recording no matter the level of influence or control of the
investee.
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Cost recovery method of accounting for revenue (sunk cost method)
The cost recovery method of accounting for revenue is used normally in high risk transactions; all
costs incurred must be recovered before any profit is recognized.
Cost reduction method
See Investment tax credit.
Cost structure
A cost structure is the relative proportion of fixed, variable, and mixed costs found within an
organization.
Cost/benefit effectiveness
Cost/benefit effectiveness is achieved when the benefits derived by external users of the financial
statements from certain information should outweigh the costs of preparation.
Cost-plus contract (CICA Part I IFRS)
Construction contract in which the contractor is reimbursed for allowable or otherwise defined
costs, plus a percentage of these costs or a fixed fee. IAS 11.3. See Construction contract, Fixed
price contract.
Cost-plus pricing
Cost-plus pricing is a pricing method in which a predetermined markup is applied to a cost base
to determine a target selling price.
Cost-volume-profit (CVP) analysis
A cost-volume-profit (CVP) analysis determines the relationship between revenues, costs, and
level of sales or revenue. A key point in the CVP analysis is the break-even point, where total
revenue equals total cost.
Costs of disposal (CICA Part I IFRS)
Incremental costs directly attributable to the disposal of an asset or cash-generating unit,
excluding finance costs and income tax expense. IAS 36.6
Costs to sell (CICA Part I IFRS)
Incremental costs directly attributable to the disposal of an asset, excluding finance costs and
income taxes. IAS 41.5, IFRS 5.A.
Coupon bond
A coupon bond is a bond that has interest coupons attached to its certificate. The bondholders
detach the coupons when they mature and present them to a financial institution for collection.
Coupon rate
The coupon rate is the fixed interest rate provided for on long-term debt expressed as a
percentage of face value.
Covenants
Covenants are constraints placed on a borrower as a condition of receiving a loan. Examples of
covenants include threshold limits on debt-to-equity ratios, working capital, or liquidity measures.
Covered option
An option position that is offset by an equal and opposite position in the underlying security.
Credibility of information
Credibility of information, in an auditing context, is illustrated by the fact that an audit by a Big
Four firm is more credible than one by a non–Big Four firm. The essence of credibility is that the
receiver of the information knows that the supplier of the information has an incentive to disclose
truthfully.
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Credit
A credit is an entry that decreases asset and expense accounts, or increases liability, owner’s
equity, and revenue accounts. In a T-account, a credit is recorded on the right side of the
account.
Credit facility
A credit facility is a line of credit provided to a business.
Credit memo
A credit memo is a memo issued by a financial institution that reports an increase in the
company’s cash account. A credit memo is a notification that the sender has entered a credit in
the recipient’s account as maintained by the sender.
Credit period
The credit period is the time period that can pass before a customer’s payment is due.
Credit risk [CICA Part V Pre-changeover accounting standards]
Risk that one party to a financial instrument will cause a financial loss for the other party by
failing to discharge an obligation. [3862.05A(a)], IFRS 7.A
Credit sales method
The credit sales method is a method of estimating uncollectible accounts receivable by
establishing the percentage of sales that are historically uncollectible.
Credit terms
Credit terms are the description of the amounts and timing of payments that a buyer agrees to
make in the future in return for being granted credit.
Credited service period (CICA Part II ASPE)
Employee service period for which benefits are earned pursuant to the terms of a benefit plan.
The beginning of a credited service period may be the date of hire or a later date. For example, a
plan may provide benefits only for service rendered after a specified age or period of
employment. 3461G
Creditors
Creditors are individuals or organizations entitled to receive payments from a company.
Criteria for standard setting
The criteria for standard setting are:

decision usefulness;

reduction of information asymmetry;

minimized economic consequences;

the political aspects have resulted in a strong consensus.
Critical event
The critical event is one point in a series of economic activities that is chosen for revenue
recognition.
Cross-reference computer program
A cross-reference computer program is a computer program that provides printed listings of
every occurrence of each name used in an application program or a list of every file used in an
application system.
Crown corporation
A corporation owned by a government.
CU (CICA Part I IFRS)
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See Currency unit.
Culpable conduct
Culpable conduct means conduct whether an act or a failure to act that is tantamount to
intentional conduct, shows an indifference as to whether the ITA is complied with, or shows a
willful, reckless, or wanton disregard of the law.
Culpable ignorance
A reasonable observer in a given set of circumstances would have had the requisite knowledge.
Cumulative eligible capital (CEC)
The cumulative eligible capital (CEC) account consists of 75% of each eligible capital expenditure
less 75% of the net proceeds of disposition of eligible capital property. Where a balance remains
in the CEC and the business is continuing, the balance is amortized at 7% and when the business
is no longer operating, any balance in the CEC is deductible against business income. Where the
credit of 75% of the POD causes the CEC to have a negative balance, this amount must be
included as business income. In reality, CEC is seen as the tax pool of eligible capital
expenditures.
Cumulative eligible capital amount (CECA)
The cumulative eligible capital amount (CECA) is the cumulative eligible capital balance at the
end of the year before amortization  7%. The amortization of 7% on a declining balance basis is
the CECA and is deductible against business income.
Cumulative foreign currency translation account
The cumulative foreign currency translation account is the accumulated balance of unrealized
gains and losses arising from the conversion of certain financial statements of foreign operations
originally recorded in a foreign currency.
Cumulative gains limit
With respect to the capital gains deduction (CGD), the cumulative gains limit is the amount by
which:

the sum of all taxable capital gains eligible for the CGD after 1984
exceeds the total of:

net capital losses utilized after 1984;

allowable business investment losses claimed after 1984;

all CGDs claimed after 1984; and

the cumulative net investment losses (CNIL) accumulated after 1987.
Basically, the cumulative gains limit is a running total of the annual gains limit and it represents
the total absolute net capital gains for which an offsetting CGD, subject to CNIL consideration,
has not been claimed.
Cumulative net investment loss (CNIL)
Cumulative net investment loss (CNIL), calculated at the end of each taxation year, is the amount
by which the aggregate of the investment expenses exceeds the aggregate of the investment
income for taxation years ending after 1987.
Cumulative preferred shares
Cumulative preferred shares are preferred shares on which undeclared dividends accumulate
until they are paid. Ordinary shareholders cannot receive a dividend until all cumulative dividends
have been paid.
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Currency forward contract
A contract that specifies the exchange rate and quantity of a foreign currency to be delivered on
in the future. Currency forward contracts are not standardized and are not traded on organized
exchanges. See Forward contract.
Currency risk [CICA Part V Pre-changeover accounting standards]
The risk that the fair value or future cash flows of a financial instrument will fluctuate because of
changes in foreign exchange rates. [3862.05A(b)], IFRS 7.A
Currency swap
An arrangement in which two parties agree to exchange currency payments at certain points in
the future at agreed prices. Currency swaps are similar to interest rate swaps, but with one key
difference. An interest rate swap is a contract to exchange cash flow streams associated with
some fixed income obligations: for example, swapping the cash flows of a fixed rate loan for
those of a floating rate loan. A currency swap is the same thing. But while the cash flow streams
are in the same currency in an interest rate swap, with a currency swap, they are in different
currencies. See Interest rate swap.
Currency unit (CU)
A unit used in GAAP to indicate any currency. IAS 36.78
Current asset
Current assets are cash and other assets that are reasonably expected to be realized in cash or
to be sold or consumed during the normal operating cycle of the business or within one year of
the statement of financial position date, whichever is longer.
Current asset (CICA Part I IFRS)
An entity shall classify an asset as current when:

(a) it expects to realize the asset, or intends to sell or consume it, in its normal operating
cycle;

(b) it holds the asset primarily for the purpose of trading;

(c) it expects to realize the asset within 12 months after the reporting period; or

(d) the asset is cash or a cash equivalent (as defined in IAS 7), unless the asset is restricted
from being exchanged or used to settle a liability for at least 12 months after the reporting
period. IFRS 5.A
Current cost accounting
Current cost accounting involves an accounting system based on current replacement costs
instead of historical costs.
Current liability
A current liability is a liability due or payable within the next operating cycle or fiscal year,
whichever is longer.
Current liability (CICA Part I IFRS)
An entity shall classify a liability as current when:
(a) it expects to settle the liability in its normal operating cycle;
(b) it holds the liability primarily for the purpose of trading;
(c)
the liability is due to be settled within twelve months after the reporting period; or
(d) it does not have an unconditional right to defer settlement of the liability for at
least twelve months after the reporting period (see paragraph 73). Terms of a
liability that could, at the option of the counterparty, result in its settlement by the
issue of equity instruments do not affect its classification.
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Current rate method (FX) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Translation method that translates assets, liabilities, revenues, and expenses in a manner that
retains their bases of measurement in terms of the foreign currency (that is, it uses the foreign
currency as the unit of measure). In particular, assets and liabilities are translated at the
exchange rate in effect at the balance sheet date; and revenue and expense items (including
depreciation and amortization) are translated at the exchange rate in effect on the dates on
which such items are recognized in income during the period. 1651.03.
Although IAS 21 does not use this term, the application of the standard leads to the same result.
See Temporal method, Translation methods.
Current ratio
The current ratio is measured as current assets divided by current liabilities. It indicates a firm’s
ability to meet its short-term obligations.
Current service cost (CICA Part I IFRS)
Increase in the present value of a defined benefit obligation resulting from employee service in
the current period. IAS 19.7
Current service cost (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Current service costs are the actuarial present value of pension entitlement earned by the
employee in a given year; part of pension expense. (3461.084) [3461.071]
Current tax (CICA Part I IFRS)
Amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a
period. IAS 12.5
Current value accounting
General term that refers to departures from historical cost to increase the relevance of financial
information.
Curtailment (CICA Part I IFRS)
A curtailment occurs when an entity either:

(a) is demonstrably to make a significant reduction in the number of employees covered by
a plan; or

(b) amends the terms of a defined benefit plan so that a significant element of future
service by current employees will no longer qualify for benefits, or will qualify only for
reduced benefits. IAS 19.111.
An entity shall recognize gains or losses on the curtailment or settlement of a defined benefit
plan when the curtailment or settlement occurs. The gain or loss on a curtailment or settlement
shall comprise:

(a) any resulting change in the present value of the defined benefit obligation;

(b) any resulting change in the fair value of the plan assets;

(c) any related actuarial gains and losses and past service cost that, under paragraphs 92
and 96, had not previously been recognized. IAS 19.109
Curtailment (CICA Part II ASPE) [CICA Part V Pre-changeover accounting standards]
An event that, under a defined benefit plan, results in: (i) a significant reduction of the expected
years of future service of active employees; or (ii) the elimination, for a significant number of
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active employees, of the right to earn defined benefits for some or all of their future services.
3461G
Curvilinear costs
Curvilinear costs involve the relationship between cost and activity that is a curve rather than a
straight line.
Customer perspective
One of the four perspectives used by the balanced scorecard to identify target market segments
and measure the success in marketing to these segments. (Internal business process, financial,
and learning and growth are the other three perspectives)
Cutoff bank statement
A cutoff bank statement is the auditors’ information source for vouching the bank reconciliation
items. It is a complete bank statement including all paid cheques and deposit slips received
directly by the auditors.
Cutoff error
When transactions are recorded in the wrong period, either by postponing to the next period or
accelerating next period transactions into the current period.
Cycle
A cycle is a set of accounts and business activities that go together in an accounting system.
Cycle time
Cycle time, also known as throughput time, is the time required to make a completed unit of
production starting with raw materials.
Damages
Monetary compensation to a victim; a money award to compensate an injured party for the loss
caused by the other party’s breach.
Data elements
Data elements are individual pieces of information such as employee number, address, pay rate,
and balance in a computer system.
Data processor
A data processor is the component of an accounting system that interprets, manipulates, and
summarizes the recorded information so that it can be used in analyses and reports.
Data redundancy
Data redundancy indicates the same data are stored in several separate files.
Data storage
Data storage is the component of an accounting system that keeps the inputted data in a readily
accessible manner so that financial reports can be drawn from it efficiently.
Database administrator (DBA)
The database administrator (DBA) is the person responsible for determining who should have
access to data elements.
Date of dividend declaration
The date of dividend declaration is the date on which a corporation’s board of directors formally
announces a future dividend.
Date of dividend payment
The date of dividend payment is the date on which the dividend is paid to shareholders of record.
Date of dividend record
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The date of dividend record is the date on which the list of shareholders of record is prepared.
Individuals holding shares on this date receive the dividend declared. The date of record usually
follows the date of declaration by two to three weeks.
Date of transition to IFRS (CICA Part I IFRS)
Beginning of the earliest period for which an entity presents full comparative information under
IFRSs in its first IFRS financial statements. IFRS 1.A
Days’ sales uncollected
Days’ sales uncollected is the number of days of average credit sales volume accumulated in the
accounts receivable balance, calculated as the product of 365 times the ratio of accounts
receivable balance divided by credit (or net) sales.
Days’ sales uncollected 
Account s recei vabl e
 365
Net sal es
Or 365/accounts receivable turnover
Days’ stock on hand (days’ sales in inventory)
Days’ stock on hand is an estimate of how many days it will take to convert the inventory on
hand at the end of the period into accounts receivable or cash. This is calculated by dividing the
ending inventory by cost of goods sold and multiplying the result by 365.
Days’ stock on hand 
Ending inventory
365
Cost of goods sold
Or
365 ÷ merchandise turnover
Death benefit
A death benefit means the total of all amounts received by a taxpayer in a taxation year on or
after the death of an employee in recognition of the employee’s service in an office or
employment. Furthermore, only the amount in excess of $10,000 is included in the income of the
person receiving the payment.
Death benefits
Death benefits are a component of a pension plan contract that allows for special benefits to be
paid upon the death of a pension plan member.
Debenture
A debenture is a long-term corporate debt that is not secured by the pledge of specific assets. A
debenture is also known as an unsecured bond.
Debit
A debit is an entry that increases asset and expense accounts, or decreases liability, owners’
equity, and revenue accounts. In a T-account, debits are recorded on the left side.
Debit card
A debit card is a card issued by a bank or similar financial institution to allow consumers to pay
for purchases by a bank transfer authorized at the point of sale.
Debit memo
A debit memo is a notification that the sender has entered a debit in the recipient’s account as
maintained by the sender. When issued by a bank, a debit memo reports a decrease in the
recipient’s account.
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Debt covenant hypothesis
The debt covenant hypothesis states that all other things being equal, the closer a firm is to
violation of accounting-based debt covenants, the more likely the firm manager is to select
accounting procedures that shift reported earnings from future periods to the current period. The
debt covenant hypothesis is one of the positive accounting theories.
Debt service ratios
Debt service ratios are ratios that are designed to test a company’s ability to generate sufficient
cash flow from operations to satisfy debt obligations.
Debt servicing
Interest and principal repayment amounts on debt.
Debtors
Debtors are individuals or organizations who owe money to another individual or business.
Debt-to-equity ratio
The debt-to-equity ratio is a measure of a company’s leverage. It compares liabilities to equity.
Debt-to-equity =
Long-t er mdebt
Tangi bl enet wor t h ( s har eholer
d equi t y)
You will find various formulas for this ratio based on their relevance to each course.
Debt-to-total assets ratio
Debt-to-total assets is a solvency ratio that indicates the proportion of total assets that are
financed through debt.
Debt-to-total assets =
Total debt
Total assets
Debt-to-total capitalization ratio
Debt-to-total capitalization is a solvency ratio that indicates the proportion of long-term capital
that is debt.
Debt-to-total capitalization =
Total debt
Total capital
Decentralization
Decentralization is the delegation of decision-making authority throughout an organization by
allowing managers at various operating levels to make key decisions relating to their area of
responsibility.
Decision control
Decision control refers to those aspects of the decision process in which managers have the right
to either ratify or monitor a decision.
Decision criteria
Decision criteria are standards for decision making and evaluation in specific circumstances.
Decision frame
A decision frame is the process of describing or representing a decision problem.
Decision management
Decision management refers to those aspects of the decision process in which a manager either
initiates or implements a decision.
Decision rights
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Decision rights in an organization are determined by the employment contract. A decision right is
a right to either manage or control a decision process.
Decision tree
A decision tree is a graphical technique to aid in decision making under uncertainty that
structures potential outcomes and their probabilities. An example of a decision tree is as follows:
$250,000
0.40
0.50
0.10
($250,000  0.40 = $100,000)
($250,000  0.50 = $125,000)
($250,000  0.10 = $25,000)
$100,000
0.20
0.60
0.20
($100,000  0.20 = $20,000)
($100,000  0.60 = $60,000)
($100,000  0.20 = $20,000)
Decision A
Decision B
Decision usefulness approach
Accounting approach that recognizes that accountants need to provide useful information to
investors. The decision usefulness approach relies on historical cost-based financial statements
and provides supplementary material to enhance the usefulness of the product.
Declining balance amortization
Declining balance amortization is a method of accelerated amortization where amortization is
calculated as cost less accumulated amortization multiplied by a given rate until net book value
declines to residual value.
Deductible temporary differences (CICA Part I IFRS)
Temporary differences that will result in amounts that are deductible in determining taxable profit
(tax loss) of future periods when the carrying amount of the asset or liability is recovered or
settled. IAS 12.5
Deductible temporary differences (tax) (CICA Part II ASPE) [CICA Part V Prechangeover accounting standards]
Temporary differences that will result in deductible amounts in determining taxable income of
future periods when the carrying amount of the asset or liability is recovered or settled. 3465.02.
See Deferred tax assets, Deferred tax liabilities, Permanent differences, Temporary differences.
Deemed (tax)
Deemed means that the Income Tax Act (ITA) characterizes or treats a form of income or a
transaction in a specific manner, regardless of the legal reality.
Deemed cost (CICA Part I IFRS)
Amount used as a surrogate for cost or depreciated cost at a given date. Subsequent
depreciation or amortization assumes that the entity had initially recognized the asset or liability
at the given date and that its cost was equal to the deemed cost. IFRS 1.A
Deemed disposition (tax)
A deemed disposition occurs where Canada Revenue Agency (CRA) taxes a transaction as if it
had occurred, even when no actual transaction has taken place. Such dispositions include the
deemed disposition on death, when property is gifted to another individual, change in use of a
property, or on ceasing to be a resident of Canada.
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Deemed residence (tax)
Individuals are deemed to be residents of Canada for the entire year when they: sojourn in
Canada for 183 days or more in a year; are a member of the Canadian Forces or members of the
overseas Canadian Forces school staff; perform services outside Canada through an international
assistance program of the Canadian International Development Agency (CIDA), if they were
resident in Canada at any time during the three months prior to the day the services
commenced; or are an officer or servant of Canada or a province if, immediately prior to the
appointment, they were resident in Canada. This also applies to the spouses of the above
mentioned individuals and any children under 18 or over 18 who are dependent either by reason
of physical or mental infirmity.
Defalcation
Defalcation is another name for employee fraud and embezzlement.
Defamation
A false statement published to the detriment of another. See also Libel and Slander.
Defeasance (of bonds)
Defeasance refers to a provision in a bond indenture that permits the borrower to transfer cash
into an irrevocable trusteed fund. The trustee must invest the money in low-risk securities that
match the term and interest flow of the bonds. The proceeds of the investment securities are
then used to pay interest and retire the bonds at maturity; when the bond indenture specifically
provides that such an arrangement will absolve the borrower from further responsibility for the
debt, the bonds are defeased, or cancelled. Bonds are defeased when their funding requirements
are to be met in the future through assets segregated in a trust account.
Defensive-interval ratio
The defensive-interval ratio is a ratio designed to test the number of days a company could
operate if its cash flow were cut off. It is the relationship between an organization’s monetary
assets and its estimated daily operating expenditures.
Deferral and amortization approach (CICA Part II ASPE)
One of the two approaches to account for an entity's defined benefit plans — see paragraph
3461.025(b). 3461G. See Immediate recognition approach.
Deferral method of accounting (CICA Part III ASNFPO)
Method of accounting for contributions, under which restricted contributions related to expenses
of future periods are deferred and recognized as revenue in the period in which the related
expenses are incurred. Endowment contributions are reported as direct increases in net assets.
All other contributions are reported as revenue of the current period. Organizations that use fund
accounting in their financial statements without following the restricted fund method would
account for contributions under the deferral method. [4400.02(e)]. See Restricted fund method
of accounting, Fund accounting.
Deferral method of recording income taxes
The deferral method of recording income taxes is a method that records the future tax impact of
temporary differences by using the company’s average tax rate in the year that the temporary
differences first arises or originates. The future tax impact is recorded on the balance sheet as a
deferred credit/debit. This method is no longer permitted under GAAP. See Deferred income tax
accounting.
Deferral method of revenue recognition (NFPO)
A revenue recognition method used by not-for-profit organizations in which externally restricted
contributions that have not been fully used for their intended purpose are deferred in the
liabilities section of the statement of financial position at the year end. These amounts are
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recognized as revenue only when their intended expense is incurred. Unrestricted funds are
recognized as revenue when received.
If the organization receives a restricted contribution for which no restricted fund exists, and it
does not set up a separate fund, it is necessary to account for that contribution using the deferral
method.
Under the deferral method of recognizing contributions, the contribution is deferred on the
statement of financial position of the general fund until the related expense is incurred. At that
time, the deferred contribution is recognized through the statement of operations for the general
fund in an amount equal to the related expense. For amortizable capital assets, the deferred
revenue would be transferred into revenue in an amount equal to the amortization expense.
Contributions in non-amortizable capital assets are directly recognized as an increase in net
assets.
Deferrals
Deferrals are the result of cash flows that occur before expense and revenue recognition.
Deferred income tax (DIT) accounting
Deferred income tax (DIT) accounting is intended to report an increase or decrease in the income
tax expense of the current period as a result of temporary differences. If a temporary difference
generates taxes payable in future period(s), current income tax expense increases, and a liability
(DIT liability) is recognized. If a temporary difference saves taxes payable in future period(s),
current income tax expense decreases and an asset (DIT asset) is recognized.
Under IAS 12, the net amount of an entity’s deferred tax assets and deferred tax liabilities is
classified as a non-current asset or liability on the balanced sheet. This differs from the
requirements in the pre-changeover accounting standards that required that future future income
tax balances be classified according to their nature. (The future income tax method is no longer
acceptable under IFRS, but it was the acceptable method before the implementation of IFRS.)
Deferred income tax accounting also requires that a detailed explanation of the income tax
expense be provided in the statement of profit and loss. The objective is to show the composition
of the income tax expense for the period (income tax expense for the period = accounting net
income before tax – increase in DIT asset or decrease in DIT liability + decrease in DIT asset or
increase in DIT liability).
See Deferred tax assets, Deferred tax liabilities.
Deferred pension cost/liability
A deferred pension cost/liability is a balance sheet account related to pensions. Annually, it
changes by the difference between the accounting expense and the amount of cash contributed
to the pension plan. Overall, it equals the net status of the fund (liability less assets, adjusted for
unrecognized amounts).
Deferred profit sharing plan (DPSP)
A deferred profit sharing plan (DPSP) is one of three tax-assisted retirement savings plans that
allow an individual to accumulate amounts on a tax-deferred basis in order to build a retirement
fund. A deferred profit sharing plan is a deferred income plan to which only the employer may
contribute on behalf of an employee. Contributions are generally based on the profitability, or on
a profit formula of the corporation, rather than on a fixed rate per employee.
Deferred tax assets (CICA Part I IFRS)
Amounts of income taxes recoverable in future periods in respect of:

(a) deductible temporary differences;

(b) the carry forward of unused tax losses; and
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
(c) the carry forward of unused tax credits. IAS 12.5.
See Deductible temporary differences, Taxable temporary differences.
Deferred tax liabilities (CICA Part I IFRS)
Amounts of income taxes payable in future periods in respect of taxable temporary differences.
IAS 12.5. Under CICA Part V Pre-changeover accounting standards, it is called future income tax.
See Deductible temporary differences, Future income taxes, Taxable temporary differences.
Deficit (of retained earnings)
A deficit of retained earnings is the situation where accumulated losses and dividends exceed
accumulated gains. It is a debit balance in retained earnings.
Deficit financed
Spending that cannot be covered with revenues and must be financed through the acquisition of
debt.
Defined benefit plan (CICA Part I IFRS)
Post employment benefit plan other than defined contribution plan. IAS 19.7 Retirement benefit
plan under which amounts to be paid as retirement benefits are determined by reference to a
formula usually based on employees' earnings and/or years of service. IAS 26.8
See Defined contribution plan.
Defined benefit plan (CICA Part II ASPE)
Benefit plan that is not a defined contribution plan. 3461G
Defined benefit plan [CICA Part V Pre-changeover accounting standards]
Benefit plan that specifies either the benefits to be received by an employee, or the method of
determining those benefits, such as a benefit of $10,000 of life insurance or a pension benefit
equal to 1.5% of the average of the final five years' salary times the total years of service. Any
benefit plan that is not a defined contribution plan is a defined benefit plan. [3461.09]
Defined contribution plan (CICA Part I IFRS)
Post employment benefit plan under which an entity pays fixed contributions into a separate
entity (a fund) and will have no legal or constructive obligation to pay further contributions if the
fund does not hold sufficient assets to pay all employee benefits relating to employee service in
the current and prior periods. IAS 19.7 Retirement benefit plan under which amounts to be paid
as retirement benefits are determined by contributions to a fund together with investment
earnings thereon. IAS 26.8
Defined contribution plan (CICA Part II ASPE)
Benefit plan that specifies how an entity's contributions to the plan are determined rather than
the benefits to be received by an employee or the method of determining those benefits. 3461G
Defined contribution plan [CICA Part V Pre-changeover accounting standards]
Benefit plan that specifies how an entity's contributions to the plan are determined rather than
the benefits to be received by an employee or the method of determining those benefits. The
plan also allocates the entity's contributions to specific individuals. The future benefit for each
employee is the accumulated amount of the contributions made by the entity on that employee's
behalf together with the accumulated amount of any contributions made by the employee and
the investment earnings on the contributions. [3461.09]
Degree of operating leverage
The degree of operating leverage (DOL) is defined as the percentage change in earnings before
interest and taxes divided by a percentage change in sales. DOL measures the sensitivity of a
firm’s profits to changes in sales volumes. It can also be calculated as contribution
margin/operating income.
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Delivery cycle time
Delivery cycle time is the amount of time required from receipt of an order from a customer to
shipment of completed goods.
Demand loans
Demand loans are loans that are payable when the lender demands.
Democratic deficit
Absence of meaningful opportunities for participation in government decision making by
legislators and citizens.
Denominator activity
The denominator activity is the estimated activity figure used to compute the predetermined
overhead rate. Note that this figure remains unchanged throughout the year, even if the estimate
turns out to be inaccurate.
Dependency ratio
Measure showing the number of dependents (aged 0-14 and over the age of 65) to the total
population (aged 15-64). Also referred to as the "total dependency ratio."
Dependent variable
A dependent variable is a variable that reacts or responds to some causal factor (known as the
independent variable). For example, in the standard cost formula, total cost is the dependent
variable, as represented by the letter Y, in the equation Y = a + bX, where a is fixed costs, b is
the unit variable cost, and X is the volume of activity.
Depletion allowance
Depletion allowance is a deduction in computing taxable income that provides for the depletion of
non-renewable resources, such as oil.
Depreciable amount (CICA Part I IFRS) (CICA Part II ASPE) [CICA Part V
Pre-changeover accounting standards]
Cost of an asset, or other amount substituted for cost, less its residual value. 3064.08, IAS 16.6,
IAS 36.6, IAS 38.8
Depreciable property
Depreciable property is property acquired by the taxpayer with respect to which a deduction for
CCA is permitted. CCA applies to tangible assets that are expected to depreciate over time and to
intangible assets that have limited duration, such as patents. The most important exclusions from
depreciable property are property the cost of which is deductible in computing income, inventory,
land, property not acquired for the purpose of gaining or producing income, and property
situated outside Canada that is owned by non-residents.
Depreciation (CICA Part I IFRS)
Systematic allocation of the depreciable amount of an asset over its useful life. IAS 36.6, IAS
16.6. See Amortization, Componentization.
Derecognition (CICA Part I IFRS)
Removal of a previously recognized financial asset or financial liability from an entity's statement
of financial position. IAS 39.9. See Recognition.
Derecognition (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Removal of a previously recognized financial asset or financial liability from an entity's statement
of financial position. 3856.05, [3855.19(m)]. See Recognition.
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Deregulation
Elimination or reduction of the extent and depth of government control over an industry, sector,
or activity, so it can operate through the incentives and mechanisms of the private enterprise
system.
Derivative (CICA Part I IFRS) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
A derivative is a financial instrument, the value of which is derived from the value of an
underlying security. Examples of derivatives are futures, forwards, options, and swaps.
A derivative is recorded at fair-market value.
Financial instrument or other contract with all three of the following characteristics:

(a) its value changes in response to the change in a specified interest rate, financial
instrument price, commodity price, foreign exchange rate, index of prices or rates, credit
rating or credit index, or other variable, provided in the case of a non-financial variable
that the variable is not specific to a party to the contract (sometimes called the
underlying)

(b) it requires no initial net investment or an initial net investment that is smaller than
would be required for other types of contracts that would be expected to have a similar
response to changes in market factors; and

(c) it is settled at a future date. IAS 39.9, 3856.05, [3855.19(e)].
An embedded derivative is a component of a hybrid instrument that also includes a nonderivative host contract, with the result that some of the cash flows of the combined instrument
vary in the same way they would for a stand-alone derivative. An embedded derivative causes
some or all of the cash flows that otherwise would be required by the contract to be modified
based on a specified interest rate, security price, commodity price, foreign exchange rate, index
of prices or rates, a credit rating or credit index, or other variable. If a derivative attached to a
financial instrument can be sold or transferred independently of the compound instrument, it is
not an embedded derivative but a separate financial instrument.
Descriptive ethics
The branch of ethics in which there is an examination of what individuals or groups believe to be
right or wrong, good or bad, and just or unjust. Descriptive ethics is closely connected to
sociology and anthropology.
Designated assets
Assets reserved for a specific purpose.
Designation of a hedging relationship [CICA Part V Pre-changeover accounting
standards]
Because hedge accounting is optional, management must formally document when a hedging
relationship occurs. 3865.26 The documentation includes identification of the specific items
included in the hedging relationship, the period of the hedging relationship and management
desire to employ hedge accounting. Management may at any time discontinue hedge accounting
by terminating the hedging relationship and re-designate a new hedging relationship between the
derivative and another financial instrument. 3865.28. See Hedging relationship.
Detail test of control procedure
Detail tests of control procedure consists of (1) identifying the data population from which a
sample of items will be selected for audit, and (2) expressing the action that will be taken to
produce relevant evidence. In general, the actions in detail tests of control audit procedures
consist of vouching, tracing, observing, scanning, and recalculating.
Detection rate
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The detection rate is the ratio of the number of exceptions reported to auditors to the number of
account errors.
Detection risk
The risk that the auditor’s procedures will fail to find a material misstatement that exists in the
accounts.
Development (CICA Part I IFRS) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Application of research findings or other knowledge to a plan or design for the production of new
or substantially improved materials, devices, products, processes, systems, or services before the
start of commercial production or use. 3064.08, IAS 38.8
Deviation (as in control failure)
Deviation, as in control failure, refers to a departure from a prescribed internal control procedure
in a particular case.
Differential costs
Differential costs are costs that differ between alternatives. In the short term, these can be
limited to a portion of the variable costs. In the long term, they could approach total costs.
Differential reporting [CICA Part V Pre-changeover accounting standards]
Reporting principles under which qualifying enterprises may apply specified reporting options in
financial statements prepared in accordance with generally accepted accounting principles.
[1300.01]
Differential revenue
Differential revenue is the difference in revenue between any two alternatives.
Differentiation
Differentiation is classified as one of the generic strategies. For products or services that are
perceived as unique, customers sometimes will pay premium prices, giving the company higher
profit margins.
Dilution
Dilution is the reduction in proportional ownership that results when a corporation issues
additional ordinary shares to the public.
Dilution (CICA Part I IFRS)
Reduction in earnings per share or an increase in loss per share resulting from the assumption
that convertible instruments are converted, that options or warrants are exercised, or that
ordinary shares are issued upon the satisfaction of specified conditions. IAS 33.5. See
Antidilution.
Dilutive securities
Dilutive securities are convertible securities the assumed conversion of which would result in a
reduction in proportional ownership and which has the effect of decreasing earnings per share.
Direct approach method of consolidation
Method of consolidation consisting of aggregating on an item by item basis the elements of
financial statements of the parent and the subsidiary while at the same time making the
adjustments related to the purchase discrepancy, intercompany balances and/or transactions,
and intercompany unrealized profits and gains (losses). See Consolidation — Equity method.
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Direct cost
A direct cost is a cost that can be easily traced to a particular cost object under consideration.
For example, in product costing, a direct cost would be the direct materials used and easily
traceable to the manufacture of the product.
Direct costing
Direct costing is another term for variable costing. Direct costing is a costing method that
includes only variable manufactured costs, direct materials, direct labour, and variable
manufacturing overhead in the cost of a unit of product.
Direct expense
A direct expense is one which is directly associated with revenues; for example, cost of goods
sold is a direct expense.
Direct financing lease (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
A type of capital lease that, from the point of view of the lessor, transfers substantially all the
benefits and risks incident to ownership of property to the lessee and, at the inception of the
lease, the fair value of leased property is the same as its carrying amount to the lessor (usually
not a manufacturer or dealer). A lease is not precluded from being classified as a direct financing
lease after it is renewed or extended even though the carrying amount of the property at the end
of the original lease term is different from its fair value at that date. 3065.03.
Under CICA Part I IFRS, called a finance lease.
See Capital lease, Finance lease, Sales-type lease.
Direct insurance contract (CICA Part I IFRS)
Insurance contract that is not a reinsurance contract. IFRS 4.A
Direct labour
Direct labour, also known as touch labour, is those factory labour costs that can be easily traced
to particular products.
Direct materials
Direct materials are those materials that become an integral part of a finished product and can
be conveniently traced to it.
Direct method of allocating service department costs
The direct method of allocating service department costs requires the allocation of all of a service
department’s costs directly to operating departments without recognizing services provided to
other service departments.
Direct personal knowledge
Direct personal knowledge is audit evidence obtained by eyewitness and physical inspection.
Direct preparation method
The direct preparation method is a method of preparing the cash flow statement based on
analyzing the increases and decreases in the cash account resulting from operating transactions
during the relevant period (versus the indirect approach based on statement of financial position
accounts).
Direct presentation of operating activities (on the cash flow statement)
The direct presentation of operating activities on the cash flow statement is where operations
directly states the cash received from customers, cash paid to suppliers, for interest, and so on,
to arrive at cash flow from operations.
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Direct quotation (FX)
Number of Canadian dollars needed to buy one unit of a foreign currency. A direct quotation
provides the number of units of the Canadian dollar required to purchase one unit of foreign
currency. For example, US$1 = C$1.4100 indicates that it costs C$1.4100 to buy US$1. Thus,
purchasing an item for US$1,000,000 would be the equivalent of paying US$1,000,000 ×
C$1.4100, or C$1,410,000. This is called the Canadian dollar equivalent method of stating
exchange rates.
See Exchange rate, Foreign currency equivalent method, Indirect quotation.
Direct write-off method (bad debts)
The direct write-off method of accounting for bad debts is a method whereby bad debt expense
is recognized as accounts are written off with no allowance recognized. This method is not
normally considered GAAP.
Direct-effect illegal acts
Direct-effect illegal acts are violations of laws or government regulations by the company or its
management or employees that produce direct and material effects on dollar amounts in the
financial statements.
Directing and motivating
Directing and motivating is the process of mobilizing human and other resources to carry out
plans and run routine operations.
Disaggregation
See Aggregation.
Disappearing asset phenomenon
The disappearing asset phenomenon occurs in highly inflationary economies in which a foreign
operation operates. Because of the high inflation, the value of the currency in which the asset is
recorded falls. Therefore, the translated value of the asset becomes less and less over time.
Disbursements
Disbursements are cash outflows.
Disclaimer of opinion
A disclaimer of opinion is a type of modification to the auditor’s opinion; it is issued when the
auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion,
and the auditor concludes that the possible effects on the financial statements of undetected
misstatements, if any, could be both material and pervasive.
Disclosed basis of accounting (DBA)
Disclosed basis of accounting (DBA) is described in the accounting policies section of the
disclosure notes to the financial statements. This usually implies non-GAAP policies.
Disclosure notes
Disclosure notes are explanatory notes to the financial statements that include information on
accounting policy and description of financial statement elements, recognized and unrecognized.
Disclosure principle
The disclosure principle states that a manager will release all information, good or bad, because
if investors observe that the manager has information that he/she is not releasing, the investors
will assume the information is the worst case and bid down the value of the firm. Therefore, it is
in the manager’s best interest to release all information.
Disclosure threshold
Point where disclosure costs equal the impact on the cost of capital from the disclosure.
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Discontinued operation
Discontinued operations occur when management decides to sell a segment of a business. The
operating results to the discontinuance decision (the measurement date) and the gain or loss on
disposal is shown in a separate section of the statement of profit and loss (at the bottom): net
after tax.
Discontinued operation (CICA Part I IFRS)
Component of an entity that either has been disposed of or is classified as held for sale and:

(a) represents a separate major line of business or geographical area of operations;

(b) is part of a single coordinated plan to dispose of a separate major line of business or
geographical area of operations; or

(c) is a subsidiary acquired exclusively with a view to resale. IFRS 5.A
Discount
A discount is the difference between the purchase price (or sales proceeds) that occurs when the
values are below normal or face value. For bonds, a discount occurs when the purchase price is
less than the maturity value. A sale may be discounted if payment is received within a given time
frame. An example is a sale with terms of 2/10, net 30 where if the amount is paid within 10
days, there is a 2% discount from the sale price.
Discount bond
A discount bond is a bond sold at a discount from its face value. Part of the yield to the investor
occurs from capital gains that accrue over the term of the bond because of the discount.
Discount period
The discount period is the time period in which a cash discount is available. See Discount.
Discounting
A method of valuing long-term monetary assets and liabilities that considers the timing of future
related cash inflows or outflows and adjusts them for the time value of money.
Discounting notes receivable
Discounting notes receivable is the sale of notes receivable, usually to a financial institution,
where the purchasing institution discounts the face value of the note by the interest fee being
charged.
Discounts lost
Discounts lost are an expense resulting from failing to take advantage of cash discounts on
purchases. See Discount.
Discretionary accruals
Discretionary accruals are accruals that can be manipulated by management.
Discretionary fixed costs
Discretionary fixed costs are those fixed costs that arise from annual decisions by management
to spend in certain fixed cost areas, such as advertising or research.
Discretionary participation feature (CICA Part I IFRS)
Contractual right to receive, as a supplement to guaranteed benefits, additional benefits:

(a) that are likely to be a significant portion of the total contractual benefits;

(b) whose amount or timing is contractually at the discretion of the issuer; and

(c) that are contractually based on:
o
(i) the performance of a specified pool of contracts or a specified type of contract;
Page 74 of 266
o
(ii) realized and/or unrealized investment returns on a specified pool of assets held by
the issuer; or
o
(iii) the profit or loss of the company, fund or other entity that issues the contract.
IFRS 4.A
Dishonouring a note
Dishonouring a note is the failure by a promissory note’s maker to pay the amount due at
maturity.
Disposal date
The disposal date is the closing date of the sale of an asset or the date when operations cease.
Disposal group (CICA Part I IFRS)
Group of assets to be disposed of, by sale or otherwise, together as a group in a single
transaction, and liabilities directly associated with those assets that will be transferred in the
transaction. The group includes goodwill acquired in a business combination if the group is a
cash-generating unit to which goodwill has been allocated in accordance with the requirements of
paragraphs 80-87 of IAS 36 Impairment of Assets (as revised in 2004) or if it is an operation
within such a cash-generating unit. IFRS 5.A
Disposal group (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Group of assets to be disposed of, by sale or otherwise, together as a group in a single
transaction, and liabilities directly associated with those assets that will be transferred in the
transaction. (Examples of such liabilities include, but are not limited to, legal obligations that
transfer with a long-lived asset, such as certain environmental obligations, and obligations that,
for business reasons, a potential buyer would prefer to settle when assumed as part of a group,
such as warranty obligations that relate to an acquired customer base.) 3475.03. See Long-lived
asset.
Disposition
A disposition of any property includes any transaction or event entitling a taxpayer to proceeds of
disposition of the property, the redemption or cancellation of a share, bond, debenture, note,
certificate, mortgage, agreement of sale, or similar property, the cancellation or settlement of a
debt or any other right to receive an amount, the conversion of a share due to an amalgamation
or merger, the expiration of an option to acquire or dispose of property, a trust acting as agent
for all the beneficiaries whereby the trust ceases to act as agent with respect to any dealing with
any of the trust’s property, any transfer of property to a trust or from a trust to a beneficiary, and
where the property is a taxpayer’s capital interest in a trust, any payment made after 1999 from
the trust that can reasonably be considered to have been made because of the taxpayer’s capital
interest in the trust.
Note that subsection 248(1) specifies quite a few exclusions for greater clarity.
Generally, a disposition for tax purposes results from actual voluntary or involuntary release or
transfer of ownership of property. Voluntary dispositions include a sale, settlement of debt, or
gifting or transfer of property to another person or trust. Involuntary dispositions include
destruction, damage, theft, expropriation, or foreclosure.
Distributive justice
Distributes benefits and burdens fairly. Distributive justice has three parts: formal justice,
substantive justice, and procedural justice.
Dividend
A dividend is the periodic distribution of accumulated earnings to the shareholders of a
corporation, as decided by the board of directors.
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Dividend (tax)
When a corporation distributes after-tax profits to a shareholder, either in cash or in kind, the
shareholder is said to have received a dividend. A dividend is interpreted to be any distribution of
income that is divided pro rata among shareholders. Exceptions to this include dividends on a
bank account at a credit union (considered interest), dividends on a participating life insurance
policy (considered a refund of premiums due to an overpayment), patronage dividends
distributed by a cooperative (either non-taxable, taxable as other income, or reduces capital cost
of an asset), and capital gains dividends distributed by a mutual fund (considered to be capital
gain income).
Dividend in arrears
A dividend in arrears is an unpaid dividend on cumulative preferred shares. It must be paid
before any regular dividends on the preferred shares and before any dividends on ordinary
shares.
Dividend irrelevancy
Under perfect market conditions, the concept of dividend irrelevancy exists. The theory is that
the rate earned by the firm on its assets (that is, the interest rate in the economy) is the same as
the rate earned by the investors. Therefore, it is irrelevant who owns the asset because the same
amount is earned. If the firm distributes dividends, then the investor earns the economy-wide
rate of return. If the firm retains the dividends, then the firm earns the economy-wide rate of
return for the investor.
Dividend refund (tax)
The dividend refund for a private corporation at the end of its taxation year is equal to the lesser
of:

1/3 of taxable dividends paid by the corporation in the year, or

the RDTOH at the end of the year
Dividend tax credit (tax)
A dividend tax credit is a credit against taxes payable on dividends received. It has the effect of
reducing the effective tax paid on dividend income and provides some relief from double
taxation.
It is a non-refundable tax credit that may be deducted from Part I tax in the same taxation year
in which a taxable dividend is received. The corresponding deduction is 11/18 of the gross up
(approximately 19% of the grossed-up amount) for taxable dividends paid after 2005.
Dividend yield
The dividend yield is the ratio of annual dividends per share divided by the current market price
per share. It is usually expressed as a percentage.
Division of duties
Division of duties is the principle of internal control that separates critical functions in order to
safeguard assets.
DJII
See Dow Jones Industrial Index.
Dollar-value estimation objective in statistical sampling
The dollar-value estimation objective in statistical sampling assists a client obtain an estimate of
an amount. An example is using an analysis of previous warranty claims to estimate the current
warranty expense.
Double-entry system
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The double-entry system is a method of recording transactions such that the transactions change
at least two accounts. The transaction will involve both a debit entry and a credit entry.
Dow Jones Industrial Index (DJII)
The Dow Jones Industrial Average (DJIA), also referred to as the Industrial Average, the Dow
Jones, the Dow 30, or simply the Dow, is a stock market index, and one of several indices
created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow.
Downloading
Transferring responsibility for a public task (usually service delivery) to a lower level of
government or a private or not-for-profit organization (NFPO).
Downsizing
Reducing the size of an organization, in particular, its costs.
Downstream
With regard to intercompany transactions, downstream transactions occur when the parent sells
goods down to the subsidiary.
Downstream costs
Downstream costs are those costs associated with processes and costs of customers.
Downstream profits
Downstream profits are inter-company profits on transactions between a parent company and
investee where the parent records the profit.
Downstream sale
Intercompany sale from a parent company to a subsidiary. Because the transaction is initiated by
the parent and recorded in the parent’s books, any non-controlling interest does not share in any
profits or losses on downstream sales. All profits or losses on intercompany downstream sales are
therefore allocated to the parent company.
Parent —> Subsidiary (no impact on non-controlling interest, even if the subsidiary is not
100% owned)
Dual dating
Dual dating is the dating of the audit report as of the date that financial statements are approved
by the auditee’s responsible parties and attaching an additional later date to disclosure of a
significant Type II subsequent event.
Dual-currency issues
Pay coupon interest in one currency, but pay the principal in another currency.
Dual-purpose procedure
A dual-purpose procedure is an audit procedure that simultaneously serves the substantive
purpose (to obtain direct evidence about the dollar amounts in account balances) and the test of
controls purpose (to obtain evidence about the company’s performance of its own control
procedures).
Due process
Due process is the method used by standard setting bodies to trade off the conflicting interests
of constituencies affected by accounting standards. This is done through consultation with major
constituencies. Devices to achieve due process include representation of major constituencies on
the standard setting boards, super-majority voting, exposure drafts, and public meetings.
Dupont method
A further division of the Return-on-investment formula by determining two additional ratios —
the profit margin ratio and asset (investment) turnover.
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Return on investment
=
Income
Revenues
×
Revenues
Investment
Duty of care
An obligation to take steps to avoid foreseeable harm; an essential element for establishing
liability in the tort of negligence.
Earned income
Earned income for a taxpayer includes income from office or employment, royalties from a work
or invention, rental income or losses from real property, self-employment income or losses,
support payments received or paid to a former spouse or reimbursements of such payments
included in income, amounts received under a supplementary unemployment benefit plan, net
research grants, CPP/QPP disability pensions and disability benefits under a private employee
plan if reported as taxable income, and for non-residents, they will be able to include
employment or business income in earned income only to the extent that the employment or
business income is in Canada and is not exempt by treaty. Furthermore, the portion of business
income from a disposition of ECP in excess of recaptured CEC must be excluded from earned
income.
Earned surplus
An earned surplus is a synonym for retained earnings. It is rarely used any more.
Earnings before interest and taxes (EBIT)
Earnings before interest and taxes (EBIT) reflects income from operations and is independent of
capital structure. Therefore, it is used as a basis for analyzing the effects of alternative financing
options.
Earnings management
Earnings management is the choice by a manager of accounting policies so as to achieve some
specific objective. There are three main types of earnings management:

taking a bath

income smoothing

income maximization
Earnings per share
Earnings per share (EPS) is the after-tax earnings of a corporation available to ordinary
shareholders divided by the number of outstanding ordinary shares. This is calculated by taking
the net income, subtracting the preferred share entitlement, and dividing the balance by the
weighted-average number of ordinary shares outstanding during the accounting period.
EPS 
Ne t i n c o m ep r e f e r sr he ad r een t i t l et m e n
W e i g h -taev de r a gneu m b eo rf o r d i n asrhya r eo su t s t a ngd i n
Earnings persistence
See Persistence of earnings.
Earnings quality
The earnings quality is the relationship between net income and cash flow. High quality earnings
are positively correlated with cash flows, while low quality earnings are not.
Earnings response coefficient (ERC)
Earnings response coefficients (ERC) measure the extent of a security’s abnormal market return
in response to the unexpected component of reported earnings of the firm issuing that security.
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Earnings volatility
Income that changes radically from fiscal period to fiscal period.
Earnings yield
The earnings yield is a firm’s current annual earnings per share divided by the share’s market
price. This is the reciprocal of the price-earnings ratio. It is often viewed as a rough indicator of
investment return.
Ear ni ngs
yi el 
d
Ear ni ngs
pers har e
M ar ket
pr i ce
Echo check
An echo check is a magnetic read after each magnetic write, echoing back to the sending location
and comparing results.
Economic and fiscal updates
These planning documents are prepared as part of the Canadian federal government’s annual
budget cycle in anticipation of the release of the federal budget. The documents set out
information about the government’s view of the country’s current economic situation and
prospects.
Economic condition
A composite measure comprised of a government’s financial health, its ability and willingness to
meet its financial obligations, and its commitments to provide services.
Economic consequences
The concept of economic consequences is a concept that asserts that, despite the implications of
efficient securities market theory, accounting policy choice can affect firm value.
Economic efficiency
An allocation of resources in which no one person can be made better off without making
someone else worse off.
Economic exposure
Exposure to fluctuating exchange rates that affect a company's earnings, cash flow, and foreign
investments. The extent to which a company is affected by economic exposure depends on the
specific characteristics of the company and its industry.
See Accounting (translation) exposure, Foreign currency risk, Transaction exposure.
Economic growth objective
The purpose of the economic growth objective is to promote particular activities, entities, or
industries, or to compensate for imperfections in the market mechanism.
Economic income
Economic income is an increase (or decrease in the case of a loss) in wealth of a corporation. It
is a measure of income based on events rather than transactions.
Economic justice
See Distributive justice.
Economic life (CICA Part I IFRS)
Either:

(a) the period over which an asset is expected to be economically usable by one or more
users; or

(b) the number of production or similar units expected to be obtained from the asset by
one or more users. IAS 17.4. See Useful life.
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Economic life of leased property (lease) (CICA Part II ASPE) [CICA Part V Prechangeover accounting standards]
Estimated remaining period during which the property is expected to be economically usable by
one or more users, with normal repairs and maintenance, for the purpose for which it was
intended at the inception of the lease and without limitation by the lease term. 3065.03
Economic order quantity
The economic order quantity is the optimal quantity to be ordered when replenishing inventory.
It balances the costs of ordering against the costs of holding inventory.
2OD
C
Economic order quantity =
where
C = the carrying cost per unit
O = the ordering cost per order
D = the annual demand in units
Economic production lot size
The economic production lot size is the number of units produced in a production lot that results
in a minimization of set-up costs and the costs of carrying inventory. This is similar to the
concept of the economic order quantity.
Economic production lot size =
2QP
C
where
Q = the units produced each year
P = the cost to set up production
C = the carrying cost of one unit in stock for one year
Economic theory of games
See Game theory.
Economic value added (EVA)
Economic value added (EVA) is a type of residual income calculation. EVA can be both a planning
(identifying high-return projects) and control (incentive compensation plans based on EVA)
technique. The EVA formula is:
EVA = NOPAT  (WACC  Total capital)
where
WACC = weighted-average cost of capital
NOPAT = net operating profit after taxes
Economy
In the micro-economic sense, the securing of resources at the most favourable prices.
Economy-wide factors
Also referred to as market-wide factors. See States of nature.
E-democracy
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Use of information and communications technology to enhance the involvement of citizens in
politics and government.
ED
Exposure Draft
Effective interest rate
The effective interest rate is the real rate of interest paid or earned on a loan. It is the discount
rate that equates the payment stream to the net proceeds.
Effective interest method (EIM) (CICA Part I IFRS)
Method of calculating the amortized cost of a financial asset or a financial liability (or group of
financial assets or financial liabilities) and of allocating the interest income or interest expense
over the relevant period. The effective interest rate is the rate that exactly discounts estimated
future cash payments or receipts through the expected life of the financial instrument or, when
appropriate, a shorter period to the net carrying amount of the financial asset or financial liability.
When calculating the effective interest rate, an entity shall estimate cash flows considering all
contractual terms of the financial instrument (for example, prepayment, call, and similar options)
but shall not consider future credit losses. The calculation includes all fees and points paid or
received between parties to the contract that are an integral part of the effective interest rate
(see IAS 18 Revenue), transaction costs, and all other premiums or discounts. There is a
presumption that the cash flows and the expected life of a group of similar financial instruments
can be estimated reliably. However, in those rare cases when it is not possible to estimate
reliably the cash flows or the expected life of a financial instrument (or group of financial
instruments), the entity shall use the contractual cash flows over the full contractual term of the
financial instrument (or group of financial instruments). IAS 39.9
Effective interest method [CICA Part V Pre-changeover accounting standards]
Method of calculating the amortized cost of a financial asset or financial liability (or group of
financial assets or financial liabilities) and of allocating the interest income or interest expense
over the relevant period. The effective-interest rate is the rate that exactly discounts estimated
future cash payments or receipts through the expected life of the financial instrument, or a
shorter period when appropriate, to the net carrying amount of the financial asset or financial
liability. [3855.19(l)]
Effective tax rate
The effective tax rate is the real tax rate payable on a specific amount of taxable income; the real
disbursement expressed as a percentage.
Efficiency
In the micro-economic sense, the production of a particular level and quality of output at
minimum cost.
Efficient contracting form of positive accounting theory
Theory that argues that if a firm arranges its contracts to allow the manager some flexibility in
choosing different accounting policies in order to work around the impact of unanticipated
events, then all parties benefit.
Efficient portfolio
An efficient portfolio is a portfolio providing the highest possible expected returns for a particular
level of risk.
Efficient securities market anomalies
Efficient securities market anomalies are instances in which investor behaviour appears to
contradict the theory of efficient securities markets.
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Efficient securities market in the semi-strong form
An efficient securities market in the semi-strong form is one where the prices of securities traded
in that market at all times properly reflect all information that is publicly known about those
securities.
Efficient securities market in the strong form
Market where the prices of securities traded at all times properly reflect all private as well as
public information about these securities.
Efficient securities market in the weak form
Market where all historical information is reflected in the prices of the securities traded.
Eighty/Twenty rule (80/20 rule)
The 80/20 rule is a basic rule about population skewness in which 80% of the value tends to be
in 20% of the units.
Elements
Elements are the building blocks of financial statements. These include assets, liabilities,
revenues, expenses, and so on.
Eligible capital amount
See Cumulative eligible capital amount.
Eligible capital expenditure (ECE)
An eligible capital expenditure (ECE) is an expenditure on account of capital for the purpose of
gaining and producing income from a business, other than the cost of tangible property, the cost
of intangible property that is depreciable property, and property the cost of which is deductible
from income. Basically, an ECE is what is spent to acquire an eligible capital property.
Eligible capital property (ECP) (tax)
The definition of eligible capital property (ECP) in the Income Tax Act (ITA) isn’t very helpful;
basically, the ECP of a taxpayer means any property, a part of the consideration for the
disposition of which would, if the taxpayer disposed of the property, be an eligible capital amount
in respect of a business. Eligible capital property consists of intangible property of unlimited
duration, such as goodwill, a customer list, trademarks, or government rights, franchises of
unlimited duration, unlimited patents, incorporation and reorganization costs, and milk quotas.
Eligible dividend
An eligible dividend is any taxable dividend paid after 2005 to a resident of Canada by a
Canadian corporation that is designated by that corporation to be an eligible dividend. A
corporation's capacity to pay eligible dividends depends mostly on its status.
Eligible relocation (tax)
Eligible relocation means a relocation of a taxpayer where the relocation occurs to carry on a
business or to be employed elsewhere in Canada, the new work location, provided the distance
between the old residence and the new residence is at least 40 kilometres closer to the new work
location. Furthermore, a student in full-time attendance enrolled in a program at a university,
college, or other post-secondary educational institution, is considered to have an eligible
relocation provided the distance between the old residence is at least 40 kilometres closer to the
educational institution. With respect to an eligible relocation for a student, the move need not be
within Canada.
Embedded derivative
See Derivative.
Embezzlement
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Embezzlement is a type of fraud involving employees’ or non-employees’ wrongfully taking
money or property entrusted to their care, custody, and control, often accompanied by false
accounting entries and other forms of lying and cover-up.
Emphasis of Matter paragraph
A paragraph included in the auditor’s report that refers to a matter appropriately presented or
disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it
is fundamental to users’ understanding of the financial statements.
Employee
An employee is an individual that holds an office or employment.
Employee benefits (CICA Part I IFRS)
Forms of consideration given by an entity in exchange for service rendered by employees. IAS
19.7
Employee fraud
Employee fraud is the use of fraudulent means to take money or other property from an
employer.
Employee fringe benefits
Employee fringe benefits are payments by an employer, in addition to wages and salaries, that
are made to acquire employee benefits, such as insurance coverage or extended health benefits.
Employee stock option
See Stock-based compensation plan.
Employee’s gross pay
An employee’s gross pay is the amount an employee earns before any deductions for taxes or
other items such as union dues or insurance premiums.
Employee’s individual earnings record
An employee’s individual earnings record is a record of an employee’s hours worked, gross pay,
deductions, net pay, and certain personal information about the employee.
Employee’s net pay
Employee’s net pay is the amount an employee actually takes home, in pay, determined by
subtracting from gross pay all deductions for taxes and other items that are withheld from the
employee’s earnings.
Employees and others providing similar services (CICA Part I IFRS)
Individuals who render personal services to the entity and either:

(a) the individuals are regarded as employees for legal or tax purposes;

(b) the individuals work for the entity under its direction in the same way as individuals who
are regarded as employees for legal or tax purposes; or

(c) the services rendered are similar to those rendered by employees. For example, the
term encompasses all management personnel — that is, those persons having authority
and responsibility for planning, directing, and controlling the activities of the entity,
including non-executive directors. IFRS 2.A
Employment
Employment is the position of an individual in the service of some other person.
Employment contracts
Employment contracts are contracts between the firm and its managers.
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Employment expenses (tax)
Employment expenses are expenses incurred by an employee that are directly related to his
employment, the employee is required by the employer to incur them, and the employer does
not reimburse the employee for the expenses. Furthermore, the employee has to file the
prescribed form T2200, Declaration of Conditions of Employment, in order to claim these
expenses. Employment expenses include meal and entertainment expenses, motor vehicle
expenses, travel expenses, advertising and promotion expenses, home office expenses, and
office and stationery expenses.
Employment insurance
Employment insurance is an employee/employer-financed unemployment insurance plan that is
managed by the Canadian federal government.
Encumbrance
An account in which the estimated amount of expense or expenditure that the organization has
contracted for is recorded when goods are ordered.
Encumbrance accounting
Encumbrance accounting involves making journal entries to record the issue of purchase orders
for the acquisition of goods and services from outside suppliers. The amounts recorded are
estimates of the actual costs.
Encumbrance system
Requires all commitments made by an organization to be formally recorded in the accounting
records at the time the commitment is made.
Endogenous uncertainty
Endogenous uncertainty is an uncertainty arising from the reaction of investors within the
economy itself and consists of such things as different investors reacting differently to specific
changes.
Endowment
A contributed resource that must be maintained permanently, while any interest or return earned
is to be used as specified by the contributor.
Endowment contribution (CICA Part III ASNFPO)
Endowment contribution is a type of restricted contribution subject to externally imposed
stipulations specifying that the resources contributed be maintained permanently, although the
constituent assets may change from time to time. [4410.02(b)]
Endowment fund (CICA Part III ASNFPO)
Self-balancing set of accounts that report the accumulation of endowment contributions. Only
endowment contributions and investment income subject to restrictions stipulating that it be
added to the principal amount of the endowment fund would be reported as revenue of the
endowment fund. Allocations of resources to the endowment fund that result from the imposition
of internal restrictions are recorded as interfund transfers. [4410.02(e)] See Fund accounting,
Restricted fund.
Engagement letter
An engagement letter is a letter from the auditor to the management of an audit client that sets
forth the terms of the engagement.
Engagement partner
One of the most experienced members of the audit team who makes the final decision on the
audit opinion.
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Engagement quality control review
A process designed to provide an objective evaluation, on or before the date of the auditor’s
report on financial statements or other historical financial information, or prior to the issuance of
the practitioner’s report for other assurance engagements, of the significant judgments the
engagement team made and the conclusions it reached in formulating the report. The
engagement quality control review process is for audits of financial statements of listed entities
and those other engagements, if any, for which the firm has determined an engagement quality
control review is required.
Engagement team
All partners and staff performing the engagement, and any individuals engaged by the firm or a
network firm who perform procedures on the engagement. This excludes external experts
engaged by the firm or a network firm.
Enterprise-wide risk management
Taking a holistic and integrated approach to the identification and management of risk in
government.
Entity concept
The entity concept is the assumption that the owners are just one of many stakeholders in an
entity; others have a claim to net value added and are equally important (versus proprietary
concept or fund concept).
Entity specific value (CICA Part I IFRS) (CICA Part II ASPE) [CICA Part V Prechangeover accounting standards)
Present value of the cash flows an entity expects to arise from the continuing use of an asset and
from its disposal at the end of its useful life, or expects to incur when settling a liability. 3831.05,
IAS 16.6, IAS 38.8
Entity theory of consolidation
See Fair value enterprise (FVE) theory of consolidation.
Entity theory of the organization
A theoretical approach considered in the debate over how to account for income taxes. The
entity theory takes the perspective that taxes paid to governments are a distribution of wealth
similar to distributions to shareholders and owners. It also considers interest payments to
creditors in the same category.
Entity view (environmental liabilities)
The entity view assumes that the firm has a separate existence apart from all groups of
stakeholders. It is a broad view of the firm's activities and costs, and includes the perspective of
all interested parties. Under this view of the firm, creditors, employees, governments, and
owners have separate rights and interests in assets and operations. Recognition of a liability for
environmental cleanup is consistent with an expanded entity view of a firm. Seen from an
environmental perspective, the firm is an ecosystem: stakeholders include the general public and
future generations who will use the natural resources "borrowed" by the firm. There is an implied
social contract that the firm will use the environment but inflict no harm. If harm is inflicted, it
must be remedied.
Entity view (accounting theory)
View in which financial reports directly reflect the perspective of all capital providers, both current
and potential, to the entity.
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Environmental audit
Evaluation of the firm's operations by engineers and other environmental experts. This audit
helps the firm understand the effect its operation has on the ecosystem and intelligently manage
its potential liability.
Environmental liabilities
Environmental liabilities pose problems in the accounting model because there is no transaction
to signal accounting recognition. Activities that create potential environmental liability may be
obvious (for example, strip mining) or obscure (an approved waste disposal method is later
discovered to be an environmental hazard). Furthermore, some governments have imposed
retroactive legislation for environmental cleanup, resulting in cleanup liability well after the initial
activity and sometimes despite previous permission. Finally, estimates of amounts are
problematic: time spans are often long, and this area is outside an accountant's area of
expertise. Thus, while it meets the definition of a liability, an environmental liability is difficult to
record because it fails to meet recognition criteria. Environmental liabilities are a good example of
an estimated non-monetary liability — an obligation to perform a service instead of paying a fixed
number of dollars.
EOM
EOM is the abbreviation for end-of-month. It is used to describe credit terms for some
transactions.
Equation method (break even analysis)
The equation method is a method of computing the break-even point that relies on the equation
Sales = Variable expenses + fixed expenses + profit.
Equity
In law, the state, quality, or ideal of being just, impartial, and fair.
Equity (CICA Part II ASPE) [CICA Part V Pre-changeover accounting standards]
Residual interest in the assets of the enterprise after deducting all of its liabilities. 3251.03
Equity beta
See Beta.
Equity instrument (CICA Part I IFRS)
Contract that evidences a residual interest in the assets of an entity after deducting all of its
liabilities. IAS 32.11, IFRS 2.A
A contract is also an equity instrument if it does not impose the obligation of a liability, namely to
deliver cash or another financial instrument to another party or to exchange financial instruments
with another party under potentially unfavourable terms. Examples of equity instruments include
ordinary shares, some types of preferred shares, and warrants or written call options that allow
the holder to subscribe for or purchase ordinary shares in the issuing entity.
Equity instrument (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Any contract that grants the holder residual interest in the assets of an entity after deducting all
of its liabilities. Equity instruments have no fixed requirements for payment of dividends or
repayment of capital, unlike a financial liability. 3856.05 [3855.19(d)]
Equity instrument granted (CICA Part I IFRS)
Right (conditional or unconditional) to an equity instrument of the entity conferred by the entity
on another party, under a share-based payment arrangement. IFRS 2.A
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Equity interests (CICA Part I IFRS)
For the purposes of this IFRS, equity interests is used broadly to mean ownership interests of
investor-owned entities and owner, member, or participant interests of mutual entities. IFRS 3.A
Equity interests (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Ownership interests of investor-owned entities and owner, member, or participant interests of
mutual entities. 1582.03
Equity method of accounting for investments (CICA Part I IFRS)
Method of accounting whereby an interest in a jointly controlled entity is initially recorded at cost
and adjusted thereafter for the post acquisition change in the venturer's share of net assets of
the jointly controlled entity. The profit or loss of the venturer includes the venturer's share of the
profit or loss of the jointly controlled entity. IAS 31.3. A method of accounting whereby the
investment is initially recognized at cost and adjusted thereafter for the post-acquisition change
in the investor's share of net assets of the investee. The profit or loss of the investor includes the
investor's share of the profit or loss of the investee. IAS 28.2
Equity method of accounting for investments (CICA Part II ASPE) [CICA Part V Prechangeover accounting standards]
Basis of accounting for investments whereby the investment is initially recorded at cost and the
carrying value, adjusted thereafter to include the investor's pro rata share of post-acquisition
earnings of the investee, computed by the consolidation method. The amount of the adjustment
is included in the determination of net income by the investor, and the investment account of the
investor is also increased or decreased to reflect the investor's share of capital transactions and
changes in accounting policies and corrections of errors relating to prior period financial
statements applicable to post-acquisition periods. Profit distributions received or receivable from
an investee reduce the carrying value of the investment. 3051.03. See Cost method, Recording.
Equity method of consolidation
See Consolidation — equity method.
Equity ratio
The equity ratio is the portion of total assets provided by shareholders’ equity, calculated as
shareholders’ equity divided by total assets.
Equity ratio =
Shareholde
rs' equity
Totalassets
Equity settled share-based payment transaction (CICA Part I IFRS)
Share-based payment transaction in which the entity receives goods or services as consideration
for equity instruments of the entity (including shares or share options). IFRS 2.A
Equivalent units
Equivalent units are the number of units that would have been produced during a period if a
department’s effort had resulted in completed units of product. To calculate equivalent units, you
need to convert partially completed units to completed units. There are two ways of doing this:
FIFO and weighted average.
Equivalent-cash-flow methods
Equivalent-cash-flow methods consider all dollars received to be of equivalent value independent
of the time received.
Error analysis
Error analysis is the investigation of each deviation from a prescribed control procedure to
determine its nature, cause, and probable effect on financial statements.
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Error correction
An error correction is a correction of a prior year accounting error, and is adjusted to opening
retained earnings, net of tax.
Errors (as in control failure)
Errors, as in control failure, are also known as deviations, occurrences, and exceptions. This
refers to a departure from a prescribed internal control procedure in a particular case.
Errors (as in errors and irregularities)
Errors, as in errors and irregularities, are unintentional misstatements or omissions of amounts or
disclosures in financial statements.
See Prior period errors.
Estimate
See Accounting estimate, Changes in accounting estimate.
Estimated commitments
Accounts that represent the estimated value of outstanding purchase orders or commitments.
Estimated liability
An estimated liability is an obligation that is reported as a liability even though the amount to be
paid is uncertain. Measurement uncertainty is an issue for estimated liabilities such as warranty
liability. Companies are required to disclose the nature of a material measurement uncertainty.
Such disclosure includes a description of the circumstances causing the uncertainty and its
anticipated resolution. Further, if it is reasonably possible that the recognized amount could
change in the next year, note disclosure should include the amount that has been recognized and
the range of change that could occur. This disclosure is designed to inform users of material
uncertainties and improve their understanding of the estimation process underlying financial
statements.
Estimated non-monetary liability
See Environmental liabilities.
Estimates (government)
Main and supplementary estimates are budget documents prepared for a government’s legislative
body to support appropriation bills or legislation. Main estimates are the first such documents for
a fiscal year and will normally contain the bulk of a government’s spending. Supplementary
estimates are prepared later on during the fiscal year to address events that were unforeseen
when the initial budget was prepared.
Estimation risk
Non-stationarity of beta and inside information are important sources of this risk. For example,
outside investors face the risk that insiders may profit at their expense, and this risk cannot be
diversified away. The way to think about estimation risk is that a firm’s actual cost of capital will
be somewhat greater than that given by the CAPM due to estimation risk.
Ethics or moral philosophy
The systematic study of standards of human conduct and moral judgment. Ethics, or moral
philosophy, involves the examination of morality or "the tendency to do right or wrong, or ...
beliefs about what's right and wrong, good and bad" (Martin, 149). The terms "moral" and
"ethical" are used interchangeably in everyday speech and in the Ethics Readings Handbook.
Ethnocentric
The tendency to judge others solely by the standards of one’s own culture. Companies that
operate in foreign countries in the same or a similar manner as they operate in their home
country with little or no regard for the local culture are considered ethnocentric.
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Event driven
Event driven, also known as transaction driven, refers to computer data processing systems that
start with each transaction event. Individual transactions trigger the processing activity and all
relevant files are updated.
Events after the reporting period (CICA Part I IFRS)
Events after the reporting period are those events, favourable and unfavourable, that occur
between the end of the reporting period and the date when the financial statements are
authorised for issue. Two types of events can be identified:

(a) those that provide evidence of conditions that existed at the end of the reporting period
(adjusting events after the reporting period); and

(b) those that are indicative of conditions that arose after the reporting period
(non-adjusting events after the reporting period). IAS 10.3
Under CICA Part V Pre-changeover accounting standards, these are called subsequent events.
Events approach
An events approach is a method of assessing financial performance and position based on
economic events rather than completed transactions.
Evidence
Evidence is all the relevant influences upon the minds of auditors that ultimately guide their
decisions.
Ex ante net income
Ex ante net income is expected net income.
Ex ante return
Expected return for a specific time period.
Ex post net income
Ex post net income is realized net income.
Exception
An exception is also known as control failure, deviation, error. This is a departure from a
prescribed internal control procedure in a particular case.
Excessive net income volatility
Also referred to as mismatch. When revaluing assets and liabilities under fair value accounting,
this is income volatility that is greater than what would be experienced under a firm’s usual
operations.
Exchange amount (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Amount of consideration paid or received as established and agreed to by related parties.
3840.03
Exchange difference (CICA Part I IFRS)
Difference resulting from translating a given number of units of one currency into another
currency at different exchange rates. IAS 21.8
Exchange rate (CICA Part I IFRS)
Ratio of exchange for two currencies. IAS 21.8. See Direct quotation, Indirect quotation, Spot
exchange rate.
Exchangeable intangible asset
See Identifiable intangible asset.
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Excusable ignorance
A reasonable observer in a given set of circumstances would not have had the requisite
knowledge.
Excuses
Excuses rebut or refute claims of moral responsibility. Excuses are grouped under three
headings: the possibility of the agent acting otherwise, the agent's knowledge of the situation,
and the agent's freedom to act otherwise.
Ex-dividend date
The ex-dividend date is the date after which purchase of a share no longer entitles a shareholder
to the dividend declared but not yet paid for the current period.
Execute
To execute is to perform an obligation contemplated in a contract.
Executive budget
Compilation of all agency budget requests and the government’s strategic priorities.
Executive compensation plan
An executive compensation plan is an agency contract between the firm and its manager that
attempts to align the interests of owners and manager by basing the manager’s compensation on
one or more measures of the manager’s effort in operating the firm.
Executory contract
An executory contract is a contractual obligation that does not become a financial statement
liability until one of the participating parties consummates or carries out the contract.
Executory costs (lease) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Costs related to the operation of the leased property (for example, insurance, maintenance cost
and property taxes). 3065.03
Exemption clause
An attempt to limit liability under an agreement.
Exercise date
The exercise date is the date on which options are exercised, thereby allowing the holder to
purchase a given number of shares at a set price.
Exercise price
The exercise price, also called subscription or striking price, is the predetermined price at which
the holder of an option is entitled to purchase or sell ordinary shares or other assets that may be
the object of an option.
Existence (as a financial statement assertion)
Existence, as a financial statement assertion, is the management representation that assets,
liabilities, equities, revenue, and expenses exist in reality.
Exogenous uncertainty
An exogenous uncertainty is the uncertainty faced by investors in a diversified portfolio that
comes from the random market return and, therefore, is part of the environment faced by all
investors.
Expanded disclosure
Expanded disclosure is a financial reporting framework/objective intended to increase information
provided in respect of accounting policies and transactions It involves providing disclosure
beyond that normally required by applicable standards and constraints.
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Expanded scope governmental auditing
Expanded scope governmental auditing is auditing that goes beyond an audit of financial
statements and compliance with laws and regulations to include economy and efficiency and
program results audits.
Expectation about the population deviation rate
The expectation about the population deviation rate is an estimate of the ratio of the number of
expected deviations to population size.
Expected future benefit (CICA Part II ASPE)
Calculated amount representing the benefit the entity expects to realize from a plan surplus. An
expected future benefit includes any withdrawable surplus or reduction in future contributions.
An entity determines its expected future benefit as the sum of:

(i) the present value of its expected future annual accruals for service for the current
number of active employees, less the present value of required employee contributions and
minimum contributions the entity is required to make regardless of any surplus; and

(ii) the amount of the plan surplus that can be withdrawn in accordance with the existing
plan and any applicable laws and regulations. 3461G
Expected loss notes
Securities sold by sponsors to outside parties under which the purchasers committed to absorb a
majority of a VIE’s expected losses and receive a majority of expected net returns.
Expected period to full eligibility (EPFE)
The expected period to full eligibility (EPFE) is the period during which current employees are
expected to attain full eligibility under the pension plan introduced by the employer. It is used to
amortize past service costs at the inception of a pension plan and other pension components.
Expedient recording system
An expedient recording system is the practice of recording an expense upon payment of cash
before goods or services are received and recording a revenue as cash receipt before goods or
services are provided.
Expenditure Management System (EMS)
Planning and budgeting cycle of the Canadian federal government.
Expenditures
In the Canadian context, expenditures generally refer to expenses as defined in the accrual
accounting model, less amortization, plus spending on capital purchases. It is a term normally
used in the statement of activities or operations of an entity that uses the modified accrual basis
for accounting.
Expenditures (NFPO)
Expenditures are recognized when goods or services are acquired by the organization, regardless
of when they are used.
See Accrual basis of accounting (NFPO), Expenses, Modified accrual basis of accounting (NFPO).
Expenses
Expenses are costs incurred by a firm in the process of earning revenue. It is measured by the
cost of goods and services consumed in the operation of the business.
Expenses (NFPO)
Expenses are recognized when goods or services are used or consumed by the organization,
regardless of when they are acquired. See Expenditures.
Experience gains and losses of pension plans
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Experience gains and losses of pension plans are the extent to which measurements made in
previous years have turned out to be incorrect due to error in estimates. It is part of actuarial
gains and losses.
Expert witness
An expert witness in accounting is regarded as qualified by a court to testify to findings
determined during litigation as to accounting principles and auditing standards applications.
Expiration date
The expiration date is the date after which an option can no longer be exercised.
Exploitation
Using people for one's own purposes without regard for their purposes.
Exploration and evaluation assets (CICA Part I IFRS)
Exploration and evaluation expenditures recognized as assets in accordance with the entity's
accounting policy. IFRS 6.A
Exploration and evaluation expenditures (CICA Part I IFRS)
Expenditures incurred by an entity in connection with the exploration for and evaluation of
mineral resources before the technical feasibility and commercial viability of extracting a mineral
resource are demonstrable. IFRS 6.A
Exploration for and evaluation of mineral resources (CICA Part I IFRS)
The search for mineral resources, including minerals, oil, natural gas, and similar nonregenerative resources after the entity has obtained legal rights to explore in a specific area, as
well as the determination of the technical feasibility and commercial viability of extracting the
mineral resource. IFRS 6.A
Ex post return
The return actually realized during a determined time period.
Extending the audit procedures
Extending the audit procedures means performing substantive-purpose audit procedures on the
transactions in the remaining period and on the year-end balance to produce sufficient
competent evidence for a decision about the year-end balance.
Extent (of audit procedures)
The extent of audit procedures refers to the amount of work done when the procedures are
performed.
External auditors
External auditors are independent public accountants who audit financial statements for the
purpose of rendering an opinion.
External evidence
External evidence is documentary evidence obtained directly from independent external sources.
External failure costs
External failure costs are costs incurred when a non-conforming product is detected after it is
shipped to customers. These costs would include such hard to quantify costs as customer
dissatisfaction and lost repeat sales.
External motivation
Motivation that requires an enforcement authority. A “stick” approach to motivation.
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External restrictions
Restrictions imposed on one or more assets of an entity by a party outside the organization,
usually a donor or grantor.
External transactions
External transactions are exchanges between the entity and some other person or organization.
External-internal evidence
External-internal evidence is documentary evidence that has originated outside the client’s data
processing system, but which has been received and processed by the client.
Externality
An externality is an action taken by a firm or individual that imposes costs or benefits on other
firms or other individuals for which the entity creating the externality is not charged or does not
receive revenue. In other words, it is the consequence of an economic activity that is experienced
by unrelated third parties. An externality can be either positive or negative.
Extinguish debt
To extinguish debt is to nullify a liability by repayment. This can be done through either
repayment, by defeasance, or agreement.
Extraordinary items
Extraordinary items are items shown at the bottom of the income statement after a subtotal net
of tax, such as extraordinary losses and gains on financial instruments and negative goodwill. By
definition these items must not be expected to occur too frequently, not be typical of normal
business activities, and not be as a result of a decision of management or owners. [3480
Extraordinary Items]
CICA Part V IFRS does not contemplate extraordinary items (that is, income or expense outside
net income) in the income statement or notes.
Face value
The face value is the amount of principal owed on a debt instrument.
Facility-level activities
Facility-level activities are activities that relate to overall production and therefore can’t be traced
to specific products. Costs associated with these activities pertain to a plant’s general
manufacturing process. An example might be plant maintenance.
Factoring
Factoring is the sale, at a discount, of a corporation’s accounts receivable.
Fair market value (FMV)
Fair market value (FMV) is the value established between a buyer and a seller in an arm’s length
business transaction. Sometimes, FMV has to be estimated, which means that one has to
estimate what a person would agree to pay to an unrelated third party.
Fair presentation in accordance with GAAP (CICA Part II ASPE) [CICA Part V Prechangeover accounting standards]
Financial statements should present fairly in accordance with Canadian generally accepted
accounting principles the financial position, results of operations and cash flows of an entity (that
is, represent faithfully the substance of transactions and other events in accordance with the
elements of financial statements, and the recognition and measurement criteria set out in section
1000). 1400.03 Financial statements, including notes to such statements and supporting
schedules to which the financial statements are cross-referenced, should include all information
required for a fair presentation in accordance with generally accepted accounting principles.
1400.09 Financial statements should be prepared on a comparative basis, unless the comparative
Page 93 of 266
information is not meaningful or generally accepted accounting principles (as described in section
1100) permit otherwise. 1400.12
Fair value (FV) (CICA Part I IFRS)
Amount for which an asset could be exchanged between a knowledgeable, willing buyer and a
knowledgeable, willing seller in an arm's length transaction. IAS 20.3, IAS 19.7, IAS 2.6, IAS
18.7, IAS 21.8, IAS 16.6, IAS 17.4, IAS 38.8, IAS 40.5, IAS 32.11, IAS 39.9, IAS 41.8, IFRS 2.A,
IFRS 3.A, IFRS 4.A, IFRS 5.A, IFRS 1.A
Fair value (CICA Part II ASPE) [CICA Part V Pre-changeover accounting standards]
Amount of the consideration that would be agreed upon in an arm's length transaction between
knowledgeable, willing parties who are under no compulsion to act. (Paragraph 3856.A7 provides
related application guidance.) 3856.05, 3870.07, 1582.03, 3031.07, 3461G, 3475.03, 3831.08,
3840.03, 3055.03, 3063.03, 3064.08
Fair value (lease) (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Amount of the consideration that would be agreed upon in an arm's length transaction between
knowledgeable, willing parties who are under no compulsion to act.

(i) When the lessor is a manufacturer or dealer, the fair value of the property at the
inception of the lease will usually be its normal selling price, reflecting any volume or trade
discounts that may be applicable. However, the determination of fair value would be made
in light of market conditions prevailing at the time, which may indicate that the fair value of
the property is less than the normal selling price.

(ii) When the lessor is not a manufacturer or dealer, the fair value of the property at the
inception of the lease will usually be its cost to the lessor, reflecting any volume or trade
discounts that may be applicable. However, when there has been a lapse of time between
the date of acquisition of the property by the lessor and the inception of the lease, the
determination of fair value would be made in light of market conditions prevailing at the
inception of the lease, which may indicate that the fair value of the property is greater or
less than its cost or carrying value. 3065.03
Fair value accounting
Fair value accounting is accounting for transactions at the amount at which parties would be
willing to buy or sell an asset or liability in an arm’s-length transaction.
Fair value enterprise (FVE) method of consolidation
One of four theoretical approaches to consolidation when a non-controlling interest exists. The
four approaches are proprietary, parent company, parent company extension (also called
identifiable net assets) and entity (also called fair value enterprise) theories. The proprietary and
parent company theories are not IFRS compliant.
IFRS 3.18-.19 establishes procedures for the fair value enterprise (FVE) approach and the
identifiable net assets (INA) method as follows:

For each business combination, the acquirer measures at the acquisition date components
of non-controlling interests in the acquiree that are present ownership interests and entitle
their holders to a proportionate share of the entity’s net assets in the event of liquidation at
either:
o
(a) fair value; or
o
(b) the present ownership instruments’ proportionate share in the recognized
amounts of the acquiree’s identifiable net assets (INA).
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All other components of non-controlling interests are measured at their acquisition-date fair
values, unless another measurement basis is required by IFRS.
Fair-value hedge (CICA Part I IFRS)
A fair-value hedge is a hedge of all or part of the risk exposure to changes in the fair value of
financial instruments or unrecognized firm commitments. A common example is the hedge of the
foreign exchange risk associated with a foreign currency denominated accounts receivable. It is a
hedge that is intended to compensate for possible fluctuations in the fair value of any of the
following:

a recognized asset or liability

an unrecognized firm commitment

an identified portion of such an asset, liability, or firm commitment that is attributable to a
particular risk and that could affect reported income.
See also Cash-flow hedge, Hedge.
Fair-value hedge [CICA Part V Pre-changeover accounting standards]
Hedge of the exposure to changes in fair value of: a recognized asset or liability; an
unrecognized firm commitment; or an identified portion of such an asset, liability or firm
commitment that is attributable to a particular risk and could affect reported net income.
[3865.07(e)] See also Cash-flow hedge, Hedge.
For the fair-value hedge of an unrecognized firm commitment, the change in both the fair value
of the hedging instrument and the hedged item are recognized in profit as they occur.
Fair value hierarchy
Levels of difficulty in assigning fair value, as defined in Statement of Financial Accounting
Standards (SFAS) 157. At Level 1, assets and liabilities exist within an efficient market, so a
market price is readily available. Level 2 describes assets and liabilities for which we can infer a
price from similar items in the market. Level 3 describes assets and liabilities for which no market
can be observed or inferred; firms must use their own assumptions about price and value.
Fair value less costs to sell (CICA Part I IFRS)
Amount obtainable from the sale of an asset or cash-generating unit in an arm's length
transaction between knowledgeable, willing parties, less the costs of disposal. IAS 36.6
Fairness package
The fairness package for taxpayers, enacted on December 17, 1991, and applicable for the 1985
and subsequent years is administered by CRA at local offices where Fairness Committees have
been established to rule on requests made by taxpayers under the fairness package. This fairness
package was a response to severe criticism by the public and a perception by taxpayers of
unfairness in applying the administrative rules, many of which were highly technical in nature.
The most notable provisions are those that waive the three-year limitation on claiming refunds,
waive or cancel interest or penalties in certain circumstances, make it possible to file certain late
or amended elections, revoke previously filed elections, and extend the deadline for filing a notice
of objection.
Faithful representation
A depiction that is complete, neutral and free from error.
See Conceptual Framework for Financial Reporting.
Fallible
Open to the likelihood that at least some, but likely not all, of your beliefs are false.
Family
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See Close members of the family of an individual.
Farm loss
A farm loss is the lesser of:

the excess of losses from a farming or fishing business over the income from such a
business for that year
and

the non-capital loss for that year before deducting any farm loss for that year.
Note that a farm loss is incurred where the taxpayer’s primary source of income is farming or
fishing or a combination of farming or fishing and another source. As well when a taxpayer has
both a farm loss and a non-capital loss, the losses are computed so as to maximize the farm loss
carryover. A farm loss may be carried back three years and carried forward twenty years.
FASB
See Financial Accounting Standards Board.
Federal tax abatement
The federal tax abatement is a deduction from a corporation’s tax otherwise payable, equal to
10% of its taxable income earned in a province. Any corporation (private or public) is entitled to
this deduction provided it has income earned in a province.
Feedback
Feedback involves accounting and other reports that help managers monitor performance and
focus on problems and/or opportunities that might otherwise go unnoticed.
Feedback value
Feedback value is the capacity of information to assist decision-makers to confirm and/or correct
prior decisions or assumptions.
Fidelity bond
A fidelity bond is an insurance policy that covers most kinds of cash embezzlement losses.
Fiduciary duty
Fiduciary duty means that a CGA is required under law to act in the best interest of the client by
avoiding conflicts of interests, disclosing any material information, avoiding personal gain, acting
in good faith, observing the client’s instructions, and not breaching confidentiality. Such duty may
also arise between directors and officers and a corporation they serve, between business
associates including senior employees and their employer, between agents and their principals,
and between partners.
FIFO method
The FIFO (first in, first out) method of accounting for cost flows in a processing costing system is
a method in which equivalent units and unit costs relate only to work done during the current
period. The FIFO method of costing inventory is one in which the first cost paid is the one
assigned to cost of goods sold first.
Final pay plans
Final pay plans are pension plans whereby the employee is entitled to benefits based on salary
earned in the final year of service.
Finance lease (CICA Part I IFRS)
Lease that transfers substantially all the risks and rewards incidental to ownership of an asset.
Title may or may not eventually be transferred. IAS 17.4. Under CICA Part II ASPE and CICA Part
V Pre-changeover accounting standards, called a capital lease.
See Direct financing lease, Operating lease.
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Financial accounting
Financial accounting is the method used to report an organization’s financial condition and result
of operations to internal and external parties.
Financial Accounting Standards Board (FASB)
Independent body in the United States whose mission is to establish and improve standards of
financial accounting and reporting for the guidance and education of the public, including issuers,
auditors, and users of financial information. See www.fasb.org.
Financial asset (CICA Part I IFRS)
Any asset that is:

(a) cash;

(b) an equity instrument of another entity;

(c) a contractual right:

o
(i) to receive cash or another financial asset from another entity; or
o
(ii) to exchange financial assets or financial liabilities with another entity under
conditions that are potentially favourable to the entity; or
(d) a contract that will or may be settled in the entity's own equity instruments and is:
o
(i) a non-derivative for which the entity is or may be obliged to receive a variable
number of the entity's own equity instruments; or
o
(ii) a derivative that will or may be settled other than by the exchange of a fixed
amount of cash or another financial asset for a fixed number of the entity's own
equity instruments. For this purpose the entity's own equity instruments do not
include puttable financial instruments classified as equity instruments in accordance
with paragraphs 16A and 16B, instruments that impose on the entity an obligation to
deliver to another party a pro rata share of the net assets of the entity only on
liquidation and are classified as equity instruments in accordance with paragraphs
16C and 16D, or instruments that are contracts for the future receipt or delivery of
the entity's own equity instruments. IAS 32.11
Financial asset (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Any asset that is:

(i) cash;

(ii) a contractual right to receive cash or another financial asset from another party;

(iii) a contractual right to exchange financial instruments with another party under
conditions that are potentially favourable; or

(iv) an equity instrument of another entity. 3856.05 [3855.19(b)]
The cost incurred by an entity to purchase a right to reacquire its own equity instruments from
another party is a deduction from its equity, not a financial asset. 3856.05
Financial asset or financial liability at fair value through profit or loss (CICA Part I
IFRS)
Financial asset or financial liability that meets either of the following conditions:

(a) It is classified as held for trading. A financial asset or financial liability is classified as
held for trading if:
o
(i) it is acquired or incurred principally for the purpose of selling or repurchasing it in
the near term;
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
o
(ii) on initial recognition it is part of a portfolio of identified financial instruments that
are managed together and for which there is evidence of a recent actual pattern of
short term profit taking; or
o
(iii) it is a derivative (except for a derivative that is a financial guarantee contract or a
designated and effective hedging instrument);
(b) Upon initial recognition it is designated by the entity as at fair value through profit or
loss. IAS 39.9
Financial condition
A government’s financial health as measured by sustainability, vulnerability, and flexibility, looked
at in the context of the overall economic and financial environment.
Financial forecast
A financial forecast is a forecast that presents, to the best of the preparer’s knowledge and belief,
an entity’s expected financial position, results of operations, and changes in financial position;
based on assumptions about expected conditions and expected courses of action.
Financial futures contract
A financial futures contract is a futures contract where the underlying asset is a financial asset,
such as a foreign currency or a bond.
Financial guarantee contract (CICA Part I IFRS)
Contract that requires the issuer to make specified payments to reimburse the holder for a loss it
incurs because a specified debtor fails to make payment when due in accordance with the
original or modified terms of a debt instrument. IAS 39.9, IFRS 4.A
Financial instrument (CICA Part I IFRS) (CICA Part II ASPE) [CICA Part V Prechangeover accounting standards]
Contract that gives rise to a financial asset of one entity and a financial liability or equity
instrument of another entity. 3856.05, [3855.19(a)], IAS 32.11
For a financial instrument to exist, the entity must be party to a contract.
Some financial instruments involve specific amounts and times, while others do not. For example,
a bond is a contract that stipulates the cash payments to be made each year and sets the date
on which the principal of the bond is to be repaid. The holder of the bond has an asset that can
be valued and the issuer of the note has the obligation to pay certain amounts of cash in the
future. Ordinary shares of a corporation are also financial instruments, but they do not have a
maturity date or maturity value and there are no guaranteed annual payments.
The following are not financial instruments:

inventory

property, plant, and equipment

leased assets

intangibles, such as patents

prepaid items

deferred income tax assets or liabilities

commitments to buy or sell non-financial assets
A financial instrument includes such derivative financial instruments as interest-rate swaps,
currency or market-index futures, and other options that involve the potential exchange of
financial instruments and result in the transfer of one or more of the risks of the underlying,
primary instrument. See Derivative.
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Financial leverage
Financial leverage arises from the partial use of debt or other fixed-income securities to finance
investments. Fixed-financing charges have the effect of magnifying the potential variations of
returns on the equity portion of the investment. The degree of financial leverage is sometimes
defined as the percentage change in earnings per share caused by a given percentage change in
earnings before interest and taxes.
Financial liability (CICA Part I IFRS)
A liability that is:


(a) contractual obligation:
o
(i) to deliver cash or another financial asset to another entity; or
o
(ii) to exchange financial assets or financial liabilities with another entity under
conditions that are potentially unfavourable to the entity; or
(b) a contract that will or may be settled in the entity's own equity instruments and is:
o
(i) a non-derivative for which the entity is or may be obliged to deliver a variable
number of the entity's own equity instruments; or
o
(ii) a derivative that will or may be settled other than by the exchange of a fixed
amount of cash or another financial asset for a fixed number of the entity's own
equity instruments. For this purpose the entity's own equity instruments do not
include puttable financial instruments that are classified as equity instruments in
accordance with paragraphs 16A and 16B, instruments that impose on the entity an
obligation to deliver to another party a pro rata share of the net assets of the entity
only on liquidation and are classified as equity instruments in accordance with
paragraphs 16C and 16D, or instruments that are contracts for the future receipt or
delivery of the entity's own equity instruments. As an exception, an instrument that
meets the definition of a financial liability is classified as an equity instrument if it has
all the features and meets the conditions in paragraphs 16A and 16B or paragraphs
16C and 16D. IAS 32.11
Financial liability (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Liability that is a contractual obligation:

(i) to deliver cash or another financial asset to another party; or

(ii) to exchange financial instruments with another party under conditions that are
potentially unfavourable to the entity. 3856.05, [3855.19(c)]
Financial performance
An overarching concept regarding a government’s performance that encompasses financial
position, financial condition, and economic condition.
Financial perspective
One of the four perspectives used by the balanced scorecard to measure achievement of
financially strategic goals. (Internal business process, customer, and learning and growth are the
other three perspectives)
Financial position
The adequacy of cash and short-term claims to cash to meet current obligations and those
expected in the near future.
Financial projection
A financial projection is similar to a financial forecast, with the important exception that a
projection depends on one or more hypothetical assumptions.
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Financial reorganization (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Substantial realignment of the equity and non-equity interests of an enterprise such that the
holders of one or more of the significant classes of non-equity interests and the holders of all of
the significant classes of equity interests give up some (or all) of their rights and claims upon the
enterprise. 1625.03
Financial reporting
Financial reporting is the broad-based process of providing statements of financial position
(balance sheets), statements of profit and loss (income statements), statements of changes in
equity (statements of retained earnings), other required statements, and accompanying
disclosure notes to outside decision makers who have no internal source of information like the
management of the company.
See Financial statements.
Financial reporting releases (FRR)
Financial reporting releases (FRR) are Securities and Exchange Commission (SEC) publications of
rules and policies about accounting and disclosures.
Financial restructuring
Financial restructuring is to reconfigure a company’s debt and equity or the terms of debt and/or
equity financing; usually undertaken when a company is in financial difficulty in order to allow the
company to remain in operation and avoid bankruptcy.
Financial risk (CICA Part I IFRS)
Risk of a possible future change in one or more of a specified interest rate, financial instrument
price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit
index or other variable, provided in the case of a non-financial variable that the variable is not
specific to a party to the contract. IFRS 4.A
Financial statement concepts (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Concepts underlying the development and use of accounting principles in general purpose
financial statements (hereafter referred to as financial statements). Such financial statements are
designed to meet the common information needs of external users of financial information about
an entity. 1000.01
See Conceptual Framework for Financial Reporting.
Financial statements (government)
A set of government financial statements includes the following:

statement of financial position

statement of operations

statement of cash flow

statement of change in net debt

statement of change in accumulated deficit.
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Financial statements (CICA Part I IFRS)
IAS 1 establishes the components of a complete set of financial statements:

(a) a statement of financial position as at the end of the period;

(b) a statement of comprehensive income for the period;

(c) a statement of changes in equity for the period;

(d) a statement of cash flows for the period;

(e) notes, comprising a summary of significant accounting policies and other explanatory
information; and

(f) a statement of financial position as at the beginning of the earliest comparative period
when an entity applies an accounting policy retrospectively or makes a retrospective
restatement of items in its financial statements, or when it reclassifies items in its financial
statements.
An entity may use titles for the statements other than those used in IAS 1. (IAS 1 p10)
Financial statements [CICA Part V Pre-changeover accounting standards]
Financial statements normally include:

balance sheet,

income statement,

statement of retained earnings

cash flow statement.

statement of comprehensive income

Notes to financial statements, and supporting schedules to which the financial statements
are cross-referenced, which are an integral part of such statements; the same does not
apply to information set out elsewhere in an annual report, in a prospectus, or in other
material attached to or submitted with financial statements. (1400.10)
Financial statements (NFPO)
A set of financial statements for a not-for-profit organization includes the following:

statement of financial position

statement of operations (sometimes called the statement of receipts and expenditures)

statement of changes in fund balance

statement of cash flows.
Financing activities (CICA Part I IFRS) (CICA Part II ASPE) [CICA Part V Prechangeover accounting standards]
One of the sections of the cash flow statement. Financing activities is activities that result in
changes in the size and composition of the contributed equity and borrowings of the entity. It
reflects cash from and for transactions that affect long-term assets and deals with transactions
with the owners of a business or transactions with its creditors to borrow money or to repay the
principal amounts of loans. 1540.06, IAS 7.6. See Operating activities.
Financing expenses
Financing expenses are those incurred in the course of financing the issuance of shares or bonds,
obtaining a bank loan, and so on, but do not include service fees. Examples of financing fees are
legal and accounting fees to prepare prospectuses, printing of prospectuses, and commissions
paid.
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Financing fees (CICA Part II ASPE)
Amounts that compensate the lender for the risk of providing funds to the borrower. Financing
fees — sometimes referred to as fees in lieu of interest, loan fees, or financing costs — include:

(i) fees charged to originate, arrange or syndicate a loan or debt financing;

(ii) commitment, standby and guarantee fees; and

(iii) refinancing, restructuring and renegotiation fees.
Financing fees may be refundable or non-refundable. Financing fees do not include transaction
costs. 3856.05. See Transaction costs.
Financing form
The financing form is the format of the statement of financial position that uses the following
accounting identity:
Assets = Liabilities + Owners’ equity
or
A = L + OE
Financing transaction
A transaction related to the granting and use of credit and/or cash. It is independent of the
underlying operating transaction.
Finer information
Finer information, in an accounting context, adds more detail to the existing historical cost-based
statements. Examples would be expanded footnote disclosure or additional line items on the
financial statements.
Finished goods inventory
Finished goods inventory is the fully processed items held for sale, usually by a manufacturer.
Finitely corrected
Finitely corrected is a sample size calculation that incorporates the population size in such a way
that sample sizes larger than the population size cannot be produced.
Firm commitment (hedge accounting) (CICA Part I IFRS)
Binding agreement for the exchange of a specified quantity of resources at a specified price on a
specified future date or dates. IAS 39.9
Firm commitment [CICA Part V Pre-changeover accounting standards]
Anticipated transaction that is an agreement with an unrelated party, binding on both parties and
usually legally enforceable, with the following characteristics: The agreement specifies all
significant terms, including the quantity to be exchanged, the fixed price, and the timing of the
transaction. The fixed price may be expressed as a specified amount of the currency in which an
entity measures the items in its financial statements or of another currency. It may also be
expressed as a specified interest rate or specified effective yield. The agreement includes a
disincentive for non-performance that is sufficiently large to make performance probable.
[3865.07(i)]
Firm purchase commitment (CICA Part I IFRS)
Agreement with an unrelated party, binding on both parties and usually legally enforceable, that:

(a) specifies all significant terms, including the price and timing of the transactions; and

(b) includes a disincentive for non-performance that is sufficiently large to make
performance highly probable. IFRS 5.A. See Probable.
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Firm-specific factors
Uncertain factors that relate directly to a firm.
First IFRS financial statements (CICA Part I IFRS)
First annual financial statements in which an entity adopts International Financial Reporting
Standards (IFRSs), by an explicit and unreserved statement of compliance with IFRSs. IFRS 1.A.
See Date of transition to IFRS.
First IFRS reporting period (CICA Part I IFRS)
Latest reporting period covered by an entity's first IFRS financial statements. IFRS 1.A
First-best contract
The first-best contract gives the owner the maximum obtainable utility and gives the agent the
reservation utility.
First-in first-out (FIFO)
First-in first-out, also known as FIFO, refers to a method of inventory costing that assigns the
oldest cost value of purchases to the first unit sold. See FIFO method.
First-time adopter (CICA Part I IFRS)
Entity that presents its first IFRS financial statements. IFRS 1.A
Fiscal crisis of the state
Situation in which the state’s long-term expenditure obligations outstrip its capacity to finance
them.
Fiscal imbalance
Imbalance between the revenue-generating power and the spheres of spending responsibilities
among the jurisdictions in a federation.
Fiscal period
A fiscal period of a business means the period for which the accounts in respect of the business
are made up for purposes of an assessment by CRA under the ITA. For an individual the fiscal
period is the calendar year, December 31, provided the business is carried on in Canada. For
corporations, the fiscal period is its taxation year and it may end at any time in the calendar year.
However, the taxation year may not end more than 53 weeks after the period began.
Fiscal year
A fiscal year is any 12 consecutive months used by a business as its annual accounting period.
Fixed assets
Fixed assets are tangible capital assets that benefit operations over multiple periods, usually
represented by property, plant, and equipment. See Property, plant, and equipment.
Fixed award (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Award of stock-based employee compensation for which vesting is based solely on an employee's
continuing to render service to the enterprise for a specified period of time. This section
considers a stock appreciation right that calls for settlement in stock to be a fixed stock option.
3870.07. See Award.
Fixed costs
Fixed costs do not vary in response to changes in activity. Such costs are fixed in total, but as
activity changes they will be distributed over different numbers of units and will appear to vary
on a per-unit basis.
Fixed interest rate
A fixed interest rate is an interest rate that will not change over the term of the loan.
Page 103 of 266
Fixed manufacturing overhead cost deferred in inventory
Fixed overhead cost deferred in inventory involves the portion of the fixed manufacturing
overhead cost of a period that goes into inventory under the absorption costing method as a
result of production exceeding sales.
Fixed manufacturing overhead cost released from inventory
Fixed manufacturing overhead cost released from inventory refers to the portion of the fixed
manufacturing overhead cost of a prior period that becomes an expense of the current period
under the absorption costing method as a result of sales exceeding production.
Fixed price contract (CICA Part I IFRS)
Construction contract in which the contractor agrees to a fixed contract price, or a fixed rate per
unit of output, which in some cases is subject to cost escalation clauses. IAS 11.3. See
Construction contract, Cost-plus contract.
Fixed support
Fixed support is when the possible set of payoffs is fixed regardless of the agent’s choice.
Flexible budget
A flexible budget is a budget that is designed to cover a range of activity rather than a single
point. It can be used to develop budgeted revenues and/or costs anywhere within that range to
compare against actual results.
Flexible budget variance
The difference between the actual results and the flexible budget amount for revenue and costdrivers.
Flexible manufacturing systems
Flexible manufacturing systems involve a production flow line in which cells are linked together
with an automated material-handling system and that is controlled by a central computer.
Flip-flop notes
Notes that allow investors to switch between two types of debt.
Floating interest rate
A floating interest rate is an interest rate that will vary in relation to some specified base rate
such as the Canadian or U.S. prime rate or the London Inter-Bank Offering Rate (LIBOR).
Flow line
A flow line is the physical path taken by a product as it moves through the manufacturing
process from receipt of raw materials to shipment of completed units.
Flow statement
A flow statement is a statement related to a specific period of time. Flow statements may take
several different forms. Examples of flow statements include the cash flow statement and the
statement of operations.
Flow-through approach
Ignores the temporary differences and records income tax expense based on taxable income
only. Also known as the taxes payable approach.
Flow-through method
See Investment tax credit.
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FOB
FOB is the abbreviation for “free on board.” This is the designated point at which ownership of
goods passes to the buyer. FOB shipping point (or factory) means that the buyer pays the
shipping costs and FOB destination means that the seller pays the shipping cost.
Focused factory
A focused factory is a single work centre that contains all of the machines needed to make a
particular product. A focused factory is also known as a “factory within a factory.”
FOFI
FOFI is future-oriented financial information as described in section 4250 of the CICA Handbook.
Note that FOFI is not required. The Handbook merely provides standards for those who wish to
provide FOFI.
Forced (induced) conversion
A forced or induced conversion is one whereby the issuer (the corporation) calls in the senior
security for conversion to ordinary shares when the cash value is less than the share value. This
ensures that shares will be issued. If the security has a fixed maturity date, conversion will occur
when the debt has matured and must be submitted for redemption.
Forecast transaction (hedge accounting) (CICA Part I IFRS)
Uncommitted but anticipated future transaction. IAS 39.9
Forecasted transaction [CICA Part V Pre-changeover accounting standards]
A forecasted transaction is an anticipated transaction for which there is no firm commitment.
[3865.07(j)] See Firm commitment.
Foreign accrual property income (FAPI)
Foreign accrual property income (FAPI) includes income from property, income from businesses
other than active businesses, and taxable capital gains from disposition of property that were not
used principally to earn active business income. FAPI may be reduced by corresponding losses.
Further determination of what constitutes FAPI in subsections 95(1) and 95(2) of the ITA.
Foreign affiliate
A foreign affiliate of a taxpayer is a foreign corporation in which, at that time, the taxpayer’s
equity percentage was not less than 10%. Generally, a resident will have an equity percentage of
10% or more if the taxpayer holds, either directly or indirectly, 10% or more of the shares of any
class of the capital stock of the foreign corporation. The shares may be non-voting and nonparticipating.
Foreign currency (CICA Part I IFRS)
Currency other than the functional currency of the entity. IAS21.8. See Functional currency.
Foreign currency equivalent method
A method of stating exchange rates which provides the number of foreign currency units needed
to purchase one Canadian dollar. Also referred to as an indirect quotation. See Canadian dollar
equivalent method, Direct quotation, Indirect quotation.
Page 105 of 266
Foreign currency option for loan repayment
An option to repay a loan principal in a foreign currency. For example, a Canadian lender makes
a loan in Canadian dollars, the borrower’s functional currency, and receives a note payable that
bears an above-market interest rate and gives the borrower the option to repay the loan’s
principal in Canadian dollars or in a fixed amount of U.S. dollars. The note payable can be viewed
as combining a loan at prevailing market interest rates and a foreign currency option. In
purchasing the borrower’s note at par rather than at the premium typically associated with the
note’s above-market interest rate, the lender is being compensated for writing a foreign currency
option, which exposes it to changes in foreign currency exchange rates during the outstanding
period of the loan. Because the borrower has the option to repay the loan either in Canadian
dollars or in a fixed amount of U.S. dollars, this is an embedded derivative. Because a foreign
currency option is not clearly and closely related to issuing a loan, the embedded option should
be separated from the host and accounted for separately.
If both the principal payment and the interest payments on the loan had been payable only in a
fixed amount of U.S. dollars, there would be no embedded foreign currency derivative.
See Derivative, Functional currency.
Foreign currency risk
Net potential gain or loss which can arise from exchange rate changes to the foreign currency
exposure of the enterprise. Foreign currency risk has three components: transaction exposure,
accounting (translation) exposure, and economic exposure.
Translation exposure is reflected in the financial statements and therefore may have an impact
on dividend policies and share prices. These gains and losses are unrealized. They do not affect
cash flows and are only bookkeeping balancing amounts. Financial analysts should look behind
the numbers to assess the “real” transaction and economic exposures.
Transaction exposure exists between the transaction date and the settlement date. For example,
a sale denominated in U.S. dollars by an American company to the Mexican subsidiary with
payment in six months runs the risk of the peso declining further in value before payment is
made. If unhedged, this transaction could generate large losses for the Mexican subsidiary
because as the U.S. dollar rises, it costs more and more in terms of pesos to pay the accounts
payable. These gains and losses are realized and affect working capital, net income, share prices,
and dividend policy.
Economic exposure is the most important exposure in the long run. Economies and currencies
can have fundamental shifts over time with long-run appreciations or depreciations in a country’s
currency. Economic exposure represents the long-term threat or benefit to a company by taking
into account discounted cash flows from foreign investments due to real changes in exchange
rates.
Foreign currency transactions (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Transactions of the reporting enterprise whose terms are denominated in a currency other than
its reporting currency. 1651.03
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Foreign currency transactions approach
Approach to foreign currency translation of a subsidiary's accounts, in which individual
transactions are translated. The decision about whether to account for the relationship using the
foreign currency transactions approach or as a self-sustaining foreign operation depends on the
substance of the relationship between the parent and the subsidiary. Professional judgment is
often required to evaluate the economic factors that determine the level of exposure.
A subsidiary that is to be accounted for using the foreign currency transactions approach is one
in which there are many interrelationships between the parent and the foreign operation.
The operations of a foreign subsidiary should be judged to be a series of foreign currency
transactions when there is considerable interaction between the subsidiary and the parent and
when the subsidiary acts in the role of agent for the parent. For this reason, IAS 21 recommends
that the financial statements of a foreign subsidiary that is integral to the operations of the
reporting enterprise be translated using the standards and procedures in paragraphs 20–37 and
50 as if the transactions of the foreign operation had been those of the reporting enterprise itself.
This method is the method used to account for individual transactions in a foreign currency, and
the transactions of the subsidiary are viewed in essence as having been carried out by the parent
itself. Gains and losses that arise on the translation of financial statements of a foreign currency
transaction subsidiary are recorded in the same manner as for individual transactions.
Foreign exchange rate
A foreign exchange rate is the price of one currency stated in terms of another currency.
Foreign operation (CICA Part I IFRS)
Subsidiary, associate, joint venture or branch of a reporting entity, the activities of which are
based or conducted in a country or currency other than those of the reporting entity. IAS 21.8
The pre-changeover accounting standards term, self sustaining foreign operation, is roughly
parallel to operations in which the functional currency of the subsidiary differs from that of the
parent.
The pre-changeover accounting standards term, integrated foreign operation, is roughly parallel
to operations in which the functional currency of the subsidiary is the same as that of the parent.
Whether a subsidiary is a self-sustaining foreign operation or is accounted for using the foreign
currency transactions approach depends on the level of exposure of the parent to exchange rate
changes.
Subsidiaries accounted for using the foreign currency transactions approach are those in which
the parent actively participates in the business’s operating, investing, and financing activities. The
parent’s exposure is the same as if it had directly undertaken the transactions of the foreign
operation.
A self-sustaining foreign operation is one that operates independently of the parent. Although the
parent controls the subsidiary, it does not actively participate in the subsidiary’s operating,
investing, and financing activities. The parent’s exposure is limited to its investment in the
subsidiary.
See Foreign currency transactions approach, Self-sustaining foreign operation.
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Foreign operation (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Subsidiary, division, branch, joint venture or similar type of entity that undertakes and/or records
its economic activities in a currency other than the reporting currency of the reporting enterprise.
Foreign operations are divided into two categories:

(i) An integrated foreign operation is a foreign operation that is financially or operationally
interdependent with the reporting enterprise such that the exposure to exchange rate
changes is similar to the exposure that would exist had the transactions and activities of the
foreign operation been undertaken by the reporting enterprise.

(ii) A self-sustaining foreign operation is a foreign operation that is financially and
operationally independent of the reporting enterprise such that the exposure to exchange
rate changes is limited to the reporting enterprise's net investment in the foreign operation.
In some cases, a foreign entity may contain several distinct operations, some of which are
integrated and some of which are self-sustaining. 1651.03
Under IFRS, the terms integrated and self-sustaining foreign operation are not used. See Foreign
operation (CICA Part I IFRS).
Forensic accounting
Forensic accounting is the application of accounting and auditing skills to legal problems, both
civil and criminal.
Foreseeable beneficiaries
Foreseeable beneficiaries are creditors, investors, or potential investors who rely on an
accountant’s work.
Forfeiture (stock option) (CICA Part II ASPE)
Employee's failure to earn a vested right to a stock-based compensation award because the
specified vesting requirements are not satisfied. A vested award is no longer subject to forfeiture,
although the term of a vested award may be truncated by termination of service. 3870.07. See
Award, Vest.
Forgivable loans
Forgivable loans are loans that are forgiven (do not need to be repaid) when certain conditions
have been met, usually granted by a government unit.
Forgivable loans (CICA Part I IFRS)
Loans that the lender undertakes to waive repayment of under certain prescribed conditions. IAS
20.3
Formal justice
Treat similar cases alike; treat different cases differently. Contrast to substantive justice.
Page 108 of 266
Forward contract
A forward contract is a contract specifying the price and quantity at which a future transaction is
to take place. Unlike a futures contract, a forward contract is individually negotiated, not
tradable, and not marked to market.
Forward contracts differ from futures contracts in a number of ways:

Forwards do not have margin requirements, whereas future contracts do.

Forward contracts have no standard features because they are negotiated directly between
buyer and seller; futures are generally set out in a formal manner.

Forward contracts do not have a clearinghouse to cover and guarantee contracts; without
this “management,” forward contracts lack the liquidity associated with futures.

Forward contracts typically trade in the over-the-counter market, whereas futures trade on
an organized exchange.

Settlement of forward contracts occurs at the end of the contract. Futures contracts are
marked to market daily, which means that daily changes are settled day by day until the
end of the contract: the profit or loss on a futures position must be exchanged in cash
every day.

Settlement for futures contracts can occur over a range of dates. Forward contracts, on the
other hand, only possess one settlement date.

Because futures contracts are frequently employed by speculators who bet on the direction
in which an asset’s price will move, they are usually closed out prior to maturity and
delivery almost never happens. On the other hand, forward contracts are mostly used to
eliminate the volatility of an asset’s price and delivery of the asset or cash settlement will
usually take place.
Forward discount
A currency trades at a forward discount when its forward price is lower than its spot price. See
Spot exchange rate.
Forward exchange contract (or forward contract)
A form of hedge involving a contract with a bank to buy or sell a foreign currency on a specified
date in the future at a specified exchange rate. See Forward contract.
Forward exchange rate (or forward rate)
The exchange rate stated in a forward exchange contract.
Forward exchange transaction
Purchase or sale at the current exchange rate but with payment or delivery of the foreign
currency at a future date.
Forward premium
A currency trades at a forward premium when its forward price is higher than its spot price. See
Spot exchange rate.
Franchise
Rights to use a product, name, process, or concept for a period of time. These rights are
conveyed from the franchisor (that is, the owner of the product, name, process, or concept) to
the franchisee by a legal contract called a franchise agreement. The franchise agreement may
have a legal life ranging from a definite number of years to an unlimited life.
Fraud
Fraud is an action of knowingly making material misrepresentations of fact with the intent of
inducing someone to believe the falsehood and act upon it and thus suffer a loss or damage.
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Fraud auditing
Fraud auditing is a pro-active approach to detecting financial fraud using accounting records and
information, analytical relationships, and an awareness of fraud perpetration and concealment
efforts.
Fraud examiners
Fraud examiners are people engaged specifically for fraud investigation work.
Fraudulent financial reporting
Fraudulent financial reporting is also known as management fraud. This is intentional or reckless
conduct, whether by act or omission, which results in materially misleading financial statements.
Fraudulent misrepresentation
Misleading (false) words said knowingly, without belief in their truth, causing injury to another.
Freedom from bias (neutrality)
Freedom from bias is when information is not reflective of a particular viewpoint, a
predetermined result, or a particular person’s opinion.
Free-riding
Free-riding is the receipt by a firm or individual of a benefit from an externality resulting from the
cooperative behaviour of others to which the firm or individual made no contribution.
Freight-in
Freight-in refers to the freight costs associated with the purchase and receipt of inventory as
distinct from freight-out, or delivery expenses related to sales to customers.
FRNs (floating rate notes)
A note whose interest payment varies with short-term interest rates.
Full cost
Full cost is the sum of all direct costs and a fair share of the applicable indirect costs of a cost
object.
Full cost approach in oil and gas accounting
The full cost approach in oil and gas accounting capitalizes all costs of discovering reserves,
including the cost of unsuccessful drilling.
Full cost method
Full cost method, also known as absorption costing, is a method of costing that includes all
manufacturing costs — direct materials, direct labour, and both variable and fixed manufacturing
overhead — in the cost of a unit of product.
Full disclosure
Full disclosure is financial statement disclosure of all relevant information about the economic
affairs of the corporation.
Full disclosure principle
Financial statements and their accompanying financial notes must include all relevant information
about the operations, financial position, and cash flows of the entity. In other words, significant
information should not be withheld and sufficient information should be included to make the
financial report understandable.
Full eligibility date (CICA Part II ASPE)
Date at which an employee has rendered all of the service necessary to earn the right to receive
all of the benefits expected to be received by that employee (including any beneficiaries and
dependants expected to receive benefits). Determination of the full eligibility date is affected by
plan terms that provide incremental benefits expected to be received by or on behalf of an
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employee for additional years of service, unless those incremental benefits are insignificant.
3461G
Fully diluted earnings per share
Fully diluted earnings per share is a calculation of EPS based on the effect of exercising all
potential conversions and options to acquire shares. It measures the long run impact that likely
conversions will have on EPS. It excludes conversions and options that increase the ratio
(antidilutive) and thus is meant to be a worst-case scenario.
Functional currency (CICA Part I IFRS)
Currency of the primary economic environment in which the entity operates. IAS 21.8. See
Foreign currency.
Fund
Generally set up when cash is received by an organization through contractual agreements with
external parties or by agreement with an organization’s board of directors. It may be for a very
broad purpose or for specific activities.
Fund accounting
A recordkeeping system that allows organizations to separately monitor different sources of
revenue, diverse activities, and specific resources. It is generally used by not-for-profit
organizations (NFPOs) and public sector organizations.
Fund accounting (CICA Part III ASNFPO)
Collective accounting procedures resulting in a self-balancing set of accounts for each fund
established by legal, contractual, or voluntary actions of an organization. Elements of a fund can
include assets, liabilities, net assets, revenues, and expenses (and gains and losses, where
appropriate). Fund accounting involves an accounting segregation, although not necessarily a
physical segregation, of resources. [4400.02(c)] See Deferral method of accounting, Endowment
fund, Restricted fund method of accounting.
Fundamental value (of a share)
The value it would have in an efficient market if there is no inside information. That is, all
information about the share is publicly available.
Fund balance
Represents the net resources available for a particular purpose and is derived from the resources
and claims on resources that relate to the activities of the organization for that specific purpose.
Fund concept
Fund concept is the assumption that the purpose of accounting is to trace the flow of funds in
the corporation (versus proprietary concept or entity concept).
Funded benefit plan (CICA Part II ASPE)
Benefit plan in which the reporting entity is setting aside assets to pay the costs of benefits as
they become due. The assets are set aside by the reporting entity in a separate legal entity,
generally a trust, and the reporting entity cannot use the assets so set aside for its own
purposes. When benefits become payable, they are paid out of the trust directly to the
employees. Pension plans are generally funded because of legal requirements to set assets aside.
3461G
Funding (benefits) (CICA Part I IFRS)
Transfer of assets to an entity (the fund) separate from the employer's entity to meet future
obligations for the payment of retirement benefits. IAS 26.8
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Funding of pension plan
The funding of a pension plan is the manner (pattern) in which the employer remits the
necessary contributions to the pension trustee.
Further possible misstatements
Misstatements that could exist over and above the total of known and likely misstatements
because of the fundamental limitations of auditing.
Future income tax assets (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Amounts of income tax benefits arising in respect of:

(i) deductible temporary differences;

(ii) the carry forward of unused tax losses; and

(iii) the carry forward of unused income tax reductions, except for investment tax credits.
3465.02.
Under CICA Part I IFRS, called deferred tax assets.
See Deductible temporary differences, Deferred tax assets, Investment tax credit, Taxable
temporary differences.
Future income tax liabilities (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Amounts of income taxes arising from taxable temporary differences. 3465.02.
Under CICA Part I IFRS, called deferred tax liabilities.
See Deferred tax liabilities, Taxable temporary differences.
Future income taxes method (CICA Part II ASPE)
Method of accounting under which an enterprise reports as an expense (income) of the period
the cost (benefit) of current income taxes and the cost (benefit) of future income taxes,
determined in accordance with the rules established by taxation authorities. 3465.02
Under CICA Part I IFRS, called deferred taxes.
Future value
Future value is the projected future amount of money based on today’s amount plus whatever
interest, including compounded interest, is accumulated over a specific period of time.
Futures contract
A futures contract is a contract specifying the price at which a future transaction is to take place.
A futures contract, unlike a forward contract, is standardized, tradable, and marked to market.
A financial futures contract is an agreement between a buyer and a seller with a specific financial
asset or commodity underlying the trade. The agreement sets the specific delivery date in the
future and the amount of the asset to be delivered. No cash is exchanged at the time of signing
the agreement, although margin requirements must be met. See Forward contracts.
Futures option
A futures option is an option to enter a futures contract.
GAAP
See Generally accepted accounting principles.
GAAS
See Generally accepted auditing standards.
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Gains trading
Gains trading is the process of selling securities in a portfolio that have increased in value while
holding those securities that have lost value. The purpose is to book the gains from those
securities that have increased in value, while maintaining on the books at cost those that have
fallen based on holding those securities to maturity.
Game theory
Game theory attempts to model and predict the outcome of conflict between rational individuals.
General and administrative expenses
General and administrative expenses are expenses that support the overall operations of a
business and include the expenses of such activities as providing accounting services, human
resources management, and financial management.
General anti-avoidance rule (GAAR)
The general anti-avoidance rule (GAAR) stipulates that when a person is involved in an
“avoidance transaction” taxes will be adjusted to deny the benefit that would have resulted from
the transaction(s). GAAR applies when there is a misuse or abuse of the provisions of the ITA.
General fund (CICA Part III ASNFPO)
Self-balancing set of accounts which reports all unrestricted revenue and restricted contributions
for which no corresponding restricted fund is presented. The fund balance represents net assets
that are not subject to externally imposed restrictions. [4410.02(e)] See Restricted fund.
General journal
A general journal is a journal with a flexible format in which any transaction can be recorded.
General ledger
The general ledger is the ledger holding individual accounts that comprise the elements of the
financial statements.
General obligations
Obligations that bind each and every person, for example, not killing others. Most general
obligations are negative although there is a general obligation to prevent or protect others from
harm.
General partner
A general partner is a partner who assumes unlimited liability for the debts of the partnership.
The general partners in a limited partnership are usually responsible for its management.
General purpose financial statements
General purpose financial statements are financial statements prepared to meet common
information needs of external parties for financial information about an entity.
General purpose financial statements (CICA Part I IFRS)
Referred to as financial statements. Financial statements intended to meet the needs of users
who are not in a position to require an entity to prepare reports tailored to their particular
information needs. IAS 1.7
Generalized audit software (GAS)
Generalized audit software (GAS) is a set of software functions that may be utilized to read,
compute, and operate on machine-readable records.
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Generally accepted accounting principles (GAAP) (CICA Part II ASPE) [CICA Part V
Pre-changeover accounting standards]
Broad principles and conventions of general application as well as rules and procedures that
determine accepted accounting practices at a particular time. 1100.02. See Primary sources of
GAAP.
Generally accepted auditing standards (GAAS)
Generally accepted auditing standards (GAAS) are the rules adopted by the accounting profession
as guides for conducting audits of financial statements.
Geocentric
A company that is globally oriented and attempts to produce a standardized product that
accommodates the common requirements or preferences of many different countries.
Goal congruence
Goal congruence exists where the goals of management and the goals of the investors in the firm
are aligned. It is useful to align the goals of management and the goals of the investors in the
firm, but you need to remember that each party will maintain their own interests in the situation.
Going-concern principle
A business is a going concern if it will continue to operate for an indefinite period. It will use its
assets to carry on its operations and, with the exception of merchandise, not offer the assets for
sale. Current market values of individual assets such as equipment and buildings do not need to
be measured because there is no intention of selling them. It is assumed that such assets will be
used in the business and the resulting goods or services provided will be sold. If an entity is not a
going concern and thus will not continue into the future (for example, due to bankruptcy), then
historical cost figures will be irrelevant and liquidation values will be reported.
See Conceptual Framework for Financial Reporting.
Goodwill (CICA Part I IFRS) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Goodwill is an asset representing the future economic benefits arising from other assets acquired
in a business combination that are not individually identified and separately recognized. It is an
internally generated intangible asset that is not usually recognized because no transaction has
occurred to establish cost, but it is recognized on consolidation when a subsidiary is purchased
for a price higher than the fair value of its tangible assets. 3064.08, 1582.03, IFRS 3.A
See Acquisition differential.
Government (CICA Part I IFRS)
Government, government agencies, and similar bodies whether local, national or international.
IAS 20.3
Governments must present their financial statements in accordance with the Public Sector
Accounting (PSA) Handbook.
Government assistance (CICA Part I IFRS)
Action by government designed to provide an economic benefit specific to an entity or range of
entities qualifying under certain criteria. Government assistance for the purpose of this Standard
does not include benefits provided only indirectly through action affecting general trading
conditions, such as the provision of infrastructure in development areas or the imposition of
trading constraints on competitors. IAS 20.3
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Government assistance (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Governmental actions that provide specific assistance to an individual enterprise in order to
influence business decisions on matters such as investment, hiring, plant location, and so on.
3800.03
Government auditors
Government auditors are auditors whose work is governed by the GAO audit standards, whether
they are audit employees of governments or public accounting firms engaged to perform
government audits.
Government business enterprise (GBE) (as defined in the Public Sector Accounting
(PSA) Handbook)
A government business enterprise is an organization that has all of the following characteristics:

a) It is a separate legal entity with the power to contract in its own name and that can sue
and be sued;

b) It has been delegated the financial and operational authority to carry on a business;

c) It sells goods and services to individuals and organizations outside of the government
reporting entity as its principal activity;

d) It can, in the normal course of its operations, maintain its operations and meet its
liabilities from revenues received from sources outside of the government reporting entity.
(PS 1300.28) (See PS 1300.17-.24 for guidance in determining whether control exists.)
Government business enterprises (GBEs) must present their financial statements in accordance
with IFRS.
Government business-type organization (GBTO)
Government business-type organizations are no longer a separate category in the Public Sector
Accounting (PSA) Handbook. These organizations have the choice of presenting their financial
statements in accordance with IFRS or the PSA Handbook. Organizational and user needs should
be the primary factors in deciding which set of standards is more appropriate.
See Government organizations, Public sector, Public Sector Accounting (PSA) Handbook
Government grant (CICA Part I IFRS)
Assistance by government in the form of transfers of resources to an entity in return for past or
future compliance with certain conditions relating to the operating activities of the entity. They
exclude those forms of government assistance which cannot reasonably have a value placed
upon them and transactions with government which cannot be distinguished from the normal
trading transactions of the entity. IAS 20.3. See Grants related to assets, Grants related to
income.
Government not-for-profit organization (GNFPO)
A not-for-profit organization (NFPO) controlled by government. Other government organizations
are organizations controlled by the government other than those defined.
Government not-for-profit organizations currently must report their financial statements in
accordance with Part V of the CICA Handbook — Accounting. As of January 1, 2012, they must
report their financial statements in accordance with the CICA Public Sector Accounting (PSA)
Handbook, which will include the 4400 series substantially as they now appear in Part V of the
CICA Handbook — Accounting. Use of the 4400 series is optional.
See Public Sector Accounting (PSA) Handbook.
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Government organizations
Entities controlled by government. This category includes government business enterprises
(GBEs) , government not-for-profit organizations (GNFPOs), and other government organizations.
GBEs operate much like private sector companies. Other government organizations may sell
goods and services within the government reporting entity or they may rely on subsidies from the
government or other organizations in the government reporting entity to maintain their
operations or meet their liabilities.
Government reporting entity (GRE) (as defined in the Public Sector Accounting
(PSA) Handbook)
An organization that is controlled by the government.
Grade
Grade relates to the differences in degree, worth, or ranking between products or services that
have the same functional use. For example, a Volkswagen and a Mercedes have different grades.
The higher the grade, the higher the expected quality.
Graded vesting schedule
A graded vesting schedule applies when an award vests in specific quanta over a specific period;
for example, 25% over each of four years. Contrast graded vesting schedule to cliff vesting.
Grant date (CICA Part I IFRS)
The date at which the entity and another party (including an employee) agree to a share-based
payment arrangement, being when the entity and the counterparty have a shared understanding
of the terms and conditions of the arrangement. At grant date the entity confers on the
counterparty the right to cash, other assets, or equity instruments of the entity, provided the
specified vesting conditions, if any, are met. If that agreement is subject to an approval process
(for example, by shareholders), grant date is the date when that approval is obtained. IFRS 2.A
Grant date (stock option) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Date at which an enterprise and an employee have a mutual understanding of the terms of a
stock-based compensation award. The grant date of an award for current service may be the end
of a fiscal period instead of a subsequent date when an award is made to an individual employee
if:

(i) the award is provided for by the terms of an established formal plan;

(ii) the plan designates the factors that determine the total dollar amount of awards to
employees for that period (for example, a percentage of net income); and

(iii) the award is attributable to the employee's service during that period. 3870.07.
See Award.
Grants related to assets (CICA Part I IFRS)
Government grants whose primary condition is that an entity qualifying for them should
purchase, construct, or otherwise acquire long-term assets. Subsidiary conditions may also be
attached restricting the type or location of the assets or the periods during which they are to be
acquired or held. IAS 20.3. See Government grant, Grants related to income.
Grants related to income (CICA Part I IFRS)
Government grants other than those related to assets. IAS 20.3. See Government grant, Grants
related to assets.
Gross basis of recording leases
The gross basis of recording leases on the lessor or lessee books is when the lease receivable
(payable) is recorded at gross value including interest and principal portions. The unearned
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interest portion is offset against the receivable for reporting purposes. This method is common
for lessors.
Gross investment in the lease (CICA Part I IFRS)
Aggregate of:

(a) the minimum lease payments receivable by the lessor under a finance lease; and

(b) any unguaranteed residual value accruing to the lessor. IAS 17.4.
See Guaranteed residual value, Unguaranteed residual value.
Gross margin
Gross margin is the difference between net sales and the cost of goods sold.
Gross margin method
The gross margin method is a method of estimating inventories based on historical gross profit
margins.
Gross negligence
Gross negligence is the lack of even minimum care in performing professional duties, indicating
reckless disregard for duty and responsibility.
Gross profit
Gross profit is the difference between net sales and the cost of goods sold.
Gross profit on sales method
A method of determining intercompany profits in which the selling price and the percent profit
included in the sales price are known. See Markup on cost method.
Group (CICA Part I IFRS)
Parent and all its subsidiaries. IAS 27.4, IAS 21.8
Group amortization
Group amortization is the amortization of a set of similar assets based on average rates designed
to be statistically valid.
Group engagement team (CAS 600.09)
Partners, including the group engagement partner, and staff who establish the overall group
audit strategy, communicate with component auditors, perform work on the consolidation
process, and evaluate the conclusions drawn from the audit evidence as the basis for forming an
opinion on the group financial statements.
Group of biological assets (CICA Part I IFRS)
Aggregation of similar living animals or plants. IAS 41.5. See Harvest.
GST
GST, also known as the Goods and Services Tax, is a multi-level federal tax levied on all levels of
the supply chain on almost all goods and services.
Guarantee
Guarantees are classified as financial instruments that must be recorded at their fair value. For
example, assume that a company has guaranteed a $5,000,000 loan of a supplier. The company
estimates there is a 20% chance that it will have to make a partial payment of $750,000 under
the guarantee. Because of this positive probability of payment, the guarantee has a fair value
equal to the expected payment multiplied by the probability. This amount of $150,000
($750,000 × 20%) must be recorded in the financial statements as a liability and an expense.
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Guaranteed benefits (CICA Part I IFRS)
Payments or other benefits to which a particular policyholder or investor has an unconditional
right that is not subject to the contractual discretion of the issuer. IFRS 4.A
Guaranteed element (CICA Part I IFRS)
An obligation to pay guaranteed benefits, included in a contract that contains a discretionary
participation feature. IFRS 4.A
Guaranteed residual value (CICA Part I IFRS)
(a) For a lessee, that part of the residual value that is guaranteed by the lessee or by a party
related to the lessee (the amount of the guarantee being the maximum amount that could, in
any event, become payable); and
(b) For a lessor, that part of the residual value that is guaranteed by the lessee or by a third
party unrelated to the lessor that is financially capable of discharging the obligations under the
guarantee. IAS 17.4.
See Unguaranteed residual value.
Guaranteed residual value [CICA Part V Pre-changeover accounting standards]
A guaranteed residual value in a lease is the amount that the lessee agrees to that is equal to
what the lessor can get for the asset by selling it to a third party at the end of the lease term.
This is part of the minimum lease payments. [3065.03] See Unguaranteed residual value.
Guarantor
A person assuming obligation to pay if the debtor does not.
Half-year rule
For each capital asset class the half-year rule requires that in the year of acquisition of a capital
asset, the CCA on that asset may be claimed on only 50% of the net additions during the year.
Haphazard selection
Haphazard selection is any unsystematic way of selecting sample units.
Harmonization
Harmonization is the process of making accounting and auditing standards coordinated, if not
uniform, throughout the world.
Harvest (CICA Part I IFRS)
Detachment of produce from a biological asset or the cessation of a biological asset's life
processes. IAS 41.5. See Biological asset.
Head tax
A flat tax charged to all citizens, regardless of income or other characteristics.
Hedge
A hedge is a transaction that reduces the risk of an asset or a liability. It involves entering into a
transaction intended to offset risk assumed in another transaction by matching the amounts and
timing of sources and uses of cash, interest rates, foreign currency transactions, and so on. See
Hedging.
There are three types of hedges contemplated by the standards on hedge accounting: fair-value
hedge, cash-flow hedge, and the hedge of a net investment in a foreign operation. See Cash-flow
hedge, Fair-value hedge.
Hedge accounting (CICA Part I IFRS)
Hedge accounting is an optional method for accounting for hedges. If hedge accounting is not
adopted, the normal rules of accounting apply to both the hedging and hedged items. This can
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result in an interperiod mismatch between the gain on one item and the offsetting loss on the
other item. The objective of hedge accounting is to match the timing of income recognition of the
hedging item with that of the hedged item.
Hedge accounting can only be applied when the gain or loss on a hedging item would otherwise
be recognized in net income in a different period than that of the hedged item. Hence, hedge
accounting cannot be used if the hedged item is expected to be settled before year end, since
the gain or loss on both the hedging item and hedged item would be recognized in the same
period. There is a difference between accounting for hedges and hedge accounting. Accounting
for hedges involves recording the purchase and sale of hedging items and the resultant gain or
loss.
To qualify for hedge accounting, three conditions must be met at the onset of the hedging
relationship:

The company wishing to use hedge accounting has identified the risks that are being
hedged and has designated that hedge accounting will be used.

The hedging relationship has been formally documented by the company.

There is reasonable assurance that the hedge will be effective throughout its term until
disposition. IAS 39.88)
See Designation of a hedging relationship, Hedged item, Hedging, Hedging item.
Hedge accounting (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Method of recognizing the gains, losses, revenues and expenses associated with the items in a
hedging relationship such that those gains, losses, revenues and expenses are recognized in net
income in the same period when they would otherwise be recognized in different periods.
[3865.07(a)], 3856.05
Part II, Accounting Standards for Private Enterprise, includes Section 3856, Financial
Instruments, which, under ASPE, differs from IFRS in the following key areas:

The use of hedge accounting is permitted only when the critical terms of the hedging
instrument match those of the hedged item; hedge effectiveness need not be assessed.

There are fewer categories of permissible hedging relationships.

A simple accrual-based model is used for hedge accounting.

The disclosure requirements are substantively less detailed and numerous.
Hedge date
The date, usually the same as the transaction date, on which a hedge is implemented.
Hedge effectiveness (CICA Part I IFRS)
Degree to which changes in the fair value or cash flows of the hedged item that are attributable
to a hedged risk are offset by changes in the fair value or cash flows of the hedging instrument
(see Appendix A paragraphs AG105-AG113). IAS 39.9
Hedge effectiveness [CICA Part V Pre-changeover accounting standards]
Extent to which changes in the fair value or cash flows of a hedged item relating to a risk being
hedged and arising during the term of a hedging relationship are offset by changes in the fair
value or cash flows of the corresponding hedging item relating to the risk being hedged and
arising during the same period. [3865.07(l)]
Hedge of a net investment in a self-sustaining foreign operation [CICA Part V Prechangeover accounting standards]
Hedge of the foreign currency exposure of a net investment in a self-sustaining foreign
operation. [3865.07(g)]
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Hedge of the net investment in a foreign operation or subsidiary (CICA Part I IFRS)
A hedge of the net investment in a foreign operation or subsidiary is a hedge of the foreign
currency exposure of the net investment (net assets) in the operation. Under pre-changeover
accounting standards, a foreign operation was called a self-sustaining foreign operation.
Hedged item (CICA Part I IFRS)
Asset, liability, firm commitment, highly probable forecast transaction or net investment in a
foreign operation that:

(a) exposes the entity to risk of changes in fair value or future cash flows and

(b) is designated as being hedged (IAS 39 paragraphs 78-84 and Appendix A paragraphs
AG98-AG101 elaborate on the definition of hedged items). IAS 39.9
See Highly probable.
The item, e.g. account receivable, to be protected against foreign currency risk is called the
hedged item. A hedged item can be an individual asset or a group of recognized assets, a
recognized liability, an anticipated transaction, or a net investment in a foreign operation. A
hedged item must face an identified risk exposure that the entity takes steps to modify.
Hedged item (CICA Part II ASPE)
Recognized asset, a recognized liability, an anticipated transaction, or a net investment in a selfsustaining foreign operation having an identified risk exposure that an entity has taken steps to
modify. 3856.05
Hedged item [CICA Part V Pre-changeover accounting standards]
All or a specified portion of a recognized asset, a recognized liability, an anticipated transaction,
or a net investment in a self-sustaining foreign operation, or a group of similar recognized assets,
recognized liabilities or anticipated transactions, having an identified risk exposure that an entity
has taken steps to modify. [3865.07(c)]
Hedging
Hedging is trading in financial markets with the goal of reducing the risk inherent in regular
business transactions. Usually, the types of risks that are hedged include credit risk, interest rate
risk, foreign currency risk, and liquidity risk. The idea is to enter into one or more contracts
aimed at offsetting exposure to one or more of these risks. For example, a Canadian firm that
has an account receivable denominated in U.S. dollars can offset the foreign exchange risk of
gain or loss by incurring a liability in U.S. dollars for an equal amount.
Hedging instrument (CICA Part I IFRS)
Designated derivative or (for a hedge of the risk of changes in foreign currency exchange rates
only) a designated non-derivative financial asset or non-derivative financial liability whose fair
value or cash flows are expected to offset changes in the fair value or cash flows of a designated
hedged item (IAS 39 paragraphs 72-77 and Appendix A paragraphs AG94-AG97 elaborate on the
definition of a hedging instrument). IAS 39.9
Hedging item (CICA Part II ASPE)

(i) Derivative offsetting a risk exposure identified in the hedged item; or

(ii) a non-derivative financial asset or a non-derivative financial liability offsetting the
foreign currency risk exposure in the net investment in a self-sustaining foreign operation.
3856.05
A hedging item is a tool acquired to eliminate the risk of loss. At the same time, however, the
possibility of gain is also foregone. Usually, hedging items consist of derivatives (for example,
forward contracts, swaps, options) that offset a risk exposure identified in the hedged item.
However, non-derivative financial assets and liabilities may only be designated as hedging items
for a hedge of foreign currency risk.
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Hedging item [CICA Part V Pre-changeover accounting standards]
All or a specified percentage of a derivative, or all or a specified percentage of a group of
derivatives offsetting a risk exposure identified in the hedged item. All or a specified percentage
of: a non-derivative financial asset; a non-derivative financial liability; or a group of nonderivative financial assets or non-derivative financial liabilities, provided that all non-derivative
items in a group are similar, may be designated as a hedging item only for a hedge of a foreign
currency risk exposure. [3865.07(d)]
Hedging relationship (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Relationship established by an entity's management between a hedged item and a hedging item
that satisfies all of the conditions in this section. 3856.05 [3865.07(b)] See Designation of a
hedging relationship.
Hedging relationships (CICA Part I IFRS)
The most common hedging relationship is one in which a monetary item is hedged by a
derivative financial instrument such as a forward contract. Forward exchange contracts are most
often entered into with a bank.
There are some restrictions on what type of financial instrument can be designated as a hedged
or hedging item. One such restriction is that held-to-maturity investments may be designated as
follows:

hedging items only for foreign currency risk

hedged items only for risks from changes in foreign currency exchange rates and credit
risk
Held for trading financial asset or financial liability [CICA Part V Pre-changeover
accounting standards]
Financial asset or financial liability that: is not a loan or receivable and is: acquired or incurred
principally for the purpose of selling or repurchasing it in the near term; part of a portfolio of
identified financial instruments that are managed together and for which there is evidence of a
recent actual pattern of short term profit taking; or a derivative, except for a derivative that is a
designated and effective hedging instrument (see section 3865); or is designated by the entity
upon initial recognition as held for trading. Any financial instrument within the scope of this
section may be designated when initially recognized as held for trading (see paragraph 3855.20),
except for: financial instruments whose fair value cannot be reliably measured; and financial
instruments transferred in a related party transaction that were not classified as held for trading
before the transaction. [3855.19 (f)]
Held to maturity investments (CICA Part I IFRS)
Non-derivative financial assets with fixed or determinable payments and fixed maturity that an
entity has the positive intention and ability to hold to maturity) other than:

(a) those that the entity upon initial recognition designates as at fair value through profit or
loss;

(b) those that the entity designates as available for sale; and

(c) those that meet the definition of loans and receivables. An entity shall not classify any
financial assets as held to maturity if the entity has, during the current financial year or
during the two preceding financial years, sold or reclassified more than an insignificant
amount of held to maturity investments before maturity (more than insignificant in relation
to the total amount of held to maturity investments) other than sales or reclassifications
that:
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o
(i) are so close to maturity or the financial asset's call date (for example, less than
three months before maturity) that changes in the market rate of interest would not
have a significant effect on the financial asset's fair value;
o
(ii) occur after the entity has collected substantially all of the financial asset's original
principal through scheduled payments or prepayments; or
o
(iii) are attributable to an isolated event that is beyond the entity's control, is nonrecurring and could not have been reasonably anticipated by the entity. IAS 39.9.
See Loans and receivables.
Held to maturity investments [CICA Part V Pre-changeover accounting standards]
Non-derivative financial assets with fixed or determinable payments and fixed maturity that an
entity has the positive intention and ability to hold to maturity, other than those that: the entity,
upon initial recognition, designates as held for trading; the entity designates as available for sale;
and that meet the definition of loans and receivables. [3855.19(g)]
Heuristic
Heuristic is the art and science of discovery and invention. The word comes from the same Greek
root as "eureka," which means "I find." A heuristic is a way of directing your attention fruitfully.
Heuristics should not be applied mechanically; they require good judgment in use.
In psychology, heuristics are simple, efficient guidelines that have been proposed to explain how
people make decisions, come to judgments, and solve problems, typically when facing complex
problems or incomplete information. These rules work well under most circumstances, but in
certain cases lead to systematic cognitive biases.
Heuristic approach to moral reasoning
An approach to moral reasoning that encourages the study of basic moral principles and the
application of these principles to specific situations in a way that emphasizes good judgment
rather than the mechanical application of a set of rigid formulas.
High-low method
The high-low method is a method of separating a mixed cost into its fixed and variable elements
by analyzing the change in cost between the high and low levels of activity.
Highly probable (CICA Part I IFRS)
Significantly more likely than probable. IFRS 5.A. See Probable.
Hire purchase contract
See Lease.
Historical cost convention
Historical cost convention is when all economic transactions are recorded using the cost
(historical cost) of the transaction.
Holmström’s agency model
The Holmström’s agency model:

assumes that the agent’s effort is unobservable by the principal;

assumes that the payoff is jointly observable;

shows that a contract based on the payoff is less efficient than a first-best contract; and

shows that a contract based on both net income and share price reduces agency costs of a
second-best contract.
Home purchase loan (tax)
A home purchase loan is a loan received to acquire a home, or to repay debt incurred to acquire
a home, by an employee or a person related to the employee. If the employer loans the money
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without any charge for interest or at a low interest rate a taxable benefit arises. The taxable
benefit is equal to the amount of the principal outstanding times the quarterly determined
prescribed rate of interest, less interest paid during the year or within 30 days of the year end.
The benefit cannot exceed the amount of interest prescribed at the time the loan is taken out.
Furthermore, if the prescribed rate is lowered after the loan is acquired, the taxable benefit is
reduced.
Home relocation loan (tax)
A home relocation loan is a home purchase loan that has qualified as a home relocation loan. A
home relocation loan means a loan received by an individual who has just commenced
employment at a new work location in Canada, or a loan received by the individual’s spouse or
common-law partner in order to acquire a new home or a share of the capital stock of a
cooperative housing corporation at a location where the distance between the old residence and
the new work location is at least 40 kilometres greater than the distance between the new
residence and the new work location. The individual must occupy the home and there may not
be more that one home relocation loan at a time.
Furthermore, a home relocation loan may entitle the individual to a maximum $25,000 loan
exemption (the interest on the first $25,000), which may be claimed as a deduction over a fiveyear period.
Horizon problem
The horizon problem deals with aligning short-term goals with short-term contracts or activities
and long-term goals with long-term contracts or activities. The problem is that often people are
compensated based on short-term results that can have long-term material effects.
Horizontal analysis
Analysis using data from prior years as a yardstick (also called trend analysis). Usually, the oldest
year is used as a base, line by line, and subsequent years are expressed as a percentage of the
base. See Vertical analysis.
Horizontal equity
Horizontal equity means the equal treatment of people in similar positions.
Horizontal merger
A merger in which one competitor buys out another.
Horizontality
Condition in which managers realize they will more effectively solve a problem by working across
boundaries with managers in other agencies and all affected stakeholders.
HST (Harmonized Sales Tax)
HST, also known as the Harmonized Sales Tax, consists of a provincial sales tax component
and a federal component (GST). It has been implemented in the provinces of Nova Scotia,
New Brunswick, Newfoundland and Labrador, Ontario, and British Columbia. In British
Columbia, the HST will be removed in 2013 after it was rejected in a referendum in 2011.
Hung convertible
A hung convertible is a convertible bond that cannot be forced to convert if the stock price is
below the conversion price.
Hurdle rate
The hurdle rate is the minimum acceptable rate of return on an investment.
Hybrid financial instrument
Generally, a financial instrument that has characteristics of both debt and equity. Convertible
debt is an example. These are debt instruments that have an embedded option allowing the
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holder to exchange the bonds for shares of the issuer. For this reason, their market prices tend
to be influenced by both interest rates as well as the price of the issuer’s shares.
Hypothesis testing
In auditing, hypothesis testing involves auditors hypothesizing that an account balance is
materially accurate as to existence, ownership, and valuation and then testing the hypothesis
with sample-based evidence.
Hypothetical assumption
A hypothetical assumption is an expression of a condition and course of action the issuer of a
financial projection expects could take place.
IAS
International Accounting Standards. See International Financial Reporting Standards.
IASB
International Accounting Standards Board. See www.iasb.org; see International Financial
Reporting Standards.
Ideal conditions under certainty
Ideal conditions under certainty is an idealized situation in which the future cash flows of the firm
and the interest rate in the economy are publicly known with certainty.
Ideal conditions under uncertainty
Ideal conditions under uncertainty are characterized by:

a given, fixed interest rate at which the firm’s future cash flows are discounted;

a complete and publicly known set of states of nature;

stated probabilities are objective and publicly known; and

stated realization can be publicly observed.
Ideal standards
Ideal standards are standards that allow for no machine breakdowns or other work interruptions
and require peak efficiency at all times.
Identical properties (tax)
Identical properties are those properties such as shares, bonds, other securities, and so on that a
taxpayer purchases at different times for different amounts and sells at different times for
different amounts. To be identical, the properties must be identical in all respects. The cost base
for identical properties acquired after 1971 is the moving average basis.
Identifiable (CICA Part I IFRS) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
An asset is identifiable if it either:

(i) is separable (capable of being separated or divided from the entity and sold, transferred,
licensed, rented or exchanged, either individually or together with a related contract,
identifiable asset or liability, regardless of whether the entity intends to do so); or

(ii) arises from contractual or other legal rights, regardless of whether those rights are
transferable or separable from the entity or from other rights and obligations. 1582.03,
IFRS 3.A
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Identifiable intangible asset
An intangible is classified as identifiable when the asset has a value that is separate and can be
distinguished from that of other assets of the entity. Some identifiable assets are also
exchangeable, that is, they can be sold individually. Examples of exchangeable identifiable
intangibles are copyrights, patents, and trademarks. In contrast, organization costs have a
distinguishable value apart from other firm assets, but these costs are not exchangeable because
no one would buy them separately.
An intangible is classified as unidentifiable when the asset cannot be separated from the business
entity. An example of an unidentifiable intangible is goodwill, because its value is dependent on
the other assets of the entity.
An intangible can be acquired from an external party by purchase or exchange. Examples of
externally acquired intangibles are franchises and goodwill. On the other hand, an intangible can
be developed internally by the business entity itself. An example of an internally developed
intangible is research and development costs that lead to the obtainment of a patent. Some
intangible properties such as patents, copyrights, and trademarks may be either externally
acquired or internally developed.
Identifiable net assets (INA) method of consolidation
One of four theoretical approaches to consolidation when a non-controlling interest exists. The
four approaches are proprietary, parent company, parent company extension (also called
identifiable net assets) and entity (also called fair value enterprise) theories. The proprietary and
parent company theories are not IFRS compliant.
IFRS 3.18-.19 establishes procedures for the fair value enterprise (FVE) approach and the
identifiable net assets (INA) method as follows:


For each business combination, the acquirer measures at the acquisition date components
of non-controlling interests in the acquiree that are present ownership interests and entitle
their holders to a proportionate share of the entity’s net assets in the event of liquidation at
either:
o
(a) fair value; or
o
(b) the present ownership instruments’ proportionate share in the recognized
amounts of the acquiree’s identifiable net assets (INA).
All other components of non-controlling interests are measured at their acquisition-date fair
values, unless another measurement basis is required by IFRS.
Idiosyncratic risk
Firm-specific risk or market anomaly that remains once the diversifiable risk has been removed.
IFRIC
International Financial Reporting Interpretations Committee. See International Financial
Reporting Standards.
IFRS
See International Financial Reporting Standards.
Illegal acts
Illegal acts are violations of laws and regulations that are far removed from financial statement
effects.
Immediate recognition approach (CICA Part II ASPE)
One of the two approaches to account for an entity's defined benefit plans — see paragraph
3461.025(a). 3461G. See Deferral and amortization approach.
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Impairment
Impairment is the situation when an asset is no longer worth its net book value. This often
triggers a writedown to a lower value.
Impairment indicators
Factors that must be considered in assessing whether there is any indication that an individual
asset may be impaired, which include the following at a minimum:

indications of accelerated value decline by asset class

any indications of significant adverse business impacts in the technological, market,
economic or legal environment

review of interest rate relationships to confirm that the impact of market rates on cash
flows from cash generating units (CGUs) is not a material factor

comparison of the carrying amount of net fixed assets to capital

review of material assets for obsolescence or damage

review of significant business changes that have occurred or are expected, including major
asset dispositions and discontinued operations

indications of underperforming CGUs IAS 36.12
Impairment loss (CICA Part I IFRS)
Amount by which the carrying amount of an asset exceeds its recoverable amount. IAS 16.6, IAS
36.6, IAS 38.8
Impairment loss (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
An impairment loss is recognized when the carrying amount of a long-lived asset is not
recoverable and exceeds its fair value. 3063.04. See also Long-lived asset.
Impairment loss reversal
IFRS requires the reversal of an impairment loss when there has been a change in estimates to
determine recoverable amount.
Impairment model (test)
Under IFRS, impairment indicators for each asset must be identified and reviewed annually. An
impairment loss is defined as the excess of the carrying amount of an asset or group of assets
above the recoverable amount (the higher of fair value less costs to sell and value in use).
Calculating value in use requires identifying cash generating units and discounting net cash flows
of these cash generating units. These are the minimum steps for an impairment test:

Look for impairment indicators; if none, stop.

Determine appropriate testing level (asset or CGU) (no screen test).

Estimate greater of fair value less costs to sell and value in use.

Write down asset to greater of fair value less costs to sell and value in use.
CICA Part II and Part V:

Define the impairment loss as the difference between carrying amount and fair value.

Contain a screen test – the impairment test is stopped if the estimated undiscounted cash
flows from use/sale are greater than the carrying amount.
The minimum steps for impairment testing are as follows:

Look for impairment indicators; if none, stop.

Determine appropriate testing level (asset or asset group).
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
Estimate undiscounted cash flows from use and disposal, if greater than carrying amount,
stop (screen test).

If undiscounted cash flows are less than carrying amount, estimate fair value.

Write down asset to fair value.
Impairment test of goodwill
Irrespective of whether there is any indication of impairment, the entity conducts impairment
testing of goodwill acquired in a business combination for impairment annually. IAS 36.10
For the purpose of impairment testing, goodwill acquired in a business combination is, from the
acquisition date, allocated to each of the entity’s cash generating units, or groups of cash
generating units, that is expected to benefit from the synergies of the combination, irrespective
of whether other assets or liabilities of the entity are assigned to those units or groups of units.
Each unit or group of units to which the goodwill is so allocated:

represents the lowest level within the entity at which the goodwill is monitored for internal
management purposes; and

is not larger than an operating segment determined in accordance with IFRS 8 Operating
Segments. IAS 36.80
Impairment test of intangible assets
Irrespective of whether there is any indication of impairment, the entity conducts impairment
testing of an intangible asset with an indefinite useful life or an intangible asset not yet available
for use for impairment annually by comparing its carrying amount with its recoverable amount.
IAS 36.10
Imperfect market
Competitive arenas in which firms exert market power.
Implicit interest rate (lease) (CICA Part I IFRS)
Discount rate that, at the inception of the lease, causes the aggregate present value of:

(a) the minimum lease payments; and

(b) the unguaranteed residual value to be equal to the sum of:
o
(i) the fair value of the leased asset; and
o
(ii) any initial direct costs of the lessor. IAS 17.4
Implicit interest rate (lease) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Discount rate that, at the inception of the lease, causes the aggregate present value of:

(i) the minimum lease payments, from the standpoint of the lessor, excluding that portion
of the payments representing executory costs to be paid by the lessor and any profit on
such costs; and

(ii) the unguaranteed residual value accruing to the benefit of the lessor; to be equal to the
fair value of the leased property to the lessor at the inception of the lease. 3065.03.
See Executory costs.
Implied contract
An agreement inferred from the conduct of the parties.
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Impracticable (CICA Part I IFRS)
Applying a requirement is impracticable when the entity cannot apply it after making every
reasonable effort to do so. For a particular prior period, it is impracticable to apply a change in an
accounting policy retrospectively or to make a retrospective restatement to correct an error if:

(a) the effects of the retrospective application or retrospective restatement are not
determinable;

(b) the retrospective application or retrospective restatement requires assumptions about
what management's intent would have been in that period; or

(c) the retrospective application or retrospective restatement requires significant estimates
of amounts and it is impossible to distinguish objectively information about those estimates
that:
o
(i) provides evidence of circumstances that existed on the date(s) as at which those
amounts are to be recognized, measured or disclosed; and
o
(ii) would have been available when the financial statements for that prior period
were authorized for issue; from other information.
IAS 1.7, IAS 8.5. See Accounting policies.
Impracticable (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]

Applying a requirement is impracticable when the entity cannot apply it after making every
reasonable effort to do so. For a particular prior period, it is impracticable to apply a change
in an accounting policy retrospectively if:

(i) the effects of the retrospective application are not determinable;

(ii) the retrospective application requires assumptions about what management's intent
would have been in that period; or

(iii) the retrospective application requires significant estimates of amounts and it is
impossible to distinguish objectively information about those estimates that: provides
evidence of circumstances that existed on the date(s) as at which those amounts are to be
recognized, measured or disclosed; and would have been available when the financial
statements for that prior period were completed; from other information. 1506.05
Imputed interest
Imputed interest is an interest rate that is estimated and assigned based on the internal rate of
return if an effective interest rate is not evident or determinable from other factors in a
transaction.
INs
Introductions. Component of each Part of the CICA Handbook.
In the money
In the money is a state in which the market price of a share exceeds the exercise price of a right
or option on the share, thereby making it attractive for the holder to exercise his/her right.
Introduction (IN)
Component of each Part of the CICA Handbook.
In vitro
In vitro means “from without (outside) the living organism” and is used when an individual
considers whether a rule will be fair to all who follow it.
In vivo
In vivo means “from within the living organism” and is used when individuals consider whether a
rule will benefit them in their present situation.
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Inadequacy
Inadequacy is a condition in which the capacity of plant assets becomes too small for the
productive demands of the business.
Incentive-compatible
A contract is called incentive-compatible when the agent’s incentive to take a given course of
action is compatible with the principle’s best interest.
Incentive contract
A contract that provides motivational compensation.
Inception of the lease (CICA Part I IFRS)
Earlier of the date of the lease agreement and the date of commitment by the parties to the
principal provisions of the lease. As at this date:

(a) a lease is classified as either an operating or a finance lease; and

(b) in the case of a finance lease, the amounts to be recognized at the commencement of
the lease term are determined. IAS 17.4.
See Commencement of the lease term, Finance lease, Operating lease.
Inception of the lease (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Earlier of the date of the lease agreement and the date of a commitment that is signed by the
parties to the lease transaction and includes the principal terms of the lease (this is the effective
date used for classification of the lease). 3065.03
Includes (tax)
For purposes of the Income Tax Act (ITA), “includes” means that the definition is not exhaustive
and that the elements listed are only illustrations.
Income
Income is a generic term indicating revenue from a variety of sources. Income is not to be
confused with net income, which is revenue minus expenses.
Income bonds
Income bonds are bonds that yield an interest stream only if the corporation has earned
sufficient income (or operating cash flow) to enable payment of the interest.
Income for accounting purposes
Income for accounting purposes is net income as prepared according to GAAP.
Income for tax purposes (taxable income)
Income for tax purposes is arrived at by adjusting accounting net income to reflect allowable
additions and deductions as per the ITA to arrive at net income for tax purposes. Basically,
accounting net income is adjusted to reconcile it to net income for tax purposes (taxable
income).
Income from business
Income from business flows from the conduct of a business when it is carried out with the
intention to profit. When an undertaking involves a reasonable expectation of profit, it is a
commercial activity  a business; however, when the undertaking has no reasonable expectation
of profit, it is a hobby or personal venture. Note that while a business loss is deductible, the ITA
makes no provision for the deduction of losses from a hobby or personal venture.
Income from employment
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Income from employment is recognized when an entity engages the service of an individual in
return for salary, wages, and/or other taxable benefits. This contract between the employer and
the employee is a contract of service.
Income from office
Income from office is recognized when an individual holds a position that entitles the individual to
a fixed or ascertainable remuneration. Usually the position the individual holds is created by
statute, but it may be created by other means.
Income from property
Income from property generally represents a return of invested capital such as interest,
dividends, rents and royalties. It does not include a gain realized on the sale of the investment
itself; rather, it is restricted to the regular return generated from the investment’s ownership.
Income from property is often referred to as passive income because the earning process
requires little effort by the recipient. Note that rental income can be business income in certain
circumstances.
Income maximization
Income maximization is one of the types of earnings management. It involves choosing
accounting policies that create a pattern of income maximization for the reported net income
provided this does not put the numbers over the cap for bonus purposes. Firms that are close to
debt covenant violation may also maximize income.
Income minimization
Income minimization is similar to taking a bath but less extreme. This technique may be taken by
a politically visible firm during periods of high profitability. Income taxation may also be a
motivating factor in using this technique.
Income of the corporation for the year from an active business (ABI)
Income of the corporation for the year from an active business (ABI) means the total of the
corporation’s income from an active business (ABI) carried on by it, including any income for the
year pertaining to or incidental to that business. It does not include income from a source in
Canada that is a property, such as interest or dividends. Furthermore, income received from an
associated corporation that was deductible by that associated corporation in determining its ABI
is considered to be ABI.
Income smoothing
Income smoothing is a method of earnings management that managers engage in when they
want to ensure that earnings remain between the bogey and the cap of a bonus plan. Income
smoothing may smooth covenant ratios, making lending easier. Firms also smooth income to
communicate its expected persistent earnings power.
Income splitting
Income splitting occurs when income is shifted from a family member who has a high income to
members who have low incomes.
Income splitting tax (“kiddie tax”)
In an effort to further discourage income splitting with minor children, especially through the use
of family trusts, a special income splitting tax, effective January 1, 2000, was imposed on certain
dividend or trust income received by minor children under 18 years of age. Tax on this type of
income splitting is levied at the top marginal rate.
Income statement
Financial statement that shows whether the business earned a profit or suffered a loss. It lists
the types and amounts of the revenues and expenses. Referred to as the statement of profit and
loss under CICA Part I IFRS.
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Income summary account
The income summary account is a special account used only in the closing process to temporarily
hold the amounts of revenues and expenses before the net difference is added to or subtracted
from the owner’s capital account or the retained earnings account for a corporation.
Income Tax Act (ITA)
The Income Tax Act (ITA) is the main instrument in the study and practice of income tax law. It
is the ultimate authority on tax law; all tax problems have to be analysed and resolved within the
confines of the ITA. It sets out the rules by which the government levies income tax and reflects
the tax policy of the government, that is, the provisions that govern who must pay taxes and
how taxable income and income tax payable are determined and calculated. The laws contained
within the ITA allow the government to tax the income of individuals and corporations so as to
provide a reasonable and increasing source of revenue to finance ever-growing public
expenditures and to implement the government’s economic and social policies.
Income Tax Application Rules (ITAR)
The Income Tax Application Rules (ITAR) consist of transitional rules needed to pass from the
pre-1972 ITA to the ITA implementing the 1971 tax reform.
Income Tax Regulations (REG)
The Income Tax Regulations (REG) specify the terms and conditions for applying the ITA.
Income taxes (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]

(i) All domestic and foreign taxes that are based on taxable income;

(ii) taxes, such as mining taxes, that are based on a measure of revenue less certain
specified expenses;

(iii) alternative minimum income taxes, including taxes based on measures other than
income and that may be used to reduce income taxes of another period; and

(iv) taxes, such as withholding taxes, that are based on amounts paid to the enterprise.
3465.02
Incomplete markets
Incomplete markets exist if, when using market values rather than present values, there are
assets and liabilities for which there is no market.
Increasing transformations
Increasing transformations are irrelevant if your framing of a given decision is consistent. This
means that adding or subtracting a constant dollar amount will not change profit-maximizing
quantities. Or, in a simple two-frame example, the answer will be the same if you use consistent
framing between total dollar analysis and relevant dollar only analysis. The total dollar analysis is
considered an increasing transformation.
Incremental analysis
Incremental analysis is an analytical approach that focuses only on those items of revenue, cost,
and volume that will change as a result of a decision in an organization.
Incremental borrowing rate (for leases)
Incremental borrowing rate for leases, from the perspective of the lessee, is the interest rate that
would be incurred by the lessee to finance an acquisition of a similar asset with similar terms and
security. It is used as a discount rate in lease accounting when it is lower than the implicit rate of
the lease or if the implicit rate is unknown.
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Incremental borrowing rate (IBR)
The incremental borrowing rate (IBR) is the rate that the borrower would have to pay its bank
(or other lender) to borrow the same amount for the same period of time. It is also referred to as
a market rate of interest.
Incremental cost
An incremental cost is an increase in cost between two alternatives.
Incremental method
The incremental method allocates the total consideration received for a bundle of securities or
assets using the market value of one security as the basis for that security. The residual of the
consideration received is allocated to the balance of the bundle.
Incremental revenue
Any additional total revenue from one alternative.
Independent contractor
An independent contractor is an individual who is contracted to complete a specific task, has
control over how and when this assignment is to be performed, assumes personal exposure to
the risk of losses upon completion of the assignment, assumes ownership of the tools of
performance, is organizationally separate and distinct from the recipient of the services, and
terminates the relationship with the recipient upon completion of the assignment. This contract
between the recipient and the independent contractor is a contract for services and is otherwise
known as self-employment.
Independence comprises:
(a) Independence of mind – the state of mind that permits the provision of an opinion
without being affected by influences that compromise professional judgment, allowing an
individual to act with integrity, and exercise objectivity and professional skepticism.
(b) Independence in appearance – the avoidance of facts and circumstances that are so
significant a reasonable and informed third party, having knowledge of all relevant
information, including any safeguards applied, would reasonably conclude a firm's, or a
member of the assurance team's, integrity, objectivity or professional skepticism had
been compromised.
Independent variable
An independent variable is a variable that acts as a causal factor for the dependent variable. For
example, activity is the independent variable in the cost formula, as represented by the letter X in
the equation Y = a + bX, where Y is the total cost, a is the fixed costs, b is the variable unit cost,
and X is the volume of activity.
Index
An index is an imaginary portfolio designed to reflect the overall performance of the class of
assets from which it is constructed.
Indigenous governance rights
Constitutionally protected governance powers of First Nations communities.
Indirect cost
An indirect cost, also known as a common cost, is a cost that cannot be easily traced to the
particular cost object under consideration.
Indirect expense
An indirect expense is an expense associated with a period and not directly associated with
revenue (for example, administrative salaries).
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Indirect labour
Indirect labour is the labour costs of janitors, supervisors, material handlers, and other factory
workers that cannot be conveniently traced directly to particular products.
Indirect materials
Indirect materials are small items of material, such as glue and nails. These items may become
an integral part of a finished product, but are traceable into the product only at great cost and
inconvenience.
Indirect preparation method
The indirect preparation method is a method of preparing the cash flow statement based on
analyzing net income and the changes in related statement of financial position accounts.
Indirect presentation of operating activities on the cash flow statement
The indirect presentation of operating activities in the cash flow statement starts with net
income, which is adjusted for non-cash expenses, gains, or losses plus changes in working capital
to arrive at cash flow from operations.
Indirect quotation (FX)
Number of units of a foreign currency needed to buy one Canadian dollar. An indirect quotation
provides the number of foreign currency units needed to purchase one Canadian dollar. For
example, C$1 = US$0.7092 indicates that each Canadian dollar is worth US$0.7092. This is called
the foreign currency equivalent method and is the reciprocal of the Canadian dollar equivalent
method. The foreign currency equivalent rate can easily be converted into the Canadian dollar
equivalent:
See Canadian dollar equivalent method, Direct quotation, Exchange rate, Foreign currency
equivalent method.
Indirect (secondary) financing
Indirect or secondary financing is financing whereby a lessor seeks to finance a lease
arrangement (or a group of leases) by issuing bonds or commercial paper, which may or may not
be secured by the lease agreements.
Influence costs
Influence costs are a type of agency cost incurred when an employee tries to influence a decision
so that they benefit individually.
Information
Information is evidence that has the potential to affect an individual’s decision.
Information asymmetry
Information asymmetry exists when one party has access to information that the other does not.
In agency theory, the agent has an information advantage over the principal.
Information approach to decision usefulness
A financial reporting approach that recognizes individual responsibility for predicting future firm
performance and concentrates on providing useful information for this purpose. The approach
recognizes that the market will react to useful information from any source, including financial
statements.
Information Circulars (IC)
Information Circulars (IC) deal with administrative and assessment issues and are provided to
explain CRA policy about such matters as tax evasion, the collection of taxes, and the conduct of
a tax audit. Like Interpretation Bulletins, Information Circulars are not legally binding.
Information production
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Refers to additional information, finer information, and the credibility of information.
Information risk
Information risk is the probability that the financial statements distributed by a company will be
materially false and misleading.
Information system
In an accounting context, a table giving the objective probability of each possible financial
statement evidence item, conditional on each state of nature.
Information technology (IT)
The hardware and software needed to process data.
Inherent risk
Inherent risk is the probability that material misstatements have occurred in transactions entering
the accounting system used to develop financial statements.
Initial direct costs (lease) (CICA Part I IFRS)
Incremental costs that are directly attributable to negotiating and arranging a lease, except for
such costs incurred by manufacturer or dealer lessors. IAS 17.4
Initial direct costs (lease) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Costs incurred by the lessor that are directly associated with negotiating and executing a specific
leasing transaction. Such costs include commissions, legal fees and costs of preparing and
processing documents for new leases. Such costs do not include supervisory and administrative
costs, promotion and lease design costs intended for recurring use, costs incurred in collection
activities and provisions for uncollectable rentals. 3065.03
Initial lease term
The initial lease term is the period of time during which a lessee is required to make lease
payments. It is the length of the lease contract. It may be followed by a subsequent term if
renewable.
Initial public offering (IPO)
A first time offering of a corporation’s shares to the public.
Injunction
An injunction is a legal settlement in which a person or company, without admitting or denying a
violation of law, agrees not to violate the law in the future.
Input device
An input device is a means of transferring information from source documents to the data
processing component of an accounting system.
Inside information
Information that is not publicly known.
Insider trading
Insider trading is the act of buying or selling assets in response to information that is not
available to the general public.
Insolvency
A firm is considered insolvent when it cannot meet its financial obligations as they become due.
Inspection (as in test of controls procedures)
Inspection, as in test of controls procedures, is when auditors look to see whether the documents
were marked with an initial, signature, or stamp to indicate they had been checked.
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Instalment accounts receivable
Instalment accounts receivable are accounts receivable that allow the customer to make periodic
payments over several months and that typically earn interest for the seller.
Instalment notes
Instalment notes are promissory notes that require the borrower to make a series of payments
consisting of interest and principal.
Instalment sales method of accounting
Instalment sales method of accounting is a system that recognizes proportionate revenue at each
instalment payment date rather than at the time of delivery.
Institution-based trust
Institution-based trust generalizes beyond a given transaction and specific exchange partners.
Social practices within which trust is embedded come to be accepted as social facts: the way
things are and have always been. Three broad classes of institutional elements create and
maintain institutional trust; individual- and firm-specific actions, intermediaries, and regulations.
In-substance defeasance
In-substance defeasance is when a borrower places assets into an irrevocable trust to be used in
retiring debt. The same economic principle as in defeasance except that the issuer retains final
responsibility for debt; therefore, legal liability remains.
Insurance asset (CICA Part I IFRS)
Insurer's net contractual rights under an insurance contract. IFRS 4.A
Insurance contract (CICA Part I IFRS)
Contract under which one party (the insurer) accepts significant insurance risk from another
party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain
future event (the insured event) adversely affects the policyholder. IFRS 4.A
Insurance contract (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Contract under which one party (the insurer) accepts significant insurance risk from another
party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain
future event (the insured event) adversely affects the policyholder. Insurance contracts include
any contract based on climatic, geological, or other physical variables. [3855.08], 3856.05
Insurance contract (employee benefits) (CICA Part II ASPE)
Policy in which an insurance enterprise assumes an unconditional legal obligation to provide
specified benefits to specific individuals in return for a fixed consideration or premium. An
insurance contract is irrevocable and involves the transfer of significant risk from the entity (or
the plan) to the insurance enterprise. When the insurance enterprise providing the policy is a
captive insurer (an insurance enterprise that does business primarily with the entity and related
parties), or when there is any reasonable doubt that the insurance enterprise will meet its
obligations under the policy, the policy is not considered an insurance contract. Insurance
contracts include annuity contracts. 3461G
Insurance liability (CICA Part I IFRS)
Insurer's net contractual obligations under an insurance contract. IFRS 4.A
Insurance risk (CICA Part I IFRS)
Risk, other than financial risk, transferred from the holder of a contract to the issuer. IFRS 4.A
Insured event (CICA Part I IFRS)
Uncertain future event that is covered by an insurance contract and creates insurance risk. IFRS
4.A
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Insurer (CICA Part I IFRS)
Party that has an obligation under an insurance contract to compensate a policyholder if an
insured event occurs. IFRS 4.A
Intangible assets (CICA Part I IFRS) (CICA Part II ASPE) [CICA Part V Prechangeover accounting standards]
Identifiable non-monetary assets without physical substance. 1582.03, 3064.08, IAS 38.8, IFRS
3.A
Intangible properties [CICA Part III ASNFPO]
Capital assets that lack physical substance. Examples of intangible properties include copyrights,
patents, and software. [4430.05(c)]
Integrated foreign operation (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Foreign operation that is financially or operationally interdependent with the reporting enterprise
such that the exposure to exchange rate changes is similar to the exposure that would exist had
the transactions and activities of the foreign operation been undertaken by the reporting
enterprise. 1651.03. The term is not used under IFRS, but is roughly equivalent to roughly
parallel to operations in which the functional currency of the subsidiary is the same as that of the
parent.
See Foreign currency transactions approach, Foreign operation, Self-sustaining foreign operation.
Integrated risk management
Creating the means to discuss, compare, and evaluate substantially different risks. It applies to
an entire organization or government and covers all types of risks (for example, policy,
operational, human resources, financial, legal, health and safety, environment, reputation, and so
on). It includes risks that are internal to an organization and to government and that can be
controlled to a degree through various strategies, policies, and procedures, as well as those that
are external and, in the case of natural disasters, are often less controllable.
Integrity
Integrity is the ability to act in accordance with the highest moral and ethical values all the time.
Intercompany balances and transactions
Transactions between a parent and a subsidiary that involve items reported as revenue or
expense in the income statements of the individual enterprises. These transactions may result in
the creation of intercompany receivable and payable balances. Intercompany balances and postacquisitions transactions should be eliminated upon consolidation.
Intercorporate investment
Any investment by one corporation in the securities of another corporation. Purchase by a
company of securities of another company.
Interdepartmental services
Interdepartmental services, also known as reciprocal services, are services provided between
service departments.
Interest
Interest is the charge assessed for the use of money.
Interest (for tax purposes)
Interest is interpreted by CRA and the courts to be the return, consideration, or material
compensation for the use or retention by one person of a sum of money that belongs to, or is
owed to, another person. Payments need only be characterized as in connection with, incidental
to, or arising from the borrowing in order to be considered as interest.
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Interest cost (defined benefit) (CICA Part I IFRS)
Increase during a period in the present value of a defined benefit obligation which arises because
the benefits are one period closer to settlement. IAS19.7
Interest expense
Interest expense is the recorded cost of borrowed money.
Interest group theory
The interest group theory of regulation suggests that individuals form coalitions, or
constituencies, to protect and promote their interest by lobbying the government or other
regulation-setting agencies. These coalitions are viewed as being in conflict with each other to
obtain their share of benefits from regulation.
Interest method
The interest method is a method of recognizing interest income or expense on amounts due to or
from a corporation where the interest amount is a constant percentage of the opening net
balance. It is also known as the effective interest method.
Interest payment dates
Interest payment dates are the dates on which interest payments are due.
Interest rate parity theory
The interest rate parity theory explains movement in foreign exchange rates as being caused by
market forces that are reacting to disparities in interest rates between countries. Higher interest
rates in one country will encourage capital to flow into that country, creating a demand for that
country’s currency and thereby driving the value of that country’s currency higher.
Interest rate risk (CICA Part I IFRS) [CICA Part V Pre-changeover accounting
standards]
The risk that the fair value or future cash flows of a financial instrument will fluctuate because of
changes in market interest rates. [3862.05A(c)], IFRS 7.A
Interest rate swap
Interest rate swaps are financial derivatives in which two parties agree to exchange the
payments of a debt obligation.
These swaps are used to decrease risk by matching the cash flows of receipts and payments, but
may also save interest rate costs through both the quality differential in rates for the two
counterparties and the avoidance of transaction costs from hedging multiple, rather than
individual, cash flows. Typically, the contract is based on notional amounts. No funds actually
change hands.
Interest rate swaps are multi-period trades of cash flows, usually fixed rate versus floating rate.
Since the principal of each loan is denominated in the same currency, it is not swapped at the
beginning or end of the swap. Only the interest payments are swapped. For this reason, interest
rate swaps are generally less risky than currency swaps. Over time, swaps may have a net
positive or negative present value as market interest rates change. The fixed payments do not
change, but the floating payments do. The value of the fixed payments changes with market
interest rates, like a fixed rate bond.
See Currency swap.
Interest rate used for discounting net lease payments
The interest rate used for discounting net lease payments is, for the lessee, the lower of the
lessor’s interest rate implicit in the lease and the lessee’s incremental borrowing rate. For the
lessor, it is the interest rate implicit in the lease.
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Interest revenue
Interest revenue is revenue provided as a return on loaned money.
Interest-bearing
Interest-bearing describes debt obligations that have a specific interest rate to be applied to their
face value in computing interest payments.
Interest-rate risk
Interest-rate risk is the potential for gains or losses resulting from fluctuations in the market price
of fixed income securities. Such price fluctuations are a consequence of changes in prevailing
interest-rate levels.
Interfund transfer (NFPO)
Loans transferred from one fund (for example, General Fund) that has excess cash to another
(for example, Capital Fund) that requires cash; a permanent reallocation of resources decided by
the board (for example, permanent transfer of cash from General Fund to Capital Fund); or
reciprocal transactions such that expenses by one fund are revenues to another fund. See Fund
accounting.
Interim audit work
Interim audit work consists of procedures performed several weeks or months before the
statement of financial position date.
Interim financial report (CICA Part I IFRS)
Financial report containing either a complete set of financial statements, as described in IAS 1
Presentation of Financial Statements (as revised in 2007), or a set of condensed financial
statements (as described in this Standard) for an interim period. IAS 34.4. See Condensed
financial statements.
Interim period (CICA Part I IFRS)
Financial reporting period shorter than a full financial year. IAS 34.4
Interim statements
Interim statements are financial statements prepared for less than a full fiscal year, usually
monthly or quarterly and usually unaudited.
Internal accounting control
Internal accounting control is the plan of organization and procedures designed to prevent,
detect, and correct accounting errors that may occur and get recorded in ledger accounts and
financial statements.
Internal auditing
Internal auditing is also known as management auditing, operational auditing, or performance
auditing. It is the study of business operations for the purpose of making recommendations
about the economic and efficient use of resources, effective achievement of business objectives,
and compliance with company policies.
Internal auditors
Internal auditors are persons employed within organizations for audit assignments.
Internal business process perspective
One of the four perspectives used by the balanced scorecard to focus on how to improve internal
operations. (Financial, customer, and learning and growth are the other three perspectives)
Internal control
The system of policies and procedures needed to maintain adherence to a company’s objectives,
especially the accuracy of recordkeeping and safeguarding of assets.
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Internal control questionnaire
An internal control questionnaire is a checklist used in a formal interview with knowledgeable
managers.
Internal control structure
The internal control structure consists of a company’s control environment, accounting system,
and control procedures. The existence of a satisfactory internal control structure reduces the
probability of errors and irregularities in the accounts.
Internal evidence
Internal evidence consists of documents that are produced, circulated, and finally, stored with
the client’s information system.
Internalizing
When one party to a contract takes all the risk.
Internal failure costs
Internal failure costs are costs incurred when a non-conforming product is detected before it is
shipped to customers.
Internal labour markets
An internal labour market consists of an employer and long-term employees. These markets are
also characterized by limited ports of entry for hiring, career paths within the firm, and
promotions from within.
Internal motivation
Motivation based on the rewards of keeping promises, honouring contracts, and generally playing
within the rules. A “carrot” approach to motivation.
Internal rate of return
The internal rate of return (IRR) is the interest rate (also called the discount rate) that makes the
net present value of the investment equal zero. The internal rate of return is compared with the
required rate to determine if the investment generates a rate that is equal to or greater than the
required rate.
Internal restrictions
Restrictions imposed on assets of an entity by the governing body of that entity.
Internal transaction
An internal transaction is a term occasionally used to describe economic events that affect an
entity’s accounting equation but that are not transactions between two parties.
International Accounting Standards Board (IASB)
The International Accounting Standards Board (IASB) is an association of professional accounting
bodies from around the world whose purpose is to develop and issue international accounting
and reporting standards.
International Auditing Assurance and Standards Board (IAASB)
The audit standard-setting body for International Standards on Auditing (ISAs).
International Federation of Accountants (IFAC)
An organization dedicated to developing international auditing standards.
International Financial Reporting Standards (CICA Part I IFRS)
Standards and Interpretations adopted by the International Accounting Standards Board (IASB).
They comprise:

(a) International Financial Reporting Standards;
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
(b) International Accounting Standards (IAS); and

(c) Interpretations developed by the International Financial Reporting Interpretations
Committee (IFRIC) or the former Standing Interpretations Committee (SIC).
IAS 8.5, IAS 1.7, IFRS 1.A
International Standards on Auditing (ISAs)
The auditing standards of IFAC.
Inter-period income tax allocation
Inter-period income tax allocation is the process of reallocating a total multi-year income tax
assessment to accounting years on the basis of the accounting recognition of taxable revenue,
gains, expenses, and losses.
Interpretation Bulletins (IT)
Interpretation Bulletins (IT) are issued by CRA and contain its interpretation of specific aspects of
tax law. They reflect CRA policy; however, they are considered quasi-legal in nature and thus are
not legally binding.
Interpretation of the ITA
Clear and unambiguous words used in the Income Tax Act (ITA) must be given their ordinary
meaning unless they are defined in the ITA. Specific provisions in the ITA prevail over general
provisions when there is a conflict between the two. Government interpretations such as
Interpretation Bulletins, Information Circulars, Advance Tax Rulings, and case law (court
decisions) are also used to interpret the ITA.
Intraperiod income tax allocation
Intraperiod income tax allocation is the disaggregation of the components of income tax
according to the nature of the income, gains, and losses giving rise to the tax.
Intrinsic value (CICA Part I IFRS)
The difference between the fair value of the shares to which the counterparty has the
(conditional or unconditional) right to subscribe or which it has the right to receive, and the price
(if any) the counterparty is (or will be) required to pay for those shares. For example, a share
option with an exercise price of CU15, on a share with a fair value of CU20, has an intrinsic value
of CU5. IFRS 2.A. See Currency unit.
Intrinsic value (stock option) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Amount by which the market price of the underlying stock exceeds the exercise price of an
option. For example, an option with an exercise price of $20 on a stock whose current market
price is $25 has an intrinsic value of $5. 3870.07
Inventoriable costs
Inventoriable costs, also known as product costs, are all costs that are involved in the purchase
or manufacture of goods. In the case of manufactured goods, these costs consist of direct
labour, direct material, and manufacturing overhead.
Inventories (CICA Part I IFRS)
Assets:

(a) held for sale in the ordinary course of business;

(b) in the process of production for such sale; or

(c) in the form of materials or supplies to be consumed in the production process or in the
rendering of services. IAS 2.6
Inventories encompass goods purchased and held for resale including, for example, merchandise
purchased by a retailer and held for resale, or land and other property held for resale.
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Inventories also encompass finished goods produced, or work in progress being produced, by the
entity and include materials and supplies awaiting use in the production process. In the case of a
service provider, inventories include the costs of the service, as described in paragraph 19, for
which the entity has not yet recognized the related revenue (see IAS 18 Revenue). IAS 2.8
Inventories (CICA Part II ASPE) [CICA Part V Pre-changeover accounting standards]
Assets:

(i) held for sale in the ordinary course of business;

(ii) in the process of production for such sale; or

(iii) in the form of materials or supplies to be consumed in the production process or in the
rendering of services. 3031.07
Inventory appraisal system
An inventory appraisal system is a system under which capital assets are appraised at the end of
each accounting period in their present condition. Amortization is recorded as the decline in value
over the period.
Inventory carrying costs
Inventory carrying costs are those costs associated with the holding of inventory, such as rental
of storage space, handling costs, property taxes, insurance, and interest on funds.
Inventory ordering costs
Inventory ordering costs are those costs associated with the acquisition of inventory, such as
clerical costs and transportation costs.
Inventory profit
Inventory profit is also known as phantom profit. It is the difference between the cost of goods
sold and their replacement cost.
Inventory turnover
Inventory turnover is the frequency with which a company sells its average inventory balance in
the year. It is a measure of the company’s ability to generate sales on inventory.
Inventory turnover =
Co st o f g o o d sold
s
Average inventory
Investing activities (CICA Part I IFRS) (CICA Part II ASPE) [CICA Part V Prechangeover accounting standards]
Investing activities are transactions that involve making and collecting loans or that involve
purchasing and selling capital assets, other productive assets, or investments other than cash
equivalents — in other words, acquisition and disposal of long-term assets and other investments
not included in cash equivalents. A section of the cash flow statement. IAS 7.6, 1540.06. See
Cash equivalents.
Investment centre
An investment centre describes an organizational architecture in which managers are delegated
decision rights over input mix, product mix, sales prices and quantities, and decision rights over
capital expenditures.
Investment expenses
Investment expenses include such deductions from income (mostly property income) as interest,
investment counselling fees, rental losses, inactive partnership losses, capital losses of other
years applied to capital gains ineligible for the capital gains deduction (CGD), and certain
amounts of tax-shelter write-offs.
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Investment income
Investment income includes such income (generally property income) as interest income, grossed
up dividend income, rental income, and taxable capital gains ineligible for the CGD.
Investment property (CICA Part I IFRS)
Property (land or a building — or part of a building — or both) held (by the owner or by the
lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for:

(a) use in the production or supply of goods or services or for administrative purposes; or

(b) sale in the ordinary course of business. IAS 40.5 See Finance lease.
Investment tax credit (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Type of government assistance related to specific qualifying expenditures that are prescribed by
tax legislation. The credit may be received as a reduction in income taxes otherwise payable or
may be received by other means. 3805.02
At one point in time, corporations were permitted to credit income tax expense and thus enjoyed
the effect of increasing current income by the amount of the investment tax credit. This was
called the flow through method.
Canadian GAAP prohibits the flow through method and requires that the investment tax credit be
credited directly to the asset or credited to a deferred charge, a contra account to the asset. This
is the cost reduction approach.
Investor in a joint venture (CICA Part I IFRS)
Party to a joint venture who does not have joint control over that joint venture. IAS 31.3
Invincible ignorance
The person literally could not have had the requisite knowledge.
Invoice
An invoice is an itemized statement prepared by the vendor that lists the customer’s name, the
items sold, the sales prices, and the terms of sale.
Involuntary dispositions
Involuntary dispositions are the disposals of assets that are not based on the company’s
managers’ decisions.
Irregularities
Irregularities are intentional misstatements or omissions in financial statements, including
fraudulent financial reporting (management fraud) and misappropriations of assets
(defalcations). See Errors.
ISO 9000 standards
ISO 9000 standards are quality control requirements issued by the International Standards
Organization that relate to products sold in European countries.
Issuance date (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
For an equity instrument, the date when the issuing enterprise receives the agreed-upon
consideration, which may be cash, an enforceable right to receive cash or another financial
instrument, goods, or services. 3870.07
Job cost sheet
A job cost sheet is a form prepared for each job initiated into production that serves as a means
for accumulating the materials, labour and overhead costs chargeable to the job and as a means
of computing unit cost.
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Job-order costing system
A job-order costing system is a costing system used in those manufacturing situations where
many different products, jobs, or batches of production are being produced each period.
Joint control (CICA Part I IFRS)
Contractually agreed sharing of control over an economic activity, and exists only when the
strategic financial and operating decisions relating to the activity require the unanimous consent
of the parties sharing control (the venturers). IAS 31.3, IAS 28.2, IAS 24.9
Joint control of an economic activity (CICA Part II ASPE) [CICA Part V Prechangeover accounting standards]
Contractually agreed sharing of the continuing power to determine its strategic operating,
investing and financing policies. 3840.03, 3055.03
Joint liability
Liability under which all parties must be sued together; partners may face joint liability for debts
of the firm.
Joint venture (CICA Part I IFRS)
Contractual arrangement whereby two or more parties undertake an economic activity that is
subject to joint control. IAS 31.3
Joint venture (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Economic activity (investment) resulting from a contractual arrangement whereby two or more
venturers jointly control the economic activity. The joint venture is subject to joint control by the
joint venturers. 3055.03
Journal
A journal is an organized medium for recording transactions in debit-credit format. This is also
called a book of original entry.
Junk bonds
Junk bonds are debt instruments issued with a less than any generally accepted investment
grade rating by a bond rating service. These bonds are higher risk and are issued at a substantial
discount to provide higher effective interest rates to compensate investors for the risk assumed.
Junior governments
Jurisdictions that are not senior governments (for example, cities and municipalities).
Justice
Be fair, or treat people equitably.
Justice in punishment
Wrongdoers ought to be punished in proportion to the wrong done and in order to protect
society from wrongdoing.
Just-in-time inventory (JIT) system
A just-in-time inventory (JIT) system is a management system that involves inventories kept at
their lowest levels possible. Goods and materials arrive just in time for use in the manufacturing
or assembly process.
Kaizen costing
Kaizen costing is the continuous pursuit of cost reduction during the production phase.
Key control
A key control is an important control procedure that auditors should identify and audit. Only
these controls should be audited.
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Key management personnel (KMP) (CICA Part I IFRS)
Persons having authority and responsibility for planning, directing and controlling the activities of
the entity, directly or indirectly, including any director (whether executive or otherwise) of that
entity. IAS 24.9
Under IFRS, details of key management personnel (KMP) compensation must be disclosed in total
and for each of the following categories:

Short term employee benefits

Post employment benefits

Other long term benefits

Termination benefits.
IFRS does not exclude management compensation arrangements, expense allowances, or similar
payments to individuals in the normal course of operations.
Keynesian economics
Keynesian economics is the theory of macroeconomics developed by the British economist John
Maynard Keynes. Keynesian economics admits a larger scope for government intervention in the
economy than do most other approaches.
Known misstatement
A known misstatement is the actual monetary error found in a sample.
Labour efficiency variance
A labour efficiency variance is a measure of the difference between actual hours required to
complete a task and the standard hours allowed, multiplied by the standard hourly rate.
Labour efficiency variance = SR(AH  SH)
where
SR
= standard rate
AH
= actual hours
SH
= standard hours
Lack of unanimity
Source of market failure that arises when shareholders and managers do not agree on the
amount of information the firm should produce.
Land improvements
Land improvements are assets that increase the usefulness of land but that have a limited useful
life and are subject to amortization.
Lapsing of funds
When a government department does not spend its entire budget allocation approved by
Parliament by the end of the budget year, the department’s funds are said to have lapsed.
Last-in first-out (LIFO)
Last-in first-out (LIFO) is a method of inventory costing that assigns the most recent cost value
of purchases to the first unit sold. LIFO is no longer a valid method under Canadian GAAP and is
not allowed for tax purposes.
Late timing
Managers backdate grant dates on ESOs to a time when share price was lower than at the actual
grant date to understate ESO expense.
Lead time
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Lead time is the interval between the time that an order is placed and the time that the order is
finally received from the supplier.
Lean production
A demand-pull system in which each component in a production line is produced immediately as
the next step in the production line needs the component.
Learning and growth perspective
One of the four perspectives used by the balanced scorecard to focus on the identification,
development, retention, and valuation of intellectual capital. (Internal business process,
customer, and financial are the other three perspectives)
Learning curve effect
The learning curve effect is an increase in proficiency that causes an increase in labour efficiency.
Lease (CICA Part I IFRS)
Agreement whereby the lessor conveys to the lessee in return for a payment or series of
payments the right to use an asset for an agreed period of time. IAS 17.4. The definition of a
lease includes contracts for the hire of an asset that contain a provision giving the hirer an option
to acquire title to the asset upon the fulfilment of agreed conditions. These contracts are
sometimes known as hire purchase contracts. IAS 17.6
Lease (CICA Part II ASPE) [CICA Part V Pre-changeover accounting standards]
Conveyance, by a lessor to a lessee, of the right to use a tangible asset, usually for a specified
period of time in return for rent. 3065.03
Lease inducements (CICA Part II ASPE)
Incentives for a lessee to sign a lease (for example, an up-front cash payment to the lessee, an
initial rent-free period or reduced rent payments in early periods, the reimbursement of costs of
the lessee such as moving costs or leasehold improvements, or the assumption by the lessor of
the lessee's pre-existing lease). 3065.03
Lease term (CICA Part I IFRS)
Non-cancellable period for which the lessee has contracted to lease the asset together with any
further terms for which the lessee has the option to continue to lease the asset, with or without
further payment, when at the inception of the lease it is reasonably certain that the lessee will
exercise the option. IAS 17.4
Lease term (CICA Part II ASPE) [CICA Part V Pre-changeover accounting standards]
Fixed non-cancellable period of the lease plus:

(i) all periods covered by bargain renewal options;

(ii) all periods for which failure to renew would impose on the lessee a penalty sufficiently
large that renewal appears, at the inception of the lease, reasonably assured;

(iii) all periods covered by ordinary renewal options during which the lessee has undertaken
to guarantee the lessor's debt related to the leased property;

(iv) all periods covered by ordinary renewal options preceding the date on which a bargain
purchase option is exercisable; and

(v) all periods representing renewals or extensions of the lease at the lessor's option;
provided that the lease term does not extend beyond the date a bargain purchase option
becomes exercisable. The lease term is considered to be non-cancellable if cancellation is
possible only:
o
(i) upon the occurrence of some unlikely contingency;
o
(ii) with permission of the lessor;
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o
(iii) upon the lessee entering into a new lease for the same or equivalent property
with the same lessor; or
o
(iv) upon payment by the lessee of a penalty sufficiently large that continuation of
the lease appears, at the inception of the lease, reasonably assured. 3065.03
Leasehold
Leasehold is the rights granted to a lessee by the lessor under the terms of a lease contract.
Leasing
Leasing is a form of financing that is similar to debt and is used to fund the acquisition of specific
assets. Unlike debt, however, leases are contracts in which the lessor retains title to the asset,
but allows the lessee to use it in return for periodic lease payments.
Least-squares regression method
A statistical method used for estimating changes in a dependent variable in relation to one or
more independent variables. This method produces a straight line (refereed to as the regression
line) through the data points so that the sum of the squared deviations between the data points
and the line is minimized.
Ledger
A ledger is the collection of all accounts used by a business.
Legal capital
Legal capital is the share capital of the company as recorded in its equity accounts. Dividends
may not be paid from share capital without permission from creditors.
Legal obligation (CICA Part I IFRS)
Obligation that derives from:

(a) a contract (through its explicit or implicit terms);

(b) legislation; or

(c) other operation of law. IAS 37.10
Legal responsibility
Legal responsibility means to exercise reasonable care and competence in what CGAs do in their
professional duties. There is no room for negligence.
Lending contracts
Lending contracts are contracts between the firm and its lenders, be they bondholders, banks, or
other.
Lessee
The lessee in a lease is the party renting the asset.
Lessee’s incremental borrowing rate of interest
See Borrowing rate (lease).
Lessor
The lessor in a lease is the party renting out the asset.
Level benefit method
The level benefit method is a method of calculating employers’ contributions for defined benefit
plans. The funding is based on the projected total years of service to date and on the projected
estimated final salary. This amount is then allocated evenly over the years of service.
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Levels of assurance
Levels of assurance given by an auditor are:

standard unqualified report with opinion on financial statements;

review report with negative assurance; and

compilation report with no expression of opinion or assurance.
Leverage
Leverage is the increase in volatility of financial results (earnings per share) for a given variation
in sales. Leverage is caused by fixed costs. Fixed operating costs result in increased fluctuations
of operating income and create operating leverage. Fixed financing costs (for example, interest
on debt) create additional variability in after-tax earnings per share and result in financial
leverage.
Leverage ratios
Leverage ratios are ratios measuring the extent to which a company uses fixed term obligations
to finance its assets.
Leveraged lease
A leveraged lease is a lease whereby the lessor arranges for a third party to provide the bulk of
the financing for a lease arrangement and also arranges for the lessee’s payments to coincide
with the debt service payments to the third party. In a leveraged recourse lease, the third party
may seek compensation from the lessor if the lessee fails to make payments. In a leveraged nonrecourse lease, the third party financier cannot seek repayment from the lessor if the lessee
defaults, restitution is available only from the lessee.
Liabilities
Liabilities are obligations of an entity arising from past transactions or events, the settlement of
which may result in the transfer or use of assets, provision of services or other yielding of
economic benefits in the future.
Liability
Person A is liable for wrongdoing X if A ought to pay or receive some penalty for having done X.
Liability (CICA Part I IFRS)
Present obligation of the entity arising from past events, the settlement of which is expected to
result in an outflow from the entity of resources embodying economic benefits. IAS 37.10
Liability adequacy test (CICA Part I IFRS)
An assessment of whether the carrying amount of an insurance liability needs to be increased (or
the carrying amount of related deferred acquisition costs or related intangible assets decreased),
based on a review of future cash flows. IFRS 4.A
Liability method of recording income taxes
The liability method of recording income taxes records the future tax impact of temporary
differences by using the tax rate that will be in effect in the year of reversal. The future tax
impact is recorded on the statement of financial position as a liability and is updated as the tax
rates change.
Libel
The written or more permanent form of a defamatory statement. See also Slander.
Lien
A lien is a claim by a creditor on the assets of a company as security on a loan or debt. The party
placing the lien has first claim on assets in the event of default.
Life-cycle costing
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Life-cycle costing looks at the profitability of a product line over its entire life. Full life-cycle
costing includes research, development, and engineering cycle costing; manufacturing cycle
costing; and sale, service, and disposal cycle costing.
Likely misstatement
The likely misstatement is the projected amount of the known misstatement in a population of a
sample.
Limited liability
Limited liability is the provision that limits shareholder losses to the amount invested in the
shares of an incorporated business.
Limited partners
Limited partners are partners who have no personal liability for debts of the limited partnership
beyond the amount invested in the partnership.
Limited partnership
A limited partnership is a partnership in which one or several partners enjoy limited liability. In
such a case there must be at least one partner with unlimited liability.
Line
A line position is a position within a company that is directly related to the achievement of the
organization’s basic objectives.
Line of credit
A line of credit is an arrangement with a financial institution that enables a firm to borrow up to a
stipulated amount as the need arises. Interest is only paid on actual balances outstanding. This
form of borrowing is often used to finance seasonal needs.
Liquid asset
A liquid asset is an asset such as cash that is easily converted into other types of assets or used
to buy services or pay liabilities.
Liquid yield option note (LYON)
A zero coupon convertible bond, callable by the issuer and putable by the investor.
Liquidating dividends
Liquidating dividends are asset distributions in excess of a credit balance in retained earnings. It
is considered a return of the original investment.
Liquidity
Liquidity, in the context of a firm, is the ability of the firm to meet its financial obligations as they
become due. Liquidity is enhanced when a firm has a high proportion of cash, liquid assets, or
unused borrowing capacity relative to the level of its current liabilities. In the context of an asset,
liquidity refers to the ability to convert the asset into cash on short notice and at fair value.
Liquidity ratios
Liquidity ratios are designed to test a company’s ability to meet its short-term financial
obligations.
Liquidity risk (CICA Part I IFRS)
The risk that an entity will encounter difficulty in meeting obligations associated with financial
liabilities that are settled by delivering cash or another financial asset. IFRS 7.A
Liquidity risk [CICA Part V Pre-changeover accounting standards]
The risk that an entity will encounter difficulty in meeting its obligations associated with financial
liabilities. [3862.05A(d)]
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Liquidity traders
Liquidity traders are also called “noise traders.” These are investors that are buying or selling
securities for a variety of unpredictable reasons rather than reasons based on informed decision
making. Examples of this type of buying or selling would be: deciding to retire early, needing the
money suddenly, or getting a “hot tip.”
List price
List price is the nominal price of an item before any trade discount is deducted.
Listed personal property
Listed personal property of a taxpayer means the taxpayer’s personal-use property that is all or
any portion of, or any interest in or right to, any print, etching, drawing, painting, sculpture, or
other similar work of art, jewellery, rare folio, rare manuscript, or rare book, stamp, or coin.
Litigated
Litigated is the settlement of a controversy by a judge in the civil justice system.
Litigation support
Litigation support is consulting in the capacity of helping lawyers document cases and determine
damages.
Loans and receivables (CICA Part I IFRS)
Non-derivative financial assets with fixed or determinable payments that are not quoted in an
active market other than:

(a) those that the entity intends to sell immediately or in the near term, which shall be
classified as held for trading, and those that the entity upon initial recognition designates as
at fair value through profit or loss;

(b) those that the entity upon initial recognition designates as available for sale; or

(c) those for which the holder may not recover substantially all of its initial investment,
other than because of credit deterioration, which shall be classified as available for sale. IAS
39.9
An interest acquired in a pool of assets that are not loans or receivables (for example, an interest
in a mutual fund or a similar fund) is not a loan or receivable. IAS 39.9
Loans and receivables [CICA Part V Pre-changeover accounting standards]
Non-derivative financial assets with fixed or determinable payments that are not quoted in an
active market resulting from the delivery of cash or other assets by a lender to a borrower in
return for a promise to repay on a specified date or dates, or on demand, usually with interest,
other than: debt securities; and loans and receivables that the entity, upon initial recognition,
designates as held for trading or as available for sale. [3855.19(h)]
Loans payable (CICA Part I IFRS)
Financial liabilities, other than short-term trade payables on normal credit terms. IFRS 7.A
Local linear approximations (LLAs)
Local linear approximations (LLAs) are used within a relevant range. Within this range
accountants assume that costs will behave in a linear fashion, even though the cost behaviour is
non-linear in most cases. Basically, what this means is that accountants use LLAs to estimate true
marginal costs.
Local searches
Local searches are possible, that is, it is possible to pre-screen decisions. Pre-screening requires
that the possible number of alternative actions be reduced to a limited set.
Localism
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Matters should be handled by the lowest competent authority. See Subsidiarity.
Localization
Shifting power to local levels of government.
Logic model
Visual summary of a program that connects the key activities of the program to its intended
outcomes. Logic modelling is used to guide the selection of performance measures.
Logical unit
A logical unit is an ordinary accounting subsidiary unit that contains the dollar unit selected in a
dollar-unit sample.
Long-lived asset (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Asset that does not meet the definition of a current asset (see Current assets and Current
liabilities, section 1510). See sections 3063.03 and 3475.03, Asset group, Disposal group.
Long term
Long term is the period of time over which productive capacity can be changed and need not be
considered a constraint.
Long-term investments
Investments that have been purchased for interest or dividend income or capital appreciation.
Long-term liability
A long-term liability is a liability due or payable beyond the next operating cycle or fiscal year.
Loss carryback
A loss carryback occurs when a tax loss is carried back against taxable income of (up to three)
prior years and a refund of previous taxes paid is triggered.
Loss carryforward
A loss carryforward occurs when a tax loss is carried forward to be applied against taxable
income of subsequent years after a year in which a taxable loss is incurred. There is a limit as to
how many years depending on the type of loss.
Low earnings quality
Low earnings quality is a weak link between the current financial statements and the future firm
performance.
Lower of cost or market (LCM)
Lower of cost or market (LCM) is the recording of an asset at market value (writing it down to
market value) if market value is less than cost. It is required to avoid overstating assets.
Lump-sum payments
Lump-sum payments that qualify for a special tax-averaging treatment include the following:

employment income and damages for loss of employment received under a court judgment,
arbitration award, or lawsuit settlement agreement;

periodic pension or superannuation benefits excluding those amounts received when
leaving the plan;

wage-loss replacement plan benefits;

spousal or child support payments; and

employment insurance benefits.
Where, after 1977, an individual receives a qualifying lump-sum payment of $3,000 or more, the
individual may deduct this amount in determining his taxable income because the lump-sum
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payment is subject to a special tax-averaging, and the tax otherwise determined is added to tax
otherwise payable.
Lump-sum purchase (basket or group)
A lump-sum purchase is when several assets are purchased together for a single lump-sum price.
Main diagonal
The main diagonal is the set of entries in a square matrix or table that runs from the upper left to
the lower right.
Maintenance of financial capital (nominal dollar capital maintenance)
Maintenance of financial capital is the concept that income results only after preserving financial
capital in dollars. The closing amount of net financial assets must exceed the amount at the start
(excluding additional owner transactions) before income is present.
Maker
The maker is another name for the borrower with respect to notes payable.
Management accounting
Management accounting is the set of rules and conventions used by an organization for reporting
to internal parties for decision making, control, planning, and internal performance evaluation.
Management auditing
Management auditing is also known as internal auditing, operational auditing, or performance
auditing. It is the study of business operations for the purpose of making recommendations
about the economic and efficient use of resources, effective achievement of business objectives
and compliance with company policies.
Management by exception
Management by exception is a system of management in which standards are set for various
operating activities, with actual results then compared against these standards. Any differences
that are deemed significant are brought to the attention of management as “exceptions.”
Management commentary
Also referred to as management discussion and analysis (MD&A).
Management discussion and analysis (MD&A)
Accounting standard pursuant to Ontario Securities Commission Policy Statement 5.10, issued in
1989, the primary objective of which is to enhance investor understanding of the issuer’s
business by providing supplemental analysis and background material to allow a fuller
understanding of the nature of an issuer, its operations, and known prospects for the future.
These financial reporting requirements apply only to firms with shareholders’ equity and revenues
greater than $10 million.
Management fraud
Management fraud, also known as fraudulent financial reporting, is the deliberate fraud
committed by management that injures investors and creditors through materially misleading
financial statements.
Management letter
A communication sent to the client in which recommendations are noted and evaluated.
Management’s discussion and analysis (MD&A)
Management’s discussion and analysis (MD&A) is a section of the annual report or the quarterly
report that provides an overview of the corporation’s operations and financial position noting any
special or unusual circumstances that may have affected the financial results or may affect future
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financial results. It is written from the manager’s perspective, and has a forward-looking
orientation.
Managerial labour market
The managerial labour market constantly evaluates manager performance. A manager’s
reputation determines the value that the market places on that particular manager. A manager
who discloses false or misleading information will suffer damage to his/her reputation. Therefore,
the managerial labour market provides incentive for reliable information production.
Manufacturing and processing profits (M&P) deduction
Any corporation that earns manufacturing and processing profits in Canada, which represent that
portion of all active business income (ABI) in Canada that is derived from the manufacturing or
processing of goods for sale or lease, is entitled to an M&P deduction. However, a corporation
whose taxable income does not exceed $500,000 and is entitled to the small business deduction
(SBD) on all its taxable income is not eligible for the M&P deduction.
The manufacturing and processing profits deduction is equal to a prescribed rate of the lesser of
the following amounts:

M&P earned in Canada during the year
Less: the amount of income qualifying for the SBD

taxable income
Less: the aggregate of:

the amount of income qualifying for the SBD

3 times the foreign tax credit deducted from business income under subsection 126(2) (this
calculation determines the foreign business income component of the taxable income)

its aggregate investment income, if the corporation is a CCPC
Note that REG 5201 outlines an exception to the complex formula above for a small
manufacturing corporation. A simplified formula is available provided the following conditions in
REG 5201 are met:

The corporation’s activities during the year are primarily manufacturing or processing in
Canada of goods for sale or lease.

ABI, including ABI of all associated corporations, does not exceed the business limit for the
year.

The corporation is not engaged in any of the activities considered not to be manufacturing
or processing as defined under subsection 125.1(3) at any time during the year.

The corporation does not carry on any active business outside Canada during the year.
If all of these conditions are met (being the “small manufacturer’s rule”), the M&P deduction is
allowed on total business income, even if the latter does not consist solely of ABI from
manufacturing or processing.
Manufacturing cycle efficiency (MCE)
Manufacturing cycle efficiency (MCE) is the process (value-added) time as a percentage of
throughput time.
Manufacturing cycle time
The manufacturing cycle time, also known as throughput time, is the time required to turn raw
materials into completed products.
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Manufacturing overhead costs
Manufacturing overhead costs are all costs associated with manufacturing except direct materials
and direct labour. Examples of these costs would include factory rent, supervisors’ salaries, and
indirect materials.
Margin of safety
The margin of safety is the margin by which the return on assets exceeds the average interest
rate on fixed term securities. A smaller spread indicates higher risk of negative leverage. It is also
the excess of budgeted or actual sales over the break-even volume of sales.
Margin of safety percentage
Margin of safety in dollars (budgeted or actual sales over break-even) divided by total budgeted
or actual sales.
Marginal cost (revenue)
The marginal cost (revenue) is the rate of change in cost (revenue), usually due to one additional
unit of output (sales).
Marginal costing
Marginal costing, also known as variable costing, is a costing method that includes only variable
manufacturing costs — direct materials, direct labour, and variable manufacturing overhead — in
the cost of a unit of product.
Marginal tax rate
The marginal tax rate is the additional income tax payable if one dollar of income is added to the
taxable income already computed. Furthermore, the marginal tax rate is also the decrease in
income tax payable if one dollar of deduction is removed from taxable income.
Markdown
A markdown is a reduction in an original sales price.
Markdown cancellation
A markdown cancellation is an increase in a previously reduced sales price that does not exceed
the original sales price.
Market capitalization rate
The market capitalization rate is the rate of discount which investors apply to future cash flows
when establishing the current market price for a security. It also represents the effective yield
provided by the security, or the discount rate that, if applied to anticipated cash flows, equates
the present value of such cash flows with the current market price of the security.
Market condition (CICA Part I IFRS)
Condition upon which the exercise price, vesting or exercisability of an equity instrument depends
that is related to the market price of the entity's equity instruments, such as attaining a specified
share price or a specified amount of intrinsic value of a share option, or achieving a specified
target that is based on the market price of the entity's equity instruments relative to an index of
market prices of equity instruments of other entities. IFRS 2.A
Market failure
Occurs in information production when the “right” amount of information is not produced, such
that the social benefits of information are not equal to the social costs.
Market for corporate control
See Takeover market.
Market portfolio
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A market portfolio is an investment portfolio encompassing all risky securities in the market. This
is the most diversified portfolio of risky securities available to investors, and has a beta coefficient
of one.
Marketable securities
Marketable securities are investment securities sold in active markets with readily determinable
market prices.
Market-related value of pension assets
Market-related value of pension assets is the value of pension fund assets that are based on fair
values but not on the current fair value.
Market risk (CICA Part I IFRS) [CICA Part V Pre-changeover accounting standards]
The risk that the fair value or future cash flows of a financial instrument will fluctuate because of
changes in market prices. Market risk comprises three types of risk: currency risk, interest rate
risk and other price risk. [3862.05A(f)], IFRS 7.A
Market value method of accounting for investments
The market value method of accounting for investments uses investment values based on market
value rather than cost. Changes in market value can be included in the income of the period or
deferred.
Market-wide factors
Also referred to as economy-wide factors. See States of nature.
Marking to market
Marking to market is a procedure followed by futures market clearing houses to rewrite futures
contracts daily so that all future contracts for a given commodity and with a given maturity
specify the same futures price. If this rewriting confers a gain or loss on a trader, that trader’s
margin account is adjusted to compensate.
Markup
A markup is the difference between purchase cost and original sales price.
Markup on cost method
A method of determining intercompany profits in which the selling price and the markup
(expressed as a percentage of the original cost to the seller) are known. See Gross profit on sales
method.
Matching principle
Expenses should be reported in the same accounting period as revenues that were earned as a
result of expenses. The matching of expenses with revenues will sometimes require a company
to predict future events. It is important to realize that financial statements are based on
predictions which include measurements that are not precise (because it is impossible to
precisely predict the future).
Material loading charge
A material loading charge is a markup applied to the cost of materials that is designed to cover
the costs of ordering, handling, and carrying materials in stock and to provide for some profit.
Material weakness in internal control
Material weakness in internal control is the condition in which the design or operation of the
specific internal control structure elements (environment, accounting system, control procedures)
does not reduce the risk that material errors or irregularities may occur. This type of weakness
may not be caught by employees within a timely period in the normal course of performing their
assigned functions.
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Materiality (CICA Part I IFRS)
Omissions or misstatements of items are material if they could, individually or collectively,
influence the economic decisions that users make on the basis of the financial statements.
Materiality depends on the size and nature of the omission or misstatement judged in the
surrounding circumstances. The size or nature of the item, or a combination of both, could be the
determining factor. IAS 8.5, IAS 1.7. Assessing whether an omission or misstatement could
influence economic decisions of users and therefore be material requires consideration of the
characteristics of those users. The Conceptual Framework for Financial Reporting states in
paragraph 25 that users are assumed to have a reasonable knowledge of business and economic
activities and accounting and a willingness to study the information with reasonable diligence.
Therefore, the assessment needs to take into account how users with such attributes could
reasonably be expected to be influenced in making economic decisions. IAS 1.7 See Conceptual
Framework for Financial Reporting.
Requirements of accounting principles may be ignored if their effects on the financial statements
are unimportant to users. An accountant makes a judgment that considers whether an amount is
large enough to influence or change the decisions of people who rely on certain information. If
the amount does not affect the decision, a more expedient accounting method may be used for
that item (for example, ignore the item).
Materials price variance
A materials price variance is a measure of the difference between the actual unit price paid for an
item and the standard price that should have been paid, multiplied by the quantity purchased.
Materials price variance = (AP  SP)AQ
where
AP
= actual price
SP
= standard price
AQ
= actual quantity
Materials quantity variance
A materials quantity variance is a measure of the difference between actual quantity of materials
used in production and the standard quantity allowed, multiplied by the standard price per unit of
materials.
Material quantity variance = (AQ  SQ) SP
where
AQ
= actual quantity
SQ
= standard quantity
SP
= standard price
Materials requisition form
A materials requisition form is a detailed source document that specifies the type and quantity of
materials that are to be drawn from the storeroom and identifies the job to which the materials
are to be charged.
Mathematical computations (as audit evidence)
Mathematical computations, as audit evidence, are the auditors’ own calculations.
Maturity date
The maturity date is the end of the bond term and the due date for repayment of the face value.
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Maturity value
The maturity value is the value of a note or bond as stated on the note or bond itself.
MD&A
Management’s discussion and analysis.
Mean-variance utility
A method of directly calculating a utility using the expected rate of return.
Measurement approach
A financial reporting approach under which accountants undertake a responsibility to incorporate
fair values into the financial statements proper, providing that this can be done with reasonable
reliability, thereby recognizing an increased obligation to assist investors to predict future firm
performance.
Measurement conventions
Measurement conventions are ways to report financial positions and the results of operations.
They are accounting choices that determine the way the financial information is reported.
Measurement date
Date on which a company’s management adopts a formal plan to wind up or sell a segment.
Measurement date (CICA Part I IFRS)
Date at which the fair value of the equity instruments granted is measured for the purposes of
IAS 39.
For transactions with employees and others providing similar services, the measurement date is
grant date.
For transactions with parties other than employees (and those providing similar services), the
measurement date is the date the entity obtains the goods or the counterparty renders service.
IFRS 2.A. See Grant date.
Measurement date (stock option) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
For transactions with employees, the date at which the stock price that enters into measurement
of the fair value of an award of employee stock-based compensation is fixed. Paragraphs
3870.14-.17 establish guidance to determine the measurement date for transactions with nonemployees. 3870.07
Measurement perspective
The measurement perspective on financial reporting is an approach under which accountants
undertake a responsibility to incorporate fair values into the financial statements proper,
providing that this can be done with reasonable reliability, thereby recognizing an increased
obligation to assist investors to predict future firm performance.
Measurement uncertainty (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Uncertainty in the determination of the amount at which an item is recognized in financial
statements. Such uncertainty exists when there is a variance between the recognized amount
and another reasonably possible amount. 1508.04. See Estimated liability, Warranty.
Memorandum accounts
Account groups used to provide improved control where no control account exists, because the
assets or liabilities have been recorded as expenditures or revenues in the period in which they
were incurred or earned. Memorandum accounts can be used inside the account groups to keep
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track of capital assets when they are recorded as expenditures at the time of purchase. See
Account groups.
Merchandise
Merchandise describes goods acquired for the purpose of reselling them to customers.
Merchandise inventory
Merchandise inventory refers to goods on hand for resale, purchased by a retailer for a trading
company.
Merchandise turnover
Merchandise turnover is the number of times a company’s average inventory was sold during an
accounting period. It is calculated by dividing cost of goods sold by the average merchandise
inventory balance.
Merchandise turnover =
Co st o f g o o dso
s ld
Av erag e merch an d ise in v en to ry
Merchandising
Merchandising is the sale of products that are in finished form that have been acquired from a
manufacturer or other outside source.
Merger
A merger is a combination of two or more companies into a single corporate entity in a business
combination.
Merit-based employment
Recruitment and promotion of members of the public service strictly on the basis of their skills
and ability.
Minimum compliance
Minimum compliance is reporting the least amount of information to external stakeholders within
the relevant constraints, whether GAAP or regulation, by a financial information preparer.
Minimum lease payments (CICA Part I IFRS)
Payments over the lease term that the lessee is or can be required to make, excluding contingent
rent, costs for services and taxes to be paid by and reimbursed to the lessor, together with:

(a) for a lessee, any amounts guaranteed by the lessee or by a party related to the lessee;
or

(b) for a lessor, any residual value guaranteed to the lessor by:
o
(i) the lessee;
o
(ii) a party related to the lessee; or
o
(iii) a third party unrelated to the lessor that is financially capable of discharging the
obligations under the guarantee. IAS 17.4.
However, if the lessee has an option to purchase the asset at a price that is expected to be
sufficiently lower than fair value at the date the option becomes exercisable for it to be
reasonably certain, at the inception of the lease, that the option will be exercised, the minimum
lease payments comprise the minimum payments payable over the lease term to the expected
date of exercise of this purchase option and the payment required to exercise it.
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Minimum lease payments (lessee) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Minimum rental payments called for by the lease over the lease term; any partial or full
guarantee, by the lessee or a third party related to the lessee, of the residual value of the leased
property at the end of the lease term (when the lessee agrees to make up a deficiency in the
lessor's realization of the residual value below a stated amount, the guarantee to be included in
the minimum lease payments is the stated amount rather than an estimate of the deficiency to
be made up); and, any penalty required to be paid by the lessee for failure to renew or extend
the lease at the end of the lease term; provided that if the lease contains a bargain purchase
option, only the total of the minimum rental payments over the lease term and the payment
called for by the bargain purchase option is included in minimum lease payments. Lease
payments that depend on factors measurable at the inception of the lease, such as the consumer
price index or the prime interest rate, are not, in substance, contingent rentals in their entirety,
and are included in the minimum lease payments, based on the index or rate existing at the
inception of the lease. 3065.03
Minimum lease payments (lessor) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Minimum lease payments for the lessee as described above; and, any residual value or rental
payments beyond the lease term guaranteed by a third party unrelated to either the lessee or
lessor, provided that the guarantor is financially capable of discharging the obligations under the
guarantee. 3065.03
Minimum value (stock option) [CICA Part V Pre-changeover accounting standards]
Amount attributed to an option that is calculated without considering the expected volatility of
the underlying stock. Minimum value may be computed using a standard option pricing model
and a volatility of effectively zero. It also may be computed as the current price of the stock
reduced to exclude the present value of any expected dividends during the option's life, minus
the present value of the exercise price. Different methods of reducing the current price of the
stock for the present value of the expected dividends, if any, may result in different computed
minimum values. 3870.07
Mining properties (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Items of property, plant, and equipment represented by the capitalized costs of acquired mineral
rights and the costs associated with exploration for and development of mineral reserves.
3061.03
Ministerial responsibility
A constitutional convention in governments that a cabinet minister bears the ultimate
responsibility for the actions of their ministry.
Mismatch
See Excessive net income volatility.
Misrepresentation
A false statement of fact that persuades someone to enter into a contract or take some other
action.
Mistake
An error about some aspect of a contract that destroys consensus.
Mitigating factors
Mitigating factors are elements of financial flexibility (lines of credit, debt extensions, dividend
elimination) available as survival strategies in circumstances of going concern uncertainty that
may reduce the financial difficulties faced by a firm.
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Mix variance (also known as material mix variance)
A mix variance is the dollar effect of a difference between the actual mix of material and the
budgeted mix of materials on total materials cost.
Mix variance = [AQ – (B%  TI)] × SP
where
AQ
= actual quantity for a given material
B%
= budgeted percentage
TI = total input
SP = standard price
Mixed cost
A mixed cost is a cost that contains both variable and fixed costs elements.
Mixed measurement model
Present-day accounting, which is a mix of historical cost and current value.
Modification of terms
A modification of terms happens when the interest, term, covenants, or other characteristics of
debt are altered, usually after default.
Modified accrual basis of accounting (NFPO)
Method of accounting in which the cash basis is used for inflows but payables are accrued for
outflows, or in which accruals are used for inflows and outflows but not to record amortization on
capital assets. Its use does not comply with GAAP. See Accrual basis of accounting, Cash basis of
accounting.
Monetary assets (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Money held and assets to be received in fixed or determinable amounts of money. 3064.08, IAS
38.8. See Non-monetary assets and liabilities.
Monetary assets and liabilities (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Money or claims to future cash flows that are fixed or determinable in amounts and timing by
contract or other arrangement. Examples are cash, and accounts and notes receivable and
payable in cash. 3831.05
Monetary items (CICA Part I IFRS)
Units of currency held and assets and liabilities to be received or paid in a fixed or determinable
number of units of currency. IAS 21.8
Monetary items (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Foreign or domestic money and claims to foreign or domestic money, the value of which (in
terms of the monetary unit, whether foreign or domestic) is fixed by contract or otherwise.
Future income tax liabilities and assets are classified as monetary items. 1651.03
Monetary items (reporting)
With the exception of those items outside the scope of IAS 21, IFRS requires foreign
denominated monetary assets and liabilities such as receivables, payables, and loans to be
translated at the year-end spot rate on the balance sheet date. Gains or losses on translation are
recognized in net income in the period in which they occur. See Foreign currency transactions,
Non-monetary items (reporting), Spot exchange rate.
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Monetary unit principle
The monetary unit principle (also called stable-dollar principle or unit-of-measure principle)
requires transactions to be expressed in common units of money. It is also assumed that the unit
of money is stable so that inflationary or deflationary trends are not adjusted for and the original
amounts recorded stand.
Money market
The money market represents the places and institutions where short-term debt is traded. Most
of the trading is done in Treasury bills and commercial paper with maturities of less than one
year.
Money market investments
Money market investments are monetary financial assets in the form of short-term interestbearing securities traded in open markets.
Money purchase limit
The money purchase limit for a calendar year with respect to a contribution to an RPP is $13,500
for years after 1995 and before 2003. For 2003, the limit is $15,500. For 2004, $16,500; for
2005, $18,000; for 2006, $19,000; for 2007, $20,000, increasing by $1,000 each year until 2010
when it will be indexed. For years prior to 1996, the amounts can be found in section 147.1
under money purchase limit.
Monthly instalments
Corporations are required to pay monthly instalments that will be applied to their taxes owing
upon filing of their annual income tax return.
Moral absolutism
The view that one can and does know for sure that all one's moral beliefs are true.
Moral cynicism
The view that though people may know what is right they are unlikely to act on that knowledge.
Moral hazard
Moral hazard is the tendency of individuals to deviate from contracts and take self-interested
actions because the other party has insufficient knowledge to know if the contract was honoured.
Moral responsibility
Person A is morally responsible for an untoward event, E, provided that A is causally responsible
for E and that A both could and should have acted otherwise. To say that A could have acted
otherwise is to say that A met certain cognitive and volitional conditions.
Moral skepticism
The view that it is virtually impossible to decide whether one moral belief is better than another.
More likely than not (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
An event is more likely than not when the probability that it will occur is greater than 50%.
3465.02. See Probable.
Mortgage
A mortgage is a legal agreement that protects a lender by giving the lender the right to be paid
out of the cash proceeds from the sale of the borrower’s specific assets identified in the
mortgage.
Mortgage bond
A mortgage bond is a long-term debt that has real estate or other physical assets pledged as
collateral.
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Motive
A motive, with reference to fraud, is the pressure experienced by a person (and believed to be
not sharable with friends and confidants) that impels the fraudulent behaviour.
Moving average
A moving average is an average used with the perpetual inventory systems that calculates a new
unit cost after each purchase based on relative costs and quantities.
Moving expenses
Eligible moving expenses include the following specified categories of expenses:

travelling costs, including reasonable amounts for meals and lodging;

transportation and storage costs for household effects;

costs for up to 15 days for temporary board and lodging near either residence;

costs of cancelling a lease for the old residence;

selling costs for the sale of the old residence, such as advertising, legal fees, and real
estate commissions, but excluding expenses for work done to make the property more
saleable or any loss incurred on the sale;

legal fees in connection with the purchase of the new residence and any taxes (other than
GST) related to the transfer or the registration of title if the old residence is being sold or
has been sold. No other costs incurred in acquiring the new residence are allowed as
moving expenses;

interest, property taxes, insurance premiums and heating and utility costs for the old
residence, to a maximum of $5,000, where those expenses are incurred for the period
during which reasonable efforts are being made to sell the residence, provided that it is not
rented and or occupied by the taxpayer or a member of the taxpayer’s household; and

cost of utility connections and disconnections, changing addresses on legal documents and
replacing driver’s licences and vehicle permits.
Moving support
Moving support occurs when the set of possible payoffs is different depending on which act is
taken.
Multiemployer plans (CICA Part I IFRS)
Defined contribution plans (other than state plans) or defined benefit plans (other than state
plans) that:

(a) pool the assets contributed by various entities that are not under common control; and

(b) use those assets to provide benefits to employees of more than one entity, on the basis
that contribution and benefit levels are determined without regard to the identity of the
entity that employs the employees concerned. IAS 19.7
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Multiemployer plan (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Defined benefit plan to which two or more unrelated entities contribute, usually pursuant to one
or more collective bargaining agreements. Unrelated entities are entities that do not meet the
definition of related parties in Related Party Transactions, section 3840. 3461G. Multiemployer
plans may be referred to as joint trust or union plans. Characteristics of a multiemployer plan
include the following:

(i) Assets contributed by one participating entity are not segregated in a separate account
or restricted to provide benefits only to employees of the entity and, thus, may be used to
provide benefits to employees of other participating entities;

(ii) Participating entities usually have a common industry bond or at least have the same
labour union. Multiemployer plan is usually administered by a board of trustees composed
of management and labour representatives. 3461G
Multinational business
A multinational business is a company that operates in a large number of different countries.
Multiple employer plan (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Defined benefit plan maintained by more than one entity that is not a multiemployer plan. In
contrast to multiemployer plans, a multiple-employer plan maintains separate accounts for each
entity so that contributions provide benefits only for employees of the contributing entity. In
addition, multiple-employer plans are generally not collectively bargained and are intended to
allow participating entities, commonly in the same industry, to pool their plan assets for
investment purposes and to reduce the cost of plan administration. Multiple employer plans may
have features that allow participating entities to have different benefit formulae, with the entity's
contributions to the plan based on the benefit formula selected by the entity. 3461G
Multiple predetermined overhead rates
Multiple predetermined overhead rates is the process of setting different predetermined overhead
rates for each department, rather than having a single predetermined overhead rate for the
entire company.
Multiple regression
A multiple regression is a statistical method used when variations in a dependent variable are
caused by more than one independent variables.
Multiple-step format
The multiple-step format for presenting a statement of profit and loss is one in which there are a
number of subtotals that reflect important relationships. For example, gross margin and
operating income.
Mutual agency
Mutual agency is the legal relationship among the partners whereby each partner is an agent of
the partnership and is able to bind the partnership to contracts within the apparent scope of the
partnership’s business.
Mutual entity (CICA Part I IFRS) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
An entity, other than an investor-owned entity, that provides dividends, lower costs or other
economic benefits directly to its owners, members or participants. For example, a mutual
insurance company, a credit union, and a co-operative entity are all mutual entities. 1582.03,
IFRS 3.A
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Nash equilibrium
The Nash equilibrium is the only strategy pair such that given the strategy choice of the other
player, each player is content with his or her strategy and therefore has no incentive to change
his or her play.
Natural business year
The natural business year of a business is the 12 months ending when the activities of the
business are at their lowest point.
Natural hedge
A natural hedge is created when institutions coordinate the duration, value, and so on, of
financial assets with financial liabilities to offset any changes in values.
Nature (of audit procedures)
The nature of audit procedures refers to the seven general procedures: recalculation, physical
observation, confirmation, verbal enquiry, document examination, scanning, and analytical
procedures.
NCI
See Non-controlling interest.
Near term (CICA Part II ASPE) [CICA Part V Pre-changeover accounting standards]
Period of time not to exceed one year from the date of the financial statements. 1508.04
Negative assurance
Negative assurance would be written as follows: “Based on our review, we are not aware of any
material modifications that should be made to the accompanying financial statements in order for
them to be in conformity with generally accepted accounting principles.” This level of assurance
is only permitted in reviews of unaudited financial statements, letters to underwriters, and
reviews of interim financial information.
Negative externality
A negative externality is created when the cost to society is greater than the cost to the
individual or company. For example, a factory producing a product that creates air pollution
results in higher medical costs and decreased quality of life for those living near the factory. This
is a cost the factory does not have to pay.
Negative goodwill
Negative goodwill is the excess of the fair value of acquired net assets over cost of the purchase.
A negative goodwill should be eliminated, to the extent possible, by allocating it as a pro rata
reduction of the amounts that otherwise would be assigned to all of the acquired assets except:
financial assets other than investments accounted for by the equity method; assets to be
disposed of by sale; future income tax assets; prepaid assets relating to employee future benefit
plans; and any other current assets. Any remaining excess should be presented as an
extraordinary gain. Negative goodwill and extraordinary items are not permitted under CICA Part
I IFRS.
See Acquisition differential, Bargain purchase, Goodwill.
Negative leverage
Negative leverage occurs when a company earns less on equity than the rate of return on assets
because of the presence of debt, with a cost in excess of the return on assets, in the capital
structure.
Negligence
The unintentional, careless act that results in injury to another person or property.
Negotiable instruments
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Substitutes for money that bestow unique benefits; vehicles for conveniently transferring funds
or advancing credit.
Neo-conservative ideology
Fiscally restrictive and socially conservative philosophy.
Neo-liberal ideology
Political movement that began in the 1960s that blends traditional liberal concerns for social
justice with an emphasis on economic growth.
Net assets
Net assets are total assets less total liabilities. It is also known as owner’s equity.
Net assets available for benefits (CICA Part I IFRS)
Assets of a plan less liabilities other than the actuarial present value of promised retirement
benefits. IAS 26.8
Net assets form
The net assets form of expressing the statement of financial position uses the format:
Assets  Liabilities = Owner’s equity
or
A  L = OE
Net basis of recording leases
The net basis of recording leases on the lessor or lessee’s books is when the lease receivable
(payable) is recorded net of interest. This means that the total payments are discounted to
present value. This is common for lessees.
Net book value
Net book value is the original cost of an asset plus any capitalized post-acquisition cost less
accumulated amortization to date.
Net capital losses
Net capital losses are the excess of allowable capital losses over taxable capital gains for that
year. Allowable capital losses can only be deducted against taxable capital gains. As such, when
there are net capital losses they may be carried back three years and forward indefinitely to
offset the excess of taxable capital gains over allowable capital losses for those years.
Net carrying amount (capital asset) (CICA Part III ASNFPO)
Net carrying amount of a capital asset is cost less both accumulated amortization and the amount
of any writedowns. [4430.05(f)]
Net carrying amount (property, plant, and equipment) (CICA Part II ASPE) [CICA
Part V Pre-changeover accounting standards]
Cost less both accumulated amortization and the amount of any writedowns. 3061.03
Net income
Net income is the excess of revenues over expenses for a period.
Net income (for tax purposes)
Net income is used to designate income as calculated under section 3 of the ITA. It serves to
distinguish income for tax purposes pursuant to section 3 from its various components, as
identified by their source (employment income, business income, property income, capital gains,
and income from other sources). The concept of net income for tax purposes encompasses the
whole income measurement process, which includes additions, deductions, and exemptions, and
the period for the computation.
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Net investment in a foreign operation (CICA Part I IFRS)
Amount of the reporting entity's interest in the net assets of that operation. IAS 21.8
Net investment in a self-sustaining foreign operation (CICA Part II ASPE) [CICA Part
V Pre-changeover accounting standards]
Reporting enterprise's proportionate ownership of the foreign operation's net assets (that is, the
amount equivalent to the carrying value of the investment computed as if using the equity
method) and any other intercompany balances of a long-term nature that are related to the
acquisition or financing of the foreign operation. 1651.03
Net investment in the lease (CICA Part I IFRS)
Gross investment in the lease discounted at the interest rate implicit in the lease. IAS 17.4
Net loss
Net loss is the excess of expenses over revenues for a period.
Net present value (NPV)
The net present value (NPV) of an investment is equal to the present value of the net cash flows
from that investment minus the net cost of the initial investment. The two important factors to
consider when calculating an investment’s NPV are the appropriate discount rate and the
estimation of the cash flows.
Net realizable value (CICA Part I IFRS)
Estimated selling price in the ordinary course of business less the estimated costs of completion
and the estimated costs necessary to make the sale. IAS 2.6. The net amount that an entity
expects to realize from the sale of inventory in the ordinary course of business. Fair value reflects
the amount for which the same inventory could be exchanged between knowledgeable and
willing buyers and sellers in the marketplace. The former is an entity-specific value; the latter is
not. Net realizable value for inventories may not equal fair value less costs to sell. IAS 2.7
Net realizable value (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Estimated selling price in the ordinary course of business less the estimated costs of completion
and the estimated costs necessary to make the sale. 3031.07
Net recoverable amount (property, plant, and equipment) (CICA Part II ASPE) [CICA
Part V Pre-changeover accounting standards]
Estimated future net cash flow from use together with its residual value. 3061.03
Net worth
Net worth is defined as total assets minus total liabilities. In a corporation, net worth is capital
stock plus retained earnings.
Neutrality
Neutrality occurs when the information provided is not reflective of a particular viewpoint, a
predetermined result, or a particular person’s opinion.
See Conceptual Framework for Financial Reporting.
Neutrality (for tax purposes)
Neutrality means that the tax system should not influence the allocation of resources within the
private sector; it must not affect the business or investment decisions of taxpayers.
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New entity method (business combination)
Method to effect a business combination that assumes that the combination has resulted in the
formation of a new entity. The new-entity method requires both the parent and the subsidiary to
revalue their assets to fair value at consolidation to show that a new company has been formed
from the assets of the two previously existing companies. This method was never generally
accepted in Canada given the difficulty of revaluing to fair value and the problem of
implementation. Specifically, the assets of the parent company are not subject to an arm’s-length
transaction in the marketplace, hence any revaluation to fair value is subjective.
See Entity theory of consolidation.
Nexus of contracts
A nexus of contracts is the concept that means that firms are thought of as a series of related
contracts.
NFPO
See Not-for-profit organization.
Noise traders
Noise traders are participants in financial markets who do not employ all publicly available
information. They trade for reasons other than that provided by publicly available information.
For example, retirement might trigger the sale of stock regardless of the current information
about that stock.
Nomenclature
Nomenclature refers to the terms used to refer to different parts of a provision within the ITA; it
also reflects the structure of each section of the ITA.
Nominal accounts (temporary accounts)
Nominal accounts are general ledger accounts closed to retained earnings at the end of an
accounting period. These are usually statement of profit and loss accounts.
Nominal dollar capital maintenance
Nominal dollar capital maintenance is the concept that income results only after preserving
financial capital in dollars. The closing amount of net financial assets must exceed the amount at
the start before income is present.
Nominal interest rate
The nominal interest rate is the interest rate stated in a loan agreement or on the face of a debt
security. It is the rate at which interest is paid on the stated principal.
Non–arm’s length transactions
Non–arm’s length transactions are transactions between related persons. They can also be
transactions between persons who are unrelated but who do not deal with each other at arm’s
length. The ITA requires that transactions between taxpayers be carried on as they would on the
open market under normal market conditions.
Non-cancellable lease (CICA Part I IFRS)
Lease that is cancellable only:

(a) upon the occurrence of some remote contingency;

(b) with the permission of the lessor;

(c) if the lessee enters into a new lease for the same or an equivalent asset with the same
lessor; or

(d) upon payment by the lessee of such an additional amount that, at inception of the
lease, continuation of the lease is reasonably certain. IAS 17.4
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Non-capital loss
A non-capital loss is the aggregate of:

the excess of losses over income from an office, employment, business, and property
(including dividends deductible under section 112);
less

income from other sources;
plus

allowable business investment losses for the year;

net capital loss carryovers deducted in the year;

stock option deduction;

home relocation loan deduction;

social assistance or WCB payments deduction; and

dividends deductible pursuant to section 112.
The above amount is then adjusted by deducting the aggregate of:

taxable capital gains other than listed personal property gains;

taxable net gains from listed personal property;
less

allowable capital losses (excluding those from listed personal property) in excess of
allowable business investment losses included in allowable capital losses;

farm losses included in business losses above;
plus

foreign tax addition in section 110.5 and subparagraph 115(1)(a)(vii).
Note that losses cannot create negative net income for tax purposes. Furthermore, a non-capital
loss may be carried back three years and carried forward seven years (10 if incurred after March
2004) and can be applied against any type of income.
Non-controlling interest (NCI) (CICA Part I IFRS) (CICA Part II ASPE) [CICA Part V
Pre-changeover accounting standards]
A non-controlling interest is equity in a subsidiary not attributable, directly or indirectly, to a
parent — when a company controls a subsidiary but does not own 100% of the voting shares. It
still includes 100% of the net assets and net income in the consolidated financial statements. The
non-controlling interest in earnings is the portion of the subsidiary’s earnings that accrue to the
other, minority shareholders. The non-controlling interest in assets (a statement of financial
position credit) is the portion of net assets that represents the minority shareholders’ interest.
1582.03 1602.02, 3251.03, IAS 27.4, IFRS 3.A
Non-cooperative games
In non-cooperative games, the parties do not have the option of entering into a binding
agreement; therefore, any agreement made can be broken by either party.
Non-cumulative preferred shares
Non-cumulative preferred shares are preferred shares on which the right to receive dividends is
forfeited for any year that the dividends are not declared.
Non-current asset (CICA Part I IFRS)
Asset that does not meet the definition of a current asset. IFRS 5.A
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Non-current liability
A non-current liability is the same as a long-term liability. It is a liability due or payable beyond
the next operating cycle or fiscal year.
Non-depreciable property
Non-depreciable property includes all property that does not decrease in value through wear and
tear for the purpose of earning income and, therefore, it is not eligible for CCA under the ITA.
Such property includes land, receivables, inventory, investments, personal use property, and
listed personal property.
Non-financial instrument
Contract to buy or sell non-financial items that does not meet the definition of a financial
instrument because the contractual right of one party to receive a non-financial asset or service
and the corresponding obligation of the other party does not establish a present right or
obligation to receive, deliver, or exchange a financial asset under the contract. For example, a
contract that provides for settlement only by the receipt or delivery of a non-financial item (for
example, an option, futures, or forward contract on silver) is not a financial instrument.
IAS 39 applies to a contract to buy or sell a non-financial item if that contract can be settled net
in cash or another financial instrument, or by exchanging financial instruments, as if the contracts
were financial instruments. The exception is where the contract was entered into and remains
held for the purpose of receipt or delivery of a non-financial item in accordance with the entity’s
expected purchase, sale, or usage requirements. However, if the contract were priced based on a
variable that is not closely related to the asset being purchased, sold, or used, then the
requirements of IAS 39 would apply to non-financial derivatives.
A contract to buy or sell a non-financial item does not meet the definition of a financial
instrument (a contract to buy or sell a commodity for a fixed price at a future date). For example,
a manufacturer that uses crude oil as one of its inputs enters into a contract that calls for the
delivery of 1,000 barrels of crude oil at a certain price at a future date. The company has no
choice but to take delivery of the oil on settlement.
Non-financial performance indicators
Numerical input, output, or outcomes measures other than those normally calculated from
financial statements.
Non-governmental agencies
Organizations in the voluntary or not-for-profit sector; organizations which are not part of either
the private or public sectors.
Non-interest bearing notes
Non-interest bearing notes are notes with no stated interest rate, usually with face values higher
than the amount borrowed.
Non-maleficence
Do no harm.
Non-monetary assets and liabilities (CICA Part II ASPE) [CICA Part V Prechangeover accounting standards]
Non-monetary assets and liabilities are assets or liabilities whose value is not fixed in terms of
dollars. The actual amount of the liability cannot be known in advance; it is estimated for
financial statement purposes. Examples are inventories; investments in common stock; property,
plant, and equipment; warranty liabilities; and liabilities for rent collected in advance. A
contractual right to receive services in the future is a non-monetary asset and a contractual
obligation to perform services in the future is a non-monetary liability. 3831.05
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Non-monetary items (reporting)
Short-term non-monetary items include inventory, prepaid insurance, and deferred revenue.
Long-term non-monetary items include capital assets, intangible assets, deferred income, and
goodwill.
If a non-monetary item is obtained in a transaction involving a foreign currency, the amount paid
translated into Canadian dollars at the purchase date becomes the historical cost. Because the
item is not affected by subsequent changes in the exchange rate, no further adjustments are
necessary.
If a non-monetary item is reported at fair value, it is valued at the Canadian dollar equivalent by
applying the exchange rate in effect when the fair value was determined, rather than on the
balance sheet date. Gains or losses are recognized in income in the period in which they occur.
See Monetary items.
Non-monetary transactions (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Either:

(i) non-monetary exchanges, which are exchanges of non-monetary assets, liabilities or
services for other non-monetary assets, liabilities or services with little or no monetary
consideration involved; or

(ii) non-monetary non-reciprocal transfers, which are transfers of non-monetary assets,
liabilities, or services without consideration. Non-reciprocal transfers include, but are not
limited to: donations of non-monetary assets or services; payments of dividends-in-kind;
stock dividends when the shareholder has the option of receiving cash or shares; and the
distribution of assets to owners in the liquidation of all or part of an entity. The issue of
shares in a stock split and the payment of non-optional stock dividends are not nonreciprocal transfers. 3831.08
Non-proprietary information
Information that does not directly affect firm cash flows. See Proprietary information.
Non-public offering
A non-public offering, also called private placement, is the sale of securities to a small number of
persons or institutional investors (usually not more than 35) who can demand and obtain
sufficient information without the formality of registration.
Non–publicly accountable enterprises [CICA Part V Pre-changeover accounting
standards]
Non–publicly accountable enterprises are enterprises other than public enterprises, cooperative
business enterprises, regulated financial institutions and regulated financial institution holding
companies, rate-regulated enterprises, government business enterprises, and government
business-type organizations as defined in the CICA Public Sector Accounting (PSA) Handbook.
[1300.02(a)]
Non-reciprocal transfer
A non-reciprocal transfer is a transfer or transaction in which the firm either transfers resources
or receives resources. An example would be payment of a cash dividend.
Non-recourse factoring (of accounts receivable)
The non-recourse factoring of accounts receivable is when the risk of non-payment on factored
accounts receivable is assumed by the finance company. In the event that accounts cannot be
collected in full, the financing company must absorb the loss. Since risk is transferred, the vendor
company will not show the receivable or a liability on its financial statements.
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Non-refundable tax credits
Non-refundable tax credits reduce federal tax payable and are called non-refundable because if
they exceed tax payable, the difference is not refunded to the individual. Non-refundable tax
credits include:

personal tax credits for self, married or equivalent-to-married, and infirm dependants 18
years or older;

age amount;

Canada/Quebec Pension Plan and Employment Insurance contributions;

pension income amount;

Canada employment credit;

caregiver amount;

disability amount including any amount transferred from a dependant other than your
spouse;

interest paid on student loans;

tuition, education, and textbook amounts including those transferred from a child;

transit pass credit;

children’s arts tax credit

child fitness credit;

volunteer firefighters tax credit

first-time home buyers’ tax credit

amounts transferred from a spouse or common-law partner;

medical expenses;

charitable donations and gifts;

dividend tax credit;

foreign tax credit on any foreign taxes paid on foreign income;

federal political contribution tax credit;

investment tax credit; and

labour-sponsored funds tax credit.
Non-refundable tax credits for all individuals are computed by multiplying the total amounts by
the lowest federal tax rate. Exceptions to this are charitable donations and gifts, which have two
levels to the tax credit, and the dividend tax credit, overseas employment tax credit, foreign tax
credit, federal political contribution tax credit, investment tax credit, and labour-sponsored funds
tax credit, each of which has their own particular calculation.
Note that each province or territory has its own non-refundable tax credits.
Non-resident
A non-resident is a person who usually resides outside Canada who has no social or economic
ties within Canada. A non-resident person is liable for Part I tax only if he was employed in
Canada, carried on a business in Canada, or disposed of a taxable Canadian property. A nonresident may be liable for Canadian tax on other types of income, such as interest, dividends,
pension income, and so on under Part XIII of the ITA.
Non-sampling risk
Non-sampling risk comprises all risk other than sampling risk.
Non-statistical (judgmental) sampling
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Non-statistical sampling is audit sampling in which auditors choose items in a population for audit
testing and evaluate the findings based on the auditor’s own knowledge and experience rather
than the statistical method.
Non-systematic risk
Portion of total risk that consists of firm-specific factors (for example, quality of a firm’s
management, strikes) and can be reduced by portfolio diversification.
Non-trade receivable
A non-trade receivable is cash due to a corporation from transactions other than the sale of
goods or services.
Non-value-added activity
A non-value-added activity is an activity that consumes resources or takes time, but does not add
value for which customers are willing to pay.
Non-vested stock (stock option) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Shares of stock that cannot currently be sold because the employee to whom the shares were
granted has not yet satisfied the vesting requirements necessary to earn the right to the shares.
3870.07. See Vest.
Nonzero-sum
Game where both players are better off if they cooperate.
No-par shares
No-par shares are shares that do not carry a designated or assigned value per share; therefore,
no discount or premium is recognized. The entire amount of the proceeds received by the
company is credited to share capital.
Normal capacity
The level of output that will satisfy average customer demand over a specified time period and
complies with GAAP.
Normal cost system
A normal cost system is the system of applying overhead cost to jobs by multiplying activity times
the predetermined overhead rate.
Normal service cost
Normal service cost is the same as current service cost. It is the actuarial present value of
pension entitlement earned by the employee in a given year. It is part of pension expense.
Normalized overhead rate
A normalized overhead rate is a rate based on the average activity of many periods — past and
present — rather than based only on the expected activity of the current period.
Normative ethics
The branch of ethics that considers which views of descriptive ethics are correct.
Normative theories
Normative theories are theories that tell individuals what they should do — what should be as
opposed to what is. They are contrasted with predictive theories which indicate what individuals
will do.
No significant influence
No significant influence usually occurs when the holding in an investment is a small percentage of
the outstanding voting shares of the investee company, affording the investor little right to
participate in the strategic decision making of the investee company. This type of investment is
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seen as passive and the investor typically has a right only to cash payments such as dividends.
These investments fall into the categories of held for trading or available for sale.
See Control, Significant influence.
Not-for-profit organization (NFPO) [CICA Part V Pre-changeover accounting
standards]
Entities, normally without transferable ownership interests, organized and operated exclusively
for social, educational, professional, religious, health, charitable, or any other not-for-profit
purpose. A not-for-profit organization's members, contributors, and other resource providers do
not, in such capacity, receive any financial return directly from the organization. [4400.02(a)]
NFPOs meet a wide variety of needs. Some provide products or services to a broad user base and
are usually perceived to be for the greater good of society, such as food banks, hot-lunch
programs, hospices, and amateur theatre groups. These organizations may receive some
government funding and cover additional expenses through donations, fundraising activities, and,
in some cases, user fees. Other NFPOs serve a specific user group. Member-based organizations,
such as the Certified General Accountants Association of Canada, exist to provide service to their
members on a cost-recovery basis. Other professional associations, amateur sports groups, and
some community groups follow this model. Some NFPOs have been formed for a specific purpose
(to meet the needs of a defined group), and do not have a profit motive.
Many NFPOs are hybrids — organizations that start as special-interest groups (such as a local
theatre group) but that also meet the criteria of providing a perceived societal benefit and qualify
for government funding and charitable status.
Notes (CICA Part I IFRS)
Information in addition to that presented in the statement of financial position, statement of
comprehensive income, separate income statement (if presented), statement of changes in
equity and statement of cash flows. Notes provide narrative descriptions or disaggregations of
items presented in those statements and information about items that do not qualify for
recognition in those statements. IAS 1.7
Notes payable
Notes payable are an obligation to repay money or other assets evidenced by a signed
contractual agreement or note.
Notes receivable
Notes receivable are amounts due to a corporation because of purchases of goods or services on
credit or a loan arrangement that must be evidenced by a legal document called a note.
Notice of Assessment
Upon assessing a tax return filed by a taxpayer, CRA issues a Notice of Assessment that either
confirms the tax return is assessed as filed, or if CRA made changes, an explanation is included
on the assessment. It also details the assessed taxes and penalties and interest, if any, the
amount of tax paid by the taxpayer, and any balance owing.
Notice of Objection
A Notice of Objection is a means of objecting to an assessment and disputing it if a taxpayer
does not agree with the assessment or reassessment issued by CRA. For individuals, a Notice of
Objection must be filed in writing the later of one year after the required due date of the return
and 90 days after the mailing date on the Notice of Assessment or Reassessment. For all other
taxpayers, the Notice of Objection must be filed by 90 days following the mailing date on the
Notice of Assessment or Reassessment.
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Notice of Reassessment
A Notice of Reassessment is issued by CRA if changes were made to the taxpayer’s tax return,
either by the taxpayer or CRA, subsequent to the issuance of the Notice of Assessment. It
compares the previous assessment with the reassessed values and explains the respective
changes.
Notwithstanding
Notwithstanding means that the stated provision in the ITA that follows “notwithstanding” is not
to be considered in interpreting the balance of the provision. The equivalent in everyday
language is “in spite of.”
NSF cheque
An NSF cheque is a cheque from a customer deposited by a company which has been returned
because of “not sufficient funds” in the customer’s account.
Novation
Creation of a new contract through the substitution of a third party for one of the original parties
to a contract, by the consent of all.
Objective morality
What is actually right or wrong, morally good or bad. Contrast to subjective morality.
Objective probabilities of states of nature
Under ideal conditions, probabilities that are publicly known, rather than subjectively assessed.
Objectivity
Objectivity is a combination of quantifiability, verifiability, and freedom from bias.
Objectivity principle
Wherever possible, the amounts used in recording transactions should be based on objective
evidence rather than on subjective judgements. Objective information is reliable, trustworthy,
and verifiable. Verifiable information is information that can be confirmed by other means.
Accountants are sometimes criticized for not providing information that is relevant. Increasing
relevance, however, often means a trade-off of objectivity, which may lead to reporting
information that is highly subjective and not verifiable.
Obligating event (CICA Part I IFRS)
Event that creates a legal or constructive obligation that results in an entity having no realistic
alternative to settling that obligation. IAS 37.10. See Constructive obligation.
Obligation for employee future benefits (CICA Part II ASPE)
Actuarial present value as of a particular date of benefits expected to be paid under a defined
benefit plan. The obligation is measured on the basis of the expected amount and timing of
future benefits, taking into consideration the expected future cost of providing the benefits and
the extent to which the costs are shared by employees or others. 3461G
Obsolescence
Obsolescence is a condition in which, because of new inventions and improvements, a capital
asset can no longer be used to produce goods or services with a competitive advantage.
Occurrence

(1) Management assertion that transactions have occurred during a given period.

(2) Control failure, deviation, error, and exception. This refers to a departure from a
prescribed internal control procedure in a particular case.
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Off-balance sheet financing
Off-balance sheet financing is the ability to acquire assets through operating leases, allowing full
and unfettered use of the assets without having to report the assets (and related debt
obligations) on the balance sheet.
Off-main diagonal
The off-main diagonal is the set of entries in a square matrix or table that runs from the upper
right to the lower left.
Officers
High-ranking members of a corporation’s management team as defined in the by-laws or
appointed by the directors, such as the president, vice president, controller, chief executive
officer (CEO), chief financial officer (CFO), and general manager.
Offsetting (CICA Part I IFRS)
Subtracting a liability from an asset (or vice versa) and disclosing the net amount. Offsetting
should reflect the amounts and timing of the company’s expected future cash flows from netting
two or more separate financial instruments. Offsetting is not permitted under IFRS except as
allowed by an IFRS. IAS 1.32
A financial asset and a financial liability may be offset and the net amount presented in the
statement of financial position when, and only when, an entity:

(a) currently has a legally enforceable right to set off the recognised amounts; and

(b) intends either to settle on a net basis, or to realize the asset and settle the liability
simultaneously. (IAS 32 p42)
In accounting for a transfer of a financial asset that does not qualify for derecognition, the entity
may not offset the transferred asset and the associated liability (see IAS 39, paragraph 36).
Oil and gas properties (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Items of property, plant, and equipment represented by the capitalized costs of acquired oil and
gas rights and the costs associated with exploration for and development of oil, gas, and related
reserves. 3061.03
On demand (short term)
On demand means due on request from the lender after a short delay of 7 to 30 business days.
One-line consolidation
The equity method is referred to as one-line consolidation because there is one line on the
parent’s separate statement of financial position (Investment in the investee) that represents the
net asset value of the subsidiary and one line on the parent’s separate statement of profit and
loss (Investment income) that represents the income derived from the subsidiary. Both the equity
method and consolidation method result in the same amount of net income and shareholders’
equity in the separate financial statement of the parent company.
One-transaction approach (FX)
Under the one-transaction approach, a foreign currency denominated purchase or sale and the
eventual settlement of the resulting payable or receivable constitute one transaction. The initial
recording of the transaction is an estimate, and the final transaction amount is determined only
on the settlement date.
Onerous contract (CICA Part I IFRS)
Contract in which the unavoidable costs of meeting the obligations under the contract exceed the
economic benefits expected to be received under it. IAS 37.10
Online processing
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Online processing is an approach to inputting data whereby the data on each source document is
inputted as soon as the document is available.
Opening IFRS statement of financial position (CICA Part I IFRS)
Entity's statement of financial position at the date of transition to IFRSs. IFRS 1.A
Operating activities (CICA Part I IFRS) (CICA Part II ASPE) [CICA Part V Prechangeover accounting standards]
Operating activities is one of the sections of the cash flow statement. It may be formatted using
the direct or indirect method. It reflects cash generated during the period by the principal
revenue-producing activities of the enterprise and all other activities that are not investing or
financing activities. 1540.06, IAS 7.6. See Financing activities.
Operating cycle of a business
The operating cycle of a business is the average time a business takes to pay cash for salaries of
employees or to pay for merchandise and then to receive cash from customers in exchange for
the sale of the services or merchandise.
Operating department
An operating department is a department or similar unit in an organization within which the
central purposes of the organization are carried out.
Operating hedge
An operating hedge is a hedge against foreign exchange risk on cash outflow/inflow
commitments by generating sales or purchases in the same currency. It occurs when operations
provide the source of funds in the correct currency against upcoming commitments.
Operating lease (CICA Part I IFRS)
Lease other than a finance lease. IAS 17.4. See Finance lease.
Operating lease (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
A short-term lease (similar to a rental agreement) in which the lessor does not transfer
substantially all the benefits and risks incident to ownership of property. The contractual
commitment covers a time span that is relatively short in relation to the economic life of the
asset, leaving the lessor to absorb any risk of obsolescence. 3065.03
Operating leverage
Operating leverage is the relative proportion of fixed and variable costs in a particular firm or
industry. High operating leverage implies a high proportion of fixed costs. Operating leverage is
also known as cost structure.
Operating lines of credit
Operating lines of credit are loans granted to finance working capital. The borrowings are
available to the company at any time up to the pre-approved maximum.
Operating margin
The operating margin is a measure of the net income of an enterprise in relation to revenue
generated.
Operating segment (CICA Part I IFRS)
Component of an entity:

(a) that engages in business activities from which it may earn revenues and incur expenses
(including revenues and expenses relating to transactions with other components of the
same entity);
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
(b) whose operating results are regularly reviewed by the entity's chief operating decision
maker to make decisions about resources to be allocated to the segment and assess its
performance, and

(c) for which discrete financial information is available. IFRS 8.A
Operating segment (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Component of an enterprise:

(i) that engages in business activities from which it may earn revenues and incur expenses
(including revenues and expenses relating to transactions with other components of the
same enterprise);

(ii) for which operating results are regularly reviewed by the enterprise's chief operating
decision maker to make decisions about resources to be allocated to the segment and
assess its performance; and

(iii) for which discrete information is available. 3064.08, 3475.03.
An operating segment may engage in business activities for which it has yet to earn revenues.
For example, start-up operations may be operating segments before earning revenue. 3064.08,
1701.10. The term chief operating decision maker identifies a function, not necessarily a
manager with a specific title. That function is to allocate resources to and assess the performance
of the segments of an enterprise. Often the chief operating decision maker of an enterprise is its
chief executive officer or chief operating officer, but it may be a group (for example, consisting of
the enterprise's president, executive vice presidents, and others). 3475.03
Operating transaction
A business transaction such as a purchase, sale, or lease that is related to the operating activities
of the organization.
Operation costing
Operation costing is a costing system used when products are manufactured in batches and
when the products have some common characteristics and some individual characteristics. This
system handles individualized characteristics the same as in job-order costing and the common
characteristics the same as in process costing.
Operational auditing
Operational auditing is the study of business operations for the purpose of making
recommendations about the economic and efficient use of resources, effective achievement of
business objectives, and compliance with company policies.
Opportunistic form of positive accounting theory
Interpretation of positive accounting theory that considers management behaviour in income
maximization or income minimization to be manipulations that should be prevented.
Opportunity (with reference to fraud)
Opportunity with reference to fraud is an open door for solving the not shareable problem in
secret by violating a trust.
Opportunity cost
Opportunity cost is the benefit forgone when an action is taken. Opportunity costs are not
captured by the accounting system. Nevertheless, they may be relevant to certain types of
decisions and will need to be determined or approximated.
Oppression remedy
A statutory procedure allowing individual shareholders to seek a personal remedy if they have
been unfairly treated.
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Optimal investment decision
An individual-specific decision to buy that combination of market portfolio and risk-free asset that
yields the best trade-off between expected return and risk.
Optimal taxation
Maximization of social welfare. The determination of the optimal tax system depends on
assumptions about citizens’ preferences.
Option
An option is the right to purchase or sell a security at a predetermined price within a given time
span or at a specified future date. It is the holder’s prerogative to decide whether or not to
exercise the option.
Option contract
Financial instrument that gives the holder an opportunity to purchase or sell a specified asset for
a stated price at or before a specified date. As derivatives, options are treated as financial
instruments and are held for trading unless they are part of a designated hedging relationship.
Derivatives can be used as hedging instruments, but they themselves cannot be hedged.
You can buy a call option on shares, effectively locking in the price you’ll pay for the shares in the
future. If you guess right, the value of the option rises, essentially representing the difference
between the fair value of the shares and the locked in price. If you guess wrong, the worst-case
scenario is that you lose what you paid for the call options.
There are a number of other differences between futures or forward contracts and call options:

While you may be required to deposit monies in a margin account, you do not pay to buy
futures and forwards. When you buy an option, though, you pay a premium (fee) to the
seller.

Both the futures/forward and the option position earn a profit if the price of the underlying
asset increases, though not in the same magnitude.

The futures/forward position produces profits as soon as the price of the underlying asset
increases.

The losses from buying a call option are limited to the call premium, while losses from a
futures or forward position can be substantial.
See Futures contract.
Options, warrants, and their equivalents (CICA Part I IFRS)
Financial instruments that give the holder the right to purchase ordinary shares. IAS 33.5
Ordinary annuity
An ordinary annuity is a payment stream in which the payments (or receipts) occur at the end of
each interest-compounding period.
Ordinary negligence
Ordinary negligence is the lack of reasonable care in the performance of professional accounting
tasks.
Ordinary shares (CICA Part I IFRS)
Equity instrument that is subordinate to all other classes of equity instruments. IAS 33.5 A
potential ordinary share is a financial instrument or other contract that may entitle its holder to
ordinary shares. IAS 33.5 Formerly called common shares.
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Ordinary shares subscribed
Ordinary shares subscribed is a shareholders’ equity account in which a corporation records the
value of unissued ordinary shares that investors have contracted to purchase.
Organization costs
Organization costs are those expenditures made in setting up a business.
Organizational architecture
Organizational architecture is the administrative system that substitutes for market forces within
a given firm. These systems must measure performance, reward and punish performance, and
partition decision rights.
Organizational chart
An organizational chart is a visual diagram of a firm’s organizational structure that depicts formal
lines of reporting, communication, and responsibility between managers.
Other comprehensive income (CICA Part I IFRS)
Items of income and expense (including reclassification adjustments) that are not recognized in
profit or loss as required or permitted by other IFRSs. The components of other comprehensive
income include:

(a) changes in revaluation surplus (see IAS 16 Property, Plant, and Equipment and IAS 38
Intangible Assets);

(b) actuarial gains and losses on defined benefit plans recognized in accordance with
paragraph 93A of IAS 19 Employee Benefits;

(c) gains and losses arising from translating the financial statements of a foreign operation
(see IAS 21 The Effects of Changes in Foreign Exchange Rates);

(d) gains and losses on remeasuring available-for-sale financial assets (see IAS 39 Financial
Instruments: Recognition and Measurement);

(e) the effective portion of gains and losses on hedging instruments in a cash flow hedge
(see IAS 39). IAS 1.7.
Other comprehensive income includes unrealized gains and losses on certain transactions
specified in (a) - (e) above that do not flow through net income.
See also Statement of Comprehensive Income, Total comprehensive income.
Other comprehensive income [CICA Part V Pre-changeover accounting standards]
Revenues, expenses, gains and losses that are recognized in comprehensive income in
accordance with primary sources of GAAP, but excluded from net income. [1530.03(b)]
Other income and deductions
Other income and deductions cannot be generally defined. However, its scope is extremely
limited and encompasses the few specific items referred to in sections 56 to 66 of the ITA. Other
income embodies such items as superannuation and pension receipts [including Old Age Security
(OAS) and Canada Pension Plan benefits (CPP)], Employment Insurance benefits, alimony
payments, receipts from RRSPs, and deferred profit sharing plans (DPSP). Other deductions
include RRSP contributions, alimony payments, child care expenses, and moving expenses.
Other long-term employee benefits (CICA Part I IFRS)
Employee benefits (other than post employment benefits and termination benefits) that are not
due to be settled within 12 months after the end of the period in which the employees render the
related service. IAS 19.7. See Compensation, Post-employment benefits, Termination benefits.
Other Matter paragraph
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A paragraph included in the auditor’s report that refers to a matter other than those presented or
disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’
understanding of the audit, the auditor’s responsibilities, or the auditor’s report.
Other post-employment benefits (OPEBs)
Benefits other than pensions paid to retired employees, such as life and health insurance.
Other price risk (CICA Part I IFRS) [CICA Part V Pre-changeover accounting
standards
Risk that the fair value or future cash flows of a financial instrument will fluctuate because of
changes in market prices (other than those arising from interest rate risk or currency risk),
whether those changes are caused by factors specific to the individual financial instrument or its
issuer, or factors affecting all similar financial instruments traded in the market. [3862.05A(g)],
IFRS 7.A
Other property
Other property includes capital property, other than personal-use or listed personal property,
acquired for the purpose of earning income. It includes business assets and capital investments
such as buildings, rental properties, machinery, and financial instruments that are not inventory
and does not include eligible capital property.
Output devices
Output devices are the means by which information is taken out of the accounting system and
made available for use.
Outputs
Quantifiable results of activities (such as "number of kilometres paved" or "number of graduating
students") that do not directly represent social welfare.
Outsourcing
Outsourcing is the strategic use of outside resources to perform functions usually done in-house.
Outstanding cheques
Outstanding cheques are cheques that were written (or drawn) by the depositors, deducted on
the depositor’s records, and sent to the payees; however, they had not reached the bank for
payment and deduction from the bank statement before the statement date.
Overapplied overhead
Overapplied overhead is a credit balance in the Manufacturing overhead account that arises when
the amount of overhead cost applied to Work in progress is greater than the amount of overhead
cost actually incurred during a period.
Overdraft
An overdraft, as in a bank overdraft, is a negative bank balance reported as a current liability. It
is considered part of cash on the cash flow statement.
Overhead application
Overhead application is the charging of manufacturing overhead cost to the job cost sheets and
to the Work in progress account.
Overreliance
Overreliance is the result of assessing control risk too low and restricting other audit procedures
when they actually should perform more work in order to arrive at a correct opinion.
Over-the-counter market
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The over-the-counter market is an electronically connected market consisting of dealers who are
in constant contact with each other and who arrange for the trading of securities that are not
listed on organized exchanges.
Owner-occupied property (CICA Part I IFRS)
Property held (by the owner or by the lessee under a finance lease) for use in the production or
supply of goods or services or for administrative purposes. IAS 40.5. See Finance lease.
Owners (CICA Part I IFRS)
Holders of instruments classified as equity. IAS 1.7
Owners (CICA Part I IFRS) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Owners, used broadly, includes holders of equity interests of investor owned entities and owners
or members of, or participants in, mutual entities. 1582.03, IFRS 3.A
Ownership (as a financial statement assertion)
Ownership, as a financial statement assertion, is another name for the rights assertion. It is the
assertion that the auditee’s possession of legal title to assets does indeed exist.
Ownership interest (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Ownership in an item transferred or the benefit of a service provided exists when an enterprise
has the right and ability to, directly or indirectly, obtain future economic benefits from the item
transferred or the service provided. 3840.03
Paid-in capital
Paid-in capital is another name for contributed capital. Paid-in capital is the category of
shareholders’ equity created by the shareholders’ investments.
Paid-up capital (PUC)
The paid-up capital (PUC) of a share generally refers to the amount contributed to the
corporation when the share was issued. It is determined by the class of the shares and is equal
to the average PUC of the class to which the share belongs.
Par value
Par value is the stated monetary face value of a security.
Par value shares
Par value shares are ordinary or preferred shares that endorse a face value as indicated in the
articles of incorporation and on the share certificate. Shares issued below par value are issued at
a discount. Shares issued above par value are issued at a premium. Discounts and premiums are
kept in separate accounts.
Parallel processing
Parallel processing is a method of arranging processing departments in which, after a certain
point, the units are split to go through different processing departments. Up to the split-off point
the processing is parallel.
Parallel simulation
Parallel simulation is the reprocessing of live data to test program controls.
Parent (CICA Part I IFRS)
An entity that has one or more subsidiaries. IAS 27.4. See Subsidiary.
Parent company
A parent company is a corporation that owns a controlling interest in another corporation (more
than 50% of the voting stock is required).
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Parent company extension theory of consolidation
See Identifiable net assets (INA) method of consolidation.
Parent-company theory of consolidation
One of four theoretical approaches to consolidation when a non-controlling interest exists. Under
the parent-company theory, the non-controlling shareholders’ share of the subsidiary’s assets and
liabilities are reported in the consolidated statements at book value. This is the theory on which
consolidation accounting is based. The other approaches are proprietary , parent company
extension (identifiable net assets), and entity (fair value enterprise) theories. The proprietary and
parent company theories are not IFRS compliant.
Parent theory
Consolidated statements are directed towards the shareholders of the parent company. The
business combination does not involve the non-controlling shareholders. The non-controlling
interest is recognized as a liability, the amount of which is based on the book values of the net
assets of the subsidiary. This theory seems closest to Canadian GAAP, as described in section
1581.
Pareto optimal allocation
The Pareto optimal allocation is the point where no one can be made better off without making
someone else worse off.
Pareto principle
80% of effects arise from 20% of the causes.
Parity check
A parity check is an electronic function that ensures the coding of data internal to the computer
does not change when it is moved from one internal storage location to another.
Part I tax
Part I of the ITA determines the income tax liability for individuals and corporations. The divisions
within Part I of the ITA clearly reflect the four concerns that must be addressed by a tax system.
They are: who is liable for Part I tax; what is Part I tax levied on; what is the method for
computing Part I tax; and what are the procedures of payment compliance and dispute
resolution.
Part IV tax
Part IV tax is a tax on assessable dividends received by private corporations and it is equal to 1/3
of dividends received in the year. However, when an assessable dividend is received from a
connected corporation and the latter is entitled to a dividend refund, Part IV tax is calculated as
follows:
assessabl edi vi dends r ecei ved
di vi dend r ef und
f rom t he connect ed corpor at i on
of t heconnect ed 
t axabl edi vi dends pai d by t he
cor porat i on
connect ed corpor at i on
Part XIII tax
Part XIII tax is tax withheld at source at a rate of 25% when passive income, such as interest,
dividends, rents, royalties, management or administration fees, estate or trust income, pension
benefits, RRSPs, and retiring allowances, is received by a non-resident from a Canadian resident.
Note that Tax Conventions often stipulate the agreed upon rate of tax withheld and this rate
overrides the 25% rate found in Part XIII. Also, they usually stipulate that Canadian tax paid by a
non-resident can be claimed in the taxpayer’s country of residence as a foreign tax credit so as to
avoid or limit double taxation.
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Partial method of inter-period tax allocation
The partial method of inter-period tax allocation is a group of alternatives whereby inter-period
allocation is applied to some types of temporary differences but not all. For example one method
of partial inter-period tax allocation is to allocate only those which are “more likely than not” to
reverse.
Participants (CICA Part I IFRS)
Members of a retirement benefit plan and others who are entitled to benefits under the plan. IAS
26.8
Participating preferred shares
Participating preferred shares allow preferred shareholders to participate in dividends over the
stated preferential dividend rate on a pro rata basis with ordinary shareholders. They may be
partially participating or fully participating.
Partnership
A partnership is a business that is owned by two or more people, with a view towards profit, and
is not organized as a corporation. The partners generally face unlimited liability.
Partnership contract
A partnership contract is the agreement between partners that sets forth the terms under which
the affairs of the partnership will be conducted.
Partnership liquidation
A partnership liquidation is the winding up of a partnership business by converting its assets to
cash and distributing the cash to the proper parties.
Passenger vehicle
Passenger vehicle means an automobile acquired after June 17, 1987, and an automobile leased
under a lease entered into, extended, or renewed after June 17, 1987.
Passive investment
A passive investment is an inter-corporate investment in which the investor cannot significantly
influence or control the operations of the investee company.
Past consideration
Something completed before an agreement is made; it is not valid consideration.
Past due (CICA Part I IFRS)
When a counterparty to a financial asset fails to make a payment when contractually due. IFRS
7.A
Past service cost
Past service cost is the actuarial present value of pension benefits given in a newly introduced
pension plan for the work already rendered by current employees.
Past service cost (CICA Part I IFRS)
Change in the present value of the defined benefit obligation for employee service in prior
periods, resulting in the current period from the introduction of, or changes to, post-employment
benefits or other long-term employee benefits. Past service cost may be either positive (when
benefits are introduced or changed so that the present value of the defined benefit obligation
increases) or negative (when existing benefits are changed so that the present value of the
defined benefit obligation decreases). IAS 19.7
Patent
Exclusive right granted by the federal government that enables the patent owner to use a
process or to manufacture, sell, and control the invention of a machine or device without
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interference and infringement by others. Patents are granted for a maximum of 20 years from
the date the application was first filed (its legal life). Patents would normally be amortized over
the life of the patent. However, when the useful life of the patent is less than the legal life, the
amortization should be calculated over the shorter term.
Paternalism
The professional should treat the client as a good parent would, advancing the client's best
interests without the client's free and informed consent or even over the client's objections.
Pay-as-you-go approach to recording post-retirement benefits
Pay-as-you-go approach to recording post-retirement benefits is a method of recording the cost
of post-retirement benefits whereby the expense is recognized as amounts are paid during the
retirement period. This method is not acceptable under GAAP.
Payback period
The payback period is the measure of time it will take to recoup, in the form of cash inflows from
operations, the initial dollars of outlay. It is not a profitability measure and ignores the time value
of money. The equation for calculating the payback period is:
Payback period =
Net in v estmen t
An n u aln et cash flo w
Payee
A payee is a note holder. The lender who will receive the principal repayment at maturity is
considered the payee.
Payout ratio
The payout ratio is the proportion of a given period’s earnings that a firm pays out to
shareholders in the form of dividends.
Payroll accounting
Payroll accounting is the preparation of individual pay cheques, pay envelopes, or electronic
transfers, using rate and deduction information supplied by the personnel function and based on
data supplied by the timekeeping-supervision function.
Payroll bank account
The payroll bank account is a special bank account a company uses only for the purpose of
paying employees by depositing in the account each pay period an amount equal to the total
employee’s net pay and drawing the employees’ payroll cheques on that account.
Payroll deduction
A payroll deduction is an amount deducted from an employee’s pay, usually based on the amount
of an employee’s gross pay.
Payroll distribution
Payroll distribution is an employer’s procedure that controls the delivery of pay to employees so
that unclaimed cheques, cash, or incomplete electronic transfers are not returned to the persons
involved in any of the other payroll functions.
Peer review (auditing)
A peer review is the study of an audit firm’s quality control policies and procedures by another
audit firm, followed by a report on a firm’s quality of audit practice.
Pension holiday
A pension holiday is a period during which an employer is not required to make contributions to a
pension plan due to a surplus of plan assets over its obligations. The surplus is used to fund the
current service costs.
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Pension plan curtailment
A pension plan curtailment is where a pension plan is partially settled due to significant
restructuring or downsizing of operations. The plan continues but has significantly fewer persons
in the eligible employee group. This usually involves recognizing an expense or gain as part of
pension expense. See Curtailment.
Pension plan settlement
A pension plan settlement is where a pension plan is ended and the obligation to the pensionable
group is settled by transferring assets to a trustee and any deficiencies in funding are remedied.
This usually involves recognizing an expense or gain as part of pension expense.
Percentage-of-completion method (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Method of accounting used to account for long-term contracts. It recognizes revenue and
expenses proportionately with the degree of completion of goods or services under a contract, as
the work progresses on the contract. 3400.03. See Completed-contract method.
Perfection
Protection of a secured creditor’s claim, either by registering the secured obligation or by taking
possession of the collateral.
Performance auditing
Performance auditing is the study of business operations for the purpose of making
recommendations about the economic and efficient use of resources, effective achievement of
business objectives, and compliance with company policies.
Performance award (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Award of stock-based employee compensation for which vesting depends on both:

(i) an employee's rendering service to the enterprise for a specified period of time; and

(ii) the achievement of a specified performance target (for example, attaining a specified
growth rate in return on assets or a specified percentage increase in market share for a
specified product). 3870.07
Performance condition (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Requirement to achieve a specified performance target, such as attaining a specified increase in
market share for a specified product, and might pertain either to the performance of the
enterprise as a whole or to some part of the enterprise, such as a division. 3870.07
Performance management
Performance management is an evidence-based strategic management approach that is usually
associated with the new public management movement.
Performance materiality
The amount or amounts set by the auditor at less than materiality for the financial statements as
a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected
and undetected misstatements exceeds materiality for the financial statements as a whole. If
applicable, performance materiality also refers to the amount or amounts set by the auditor at
less than the materiality level or levels for particular classes of transactions, account balances, or
disclosures.
Performance measurement
The examination of a variety of operational statistics or other indicators of a program’s output or
outcome, possibly in relation to pre-established benchmarks.
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Performance measures
Performance measures or indicators for a program are quantifiable outputs or outcomes that
have been identified as desirable ends of that program.
Performance report
A performance report is a detailed report comparing budgeted data to actual data. It is used to
monitor and control performance by assessing the reasons for variances from budget.
Performance reports (government)
Reports prepared by government or other agencies to report on achievement of goals, objectives,
and/or targets. Also referred to as service plan reports.
Performance reporting
The act of reporting on a pre-established set of goals, objectives, or targets. This reporting
normally includes non-financial performance indicators.
Period costs
Period costs are expenses recognized as costs in the period in which they were incurred.
Periodic inventory system
A periodic inventory system is an inventory recordkeeping system that determines the quantity of
inventory on hand and related cost of goods sold only at the end of the fiscal period through a
physical count.
PERLs (principal exchange-rated-linked securities)
A debt instrument with its principal and interest in one currency, but with principal repayment
depending on the exchange rate between the instruments’ currency and another currency.
Permanent accounts
Permanent accounts are also known as real accounts. They are general ledger accounts that are
not closed to retained earnings at the end of an accounting period. They are usually statement of
financial position accounts.
Permanent differences (tax)
Differences between accounting income before tax and taxable income that are permanent.
Permanent differences happen when an item enters into the computation of taxable income but
will never be adjusted in accounting income (or vice versa). These can be revenues, gains,
expenses, or losses.
These differences are permanent in that the treatment for accounting purposes has no impact on
taxable income (for example, dividends received from taxable Canadian-controlled corporations
are not taxable to the receiving company but are part of accounting income). Similarly, some
deductions expensed for accounting purposes (for example, key employee insurance premiums)
are not allowed as deductions under the tax rules. Permanent differences do not affect taxes that
must be paid in the future. Permanent differences are taken into consideration in calculating tax
for both accounting and tax purposes.
See also Temporary differences (tax).
Permanent establishment
A permanent establishment is a place of business of a corporation, including an office, branch,
mine, oil well, farm, timberland, factory, workshop, and warehouse. Where a corporation does
not have any fixed place of business, it means the principal place in which the corporation’s
business is conducted. Other conditions that, if present, indicate there is a permanent
establishment are described in REG 400(2)(b) to (g). If a corporation has permanent
establishments in more than one province, its taxable income for the year is allocated among the
different permanent establishments.
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Permanent file
Audit working papers that are of continuing interest from year to year, including the client
company’s articles of incorporation, shareholder agreements, major contracts, and minutes.
Perpetual debt
Perpetual debt is a type of debt whose principal does not have to be repaid or is highly unlikely
to be repaid. This type of debt generally yields an interest stream of income.
Perpetual inventory system
A perpetual inventory system is an inventory recordkeeping system that continuously updates the
quantity of inventory on hand and cost of goods sold on the basis of transaction records that
report units purchased, manufactured, and sold.
Perpetuity
A perpetuity is a sequence of payments similar to an annuity, but continuing indefinitely.
Persistence of earnings
The persistence of earnings refers to whether or not the effect of either good or bad news
earnings carries over to the following year or dissipates in the current year. If the good news or
bad news effect carries over to the following year, it is said to persist.
Person
In law, persons include individuals and corporations.
Personal Information Protection and Electronic Documents Act (PIPEDA)
A Canadian law relating to data privacy. It governs how private sector organizations collect, use,
and disclose personal information in the course of commercial business. In addition, the Act
contains various provisions to facilitate the use of electronic documents.
Personal or living expenses (tax)
Personal or living expenses include anything that has the ordinary meaning of this expression.
Personal and living expenses are defined in the ITA as an expense incurred for properties that
are for the benefit of the taxpayer or a person connected by blood relationship, marriage,
common-law partnership, or adoption and that are not maintained in connection with a business
carried on with a reasonable expectation of profit, premiums for life insurance, annuities and
similar contracts, and expenses for property maintained for the beneficiary of an estate or trust.
The most common personal and living expenses are automobile expenses, entertainment
expenses, home office expenses, life insurance premiums, and travel expenses other than travel
expenses incurred while away from home in the course of carrying on business.
Personal services business (tax)
A personal services business carried on by a corporation means a business of providing services
where an individual who performs services on behalf of the corporation would normally have
been an employee of that incorporation, that is “the incorporated employee.” Specifically, a
personal services business is one in which the incorporated employee or any person related to
the incorporated employee provides service to another company; is a specified shareholder of the
company; and but for the corporation, would be an officer or employee of the serviced company.
As such, ITA paragraph 18(1)(p) limits the deductions that may be claimed in computing income.
However, where a corporation employs in the business throughout the year more than five fulltime employees, or the amount paid or payable to the corporation in the year for the services is
received or receivable by it from the corporation with which it was associated in the year, then its
income is considered to be ABI and not income from a personal services business.
Personal tax credits
Personal tax credits are amounts that may be deducted from an individual’s income taxes and
that determine the amount of income taxes to be withheld.
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Personal-use property (tax)
A personal-use property includes any property owned by a taxpayer (including a corporation) that
is used primarily for the personal use or enjoyment of the taxpayer, a person(s) related to the
taxpayer, or a beneficiary under a trust or any person(s) related to the beneficiary. It also
includes any debt owing to a taxpayer upon disposition of the personal-use property and any
property that is an option to acquire a personal-use property. A residence, car, boat, cottage,
recreation vehicle, or similar asset would be personal-use property. For a partnership, the same
applies to any member or any person related to a member of the partnership where property is
used primarily for their personal use or enjoyment.
Personnel or labour relations department
The personnel or labour relations department is the function having transaction initiation
authority to add new employees to the payroll, delete terminated employees, obtain
authorizations for deductions (such as insurance, savings bonds, and so on) and transmit
authority for pay rate changes to the payroll department.
Pervasive
A term used, in the context of misstatements, to describe the effects on the financial statements
of misstatements or the possible effects on the financial statements of misstatements, if any, that
are undetected due to an inability to obtain sufficient appropriate audit evidence. Pervasive
effects on the financial statements are those that, in the auditor’s judgment, are not confined to
specific elements, accounts, or items of the financial statements; if so confined, represent or
could represent a substantial proportion of the financial statements; or in relation to disclosures,
are fundamental to users’ understanding of the financial statements.
Physical observation (as an audit procedure)
Physical observation, as an audit procedure, occurs when the auditor actually eyewitnesses the
inspection of tangible assets and formal documents.
Physical representation of the population
The physical representation of the population is the auditor’s frame of reference for selecting a
sample.
Plan assets (benefits) (CICA Part I IFRS)
Plan assets are:

(a) Assets held by a long-term employee benefit fund; and

(b) qualifying insurance policies. IAS19.7.
Assets held by a long-term employee benefit fund are assets (other than non-transferable
financial instruments issued by the reporting entity) that:

(a) are held by an entity (a fund) that is legally separate from the reporting entity and
exists solely to pay or fund employee benefits; and

(b) are available to be used only to pay or fund employee benefits, are not available to the
reporting entity's own creditors (even in bankruptcy), and cannot be returned to the
reporting entity, unless either:
o
(i) the remaining assets of the fund are sufficient to meet all the related employee
benefit obligations of the plan or the reporting entity; or
o
(ii) the assets are returned to the reporting entity to reimburse it for employee
benefits already paid. IAS 19.7
Plan assets (CICA Part II ASPE)
Assets that have been segregated and restricted in a trust or other legal entity separate from a
reporting entity to provide for employee future benefits under the following conditions:
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
(i) The assets of the separate entity are to be used only to settle the related accrued
benefit obligation, are not available to the reporting entity's own creditors, and either
cannot be returned to the reporting entity or can be returned to the reporting entity only if
the remaining assets of the trust are sufficient to meet the plan's obligations;

(ii) To the extent that sufficient assets are in the separate entity, the reporting entity will
have no obligation to pay the related employee future benefits directly. Plan assets include
any financial instruments issued by the reporting entity and held by the trust or other legal
entity. Plan assets do not include amounts held by the reporting entity and not yet paid into
the trust or other legal entity. Plan assets may include certain arrangements with insurance
enterprises (see paragraphs 3461.128-.132). 3461G
Planned control risk assessment
Planned control risk assessment is the auditors’ selection of a control risk level for which they
want to justify a control risk assessment after completing the test of controls audit work.
Planning
Planning is the setting of short- or long-term objectives for financial and operational
performance.
Planning and control cycle
The planning and control cycle is the flow of management activities through planning, directing,
motivating, and controlling and then back to the planning stage again.
Planning materiality
Planning materiality is the largest amount of uncorrected dollar misstatement the auditors believe
could exist in published financial statements without causing them to be considered materially
misleading.
Plant and equipment
Plant and equipment are tangible, long-lived assets held for use in the production or sale of other
assets or services.
Plantwide overhead rate
A plantwide overhead rate is a single predetermined overhead rate that is used in all
departments of a manufacturing plant rather than each department having its own separate
predetermined overhead rate.
Pledge (CICA Part III ASNFPO)
A promise by a supporter to contribute cash or other assets to a not-for-profit organization
(NFPO) at some time in the future. Although they represent a potential future cash flow, pledges
are not legally enforceable claims for the NFPO. [4420.05]
Pledged assets to secured liabilities
Pledged assets to secured liabilities refers to the ratio of the book value of a company’s pledged
assets to the book value of its secured liabilities.
Pledges receivable (NFPO)
Amounts that supporters of an NFPO have promised to pay Helpful Society and that have a
reasonable certainty of being collected.
Point statement
A point statement is a statement related to an organization at a particular point in time. For
example, a statement of financial position is a point statement.
Policyholder
Party that has a right to compensation under an insurance contract if an insured event occurs.
IFRS 4.A. See Insurance contract.
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Political cost hypothesis
The political cost hypothesis states that all other things being equal, the greater the political
costs faced by a firm, the more likely the manager is to choose accounting procedures that defer
reported earnings from current to future periods.
Polycentric
An orientation to more than one country in which a company makes modifications at a branch
location or a franchise in a foreign country in order to accommodate a host country’s differences.
Pooling of interests method (business combination)
Pooling of interests is a form of consolidation, a method to effect a business combination that
assumes two companies have agreed to merge and the shareholder groups of both companies
have retained 50% ownership (merger of equals). Two or more companies’ financial statements
are combined as though they were always one; neither company’s assets are fair valued at the
date of acquisition. This method is not accepted under Canadian GAAP or IFRS. See Acquisition
method, Business combination, Purchase method.
The pooling-of-interests method (“a merger of equals”) could be used in Canada prior to July 1,
2001 under narrowly defined circumstances. Many of the credit union “mergers” that took place
in the late 1990s were accounted for by the pooling-of-interest method. This method assumed
that the business combination resulted in the formation of a new entity.
Population
The population is the set of all the elements that constitute an account balance or class of
transactions.
Population unit
A population unit is one element in a population.
Portfolio
A portfolio is the combination of assets held by a particular investor.
Portfolio theory
Portfolio theory is the theory concerned with the formation of optimal or efficient portfolios of
risky securities.
Portion of a hedged item [CICA Part V Pre-changeover accounting standards]
Percentage of the entire hedged item; all or a percentage of one or more selected contractual
cash flows; or an embedded derivative that is not accounted for separately in accordance with
section 3855, and qualifies in accordance with paragraph 3865.11. [3865.07(k)] See Hedged
item.
Positive accounting theory
Positive accounting theory is concerned with predicting such actions as the choices of accounting
policies by firms and how firms will respond to proposed new accounting standards.
Positive confirmation
A positive confirmation is a confirmation letter requesting a reply in all cases, whether the
account balance is considered correct or incorrect.
Positive externality
A positive externality is created when the benefit to society is greater than the benefit to the
individual or company. For example, a person who is immunized for a disease benefits from not
getting the disease. However, the benefit to society is greater because that person is not
spreading the disease to others.
Positive theories
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Positive theories are theories that explain what individuals and constituents do rather than what
they should do.
Possible misstatement
Possible misstatements are the further misstatements remaining undetected in units not selected
in a sample.
Post-announcement drift
Post-announcement drift is the phenomenon in which abnormal securities returns tend to drift
upwards for at least 60 days following a good-news earnings announcement and firms that
report bad news in earnings tend to have their abnormal security returns drift downwards for a
similar period. One explanation is that investors appear to underestimate the implications of
current earnings for future earnings.
Post-audit
A post-audit is a follow-up evaluation on the capital budgeting decisions. It is used to determine
if the actual timing and amounts of cash flows were as predicted.
Post-closing trial balance
The post-closing trial balance is a trial balance prepared after closing all temporary accounts to
retained earnings. It reflects statement of financial position accounts only.
Post-employment benefit plans (CICA Part I IFRS)
Formal or informal arrangements under which an entity provides post-employment benefits for
one or more employees. IAS 19.7
Post-employment benefits (CICA Part I IFRS)
Employee benefits (other than termination benefits) which are payable after the completion of
employment. IAS 19.7. See Other long-term employee benefits, Termination benefits.
Posting
Posting is the act of transferring data from a journal to a ledger.
Posting references
Posting references are the cross-referencing codes entered by the posted accounts in a ledger to
show the journal on which the account and amount was originally entered.
Post-retirement benefits
Post-retirement benefits are employer-paid programs such as pensions, extended health, or
dental care benefits for retired employees.
Posterior state probabilities
Probabilities that incorporate knowledge of past states to this point in time.
Postulates
Postulates are the underlying assumptions or the basic foundation that underlies generally
accepted accounting principles.
Power theory of executive compensation
Theory that suggests that executive compensation contracts are more consistent with the
opportunistic version of positive accounting theory; managers use their power to secure more
than their reservation utility.
Practical standards
Practical standards are standards that allow for normal machine downtime and other work
interruptions and that can be attained through reasonable, though highly efficient, efforts by the
average worker at a task.
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Precision
Less variance of noise in a performance measure.
Predetermined overhead rate
A predetermined overhead rate is a rate used to charge overhead cost to jobs in production. The
rate is established in advance for each period by using estimates of manufacturing overhead cost
and production activity for the period.
Prediction (with reference to fraud examination)
A prediction, with reference to fraud examination, is a reason to believe that fraud may have
occurred.
Predictive theories
Predictive theories are theories that indicate what individuals will do. They are contrasted with
normative theories which indicate what individuals should do.
Predictive value
The predictive value is the capability of information to assist decision-makers in predicting
outcomes of events. It is an attribute of relevance.
Predominant component approach
An approach to accounting for financial instruments under which convertible bonds were
recorded as debt until converted. This approach is not acceptable under GAAP.
Pre-emptive right
A pre-emptive right is the right that gives existing shareholders the option to purchase any new
offerings of common stock or of securities convertible into common stock, on a preferential basis.
This allows existing shareholders to maintain their percentage ownership of the firm.
Preferred creditors
Creditors who, by legislation, must be paid before other unsecured creditors.
Preferred shares
Preferred shares are shares that rank ahead of ordinary shares in their claims on dividends and in
their claim on assets in the event of liquidation. Typically, a fixed dividend is specified.
Preliminary survey
A preliminary survey is the process in which an internal auditor becomes familiar with the
organization, program, or activity being audited. This familiarization is gained by gathering
information, but without detailed investigation or verification procedures.
Premium
The premium on a note or debt is the difference between the face value and the present value of
the debt. The issuer may obtain a premium on debt sold when the nominal interest rate is
greater than market rate of interest. The premium equates the effective interest rate to the
market rate by increasing the effective principal amount of debt.
Pre-operating costs
Pre-operating costs are expenditures made in a period that precedes operation, to establish a
business. These costs may be deferred in limited circumstances.
Prepaid expenses
Prepaid expenses are assets created by payments for economic benefits that are not used until
later. As the benefits are used up, the cost of the assets become expenses.
Preparer objectives
Income tax planning, income optimization, adequate disclosure, and contract compliance are
preparer objectives.
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Prepayments
Prepayments are cash outlays made in advance of receipt of goods or services.
Prescribed (tax)
Prescribed means either that a taxpayer must refer to a regulation or that there is a form that the
taxpayer must use. A taxpayer is therefore directed to other rules or to a specific procedure, such
as an ITAR or REG.
Present value
Present value is the value today of a future amount calculated by discounting the future amount
at a specified interest rate.
Present value accounting
Accounting that is done on the basis of present values of future cash flows. This is an example of
fair value accounting.
Present value of a defined benefit obligation (CICA Part I IFRS)
Present value, without deducting any plan assets, of expected future payments required to settle
the obligation resulting from employee service in the current and prior periods. IAS 19.7
Present value model under certainty
See Ideal conditions under certainty.
Present value model under uncertainty
See Ideal conditions under uncertainty.
Presentation currency (CICA Part I IFRS)
Currency in which the financial statements are presented. IAS 21.8. See Foreign currency,
Functional currency.
Prevention costs
Prevention costs are costs incurred in preventing the production of products that do not conform
to specification.
Previous GAAP (CICA Part I IFRS)
Basis of accounting that a first time adopter used immediately before adopting IFRSs. IFRS 1.A
Price adjustment clause
A price adjustment clause is often included in purchase and sale agreements. These clauses
stipulate that the taxpayers agree to be bound by the minister’s subsequent determination of
FMV used in the agreement of purchase and sale, should the minister disagree with the
taxpayer’s value. The benefit of such clauses is that if a shareholder’s benefit results from the
minister’s determination, it is not likely to be assessed.
Price-earnings ratio
The price-earnings ratio equals the current market price of a share divided by reported annual
earnings per share for the most recent period. Often viewed as an indicator of a firm’s potential.
Its reciprocal is the earnings yield.
Price-earnings ratio = current market price of shares ÷ reported annual earnings
Price risk [CICA Part V Pre-changeover accounting standards]
There are three types of price risk: currency risk, interest-rate risk, and market risk. [3861.37(a)]
Primary beneficiaries
Primary beneficiaries are third parties for whose primary benefit an audit or other accounting
service is performed.
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Primary instruments
Financial assets and liabilities that include items such as accounts receivable and payable, and
debts and equity securities.
Primary sources of GAAP (CICA Part II ASPE)
In descending order of authority:

(i) sections 1400-3870, including Appendices; and

(ii) Accounting Guidelines, including Appendices. 1100.02.
See Generally accepted accounting principles.
Primary sources of GAAP [CICA Part V Pre-changeover accounting standards]
In descending order of authority: CICA Accounting Handbook sections 1300-4460, including
Appendices and Board Notices; Accounting Guidelines, including Appendices and Board Notices;
Abstracts of Issues Discussed by the Emerging Issues Committee (EIC Abstracts), including
Appendices; Background Information and Basis for Conclusions documents accompanying
pronouncements described in (i)-(ii), including Appendices; Illustrative material of those
pronouncements described in (i)-(iv); Implementation Guides authorized by the Board
[1100.02(c)]. See Generally accepted accounting principles.
Primary users
Primary users of financial information, including investors, lenders, and other creditors.
Prime cost
Prime cost is direct materials plus direct labour costs.
Prime rate
The prime rate is the short-term interest rate at which banks lend money to their most creditworthy customers.
Principal
The principal is the amount loaned or borrowed.
Principal residence
A principal residence is a housing unit or a cooperative housing unit ordinarily inhabited by the
taxpayer, taxpayer’s spouse or former spouse (including common-law partner), or by a child of
the taxpayer. Capital losses on the disposition of a principal residence are not allowed because a
principal residence is a personal-use property. Capital gains are generally exempt if the taxpayer
designates all years of ownership of the residence after 1971 as the taxpayer’s principal
residence.
Principal shareholder (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
One who either owns 10% or more of an enterprise's common stock or has the ability, directly or
indirectly, to control or significantly influence the enterprise. 3870.07
Principle of integration
According to the principle of integration, the income taxes paid by a corporation are integrated
into the income taxes paid by its shareholders so that there will neither be an advantage nor a
disadvantage in earning the income through a corporation rather than personally. Thus, the
system of grossing-up the taxable dividend and the corresponding deduction in computing tax
payable is to include in the individual’s income an approximation of the income of the corporation
before it has paid taxes and to grant the individual a tax credit for taxes paid by the corporation.
Prior period adjustment
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A prior period adjustment is a gain or loss which under specific circumstances is credited or
charged directly to retained earnings without flowing through the income statement. These only
existed until 1996 when standard setters eliminated the classification.
Prior period errors (CICA Part I IFRS) (CICA Part II ASPE) [CICA Part V Prechangeover accounting standards]
Omissions from, and misstatements in, the entity's financial statements for one or more prior
periods arising from a failure to use, or misuse of, reliable information that:

(i) was available when financial statements for those periods were completed; and

(ii) could reasonably be expected to have been obtained and taken into account in the
preparation and presentation of those financial statements. Such errors include the effects
of mathematical mistakes, mistakes in applying accounting policies, oversights or
misinterpretations of facts, and fraud. 1506.05, IAS 8.5
Under CICA Part I IFRS, there is an exemption from restating comparatives due to a change in
accounting policy or prior period error if it is not practical to do so. Under CICA Part V, there is no
exemption. IAS 8.43 [1506.26]
Private companies
Private companies are corporations with a limited number of shareholders (generally limited to 50
by provincial securities acts) and whose shares cannot be publicly traded. A shareholder’s
agreement sets out the rights and responsibilities of a shareholder and governs the manner in
which shares are to be sold.
Private corporation (in Canada)
A private corporation is a corporation that is resident in Canada, is not a public corporation, and
is not controlled by one or more public corporations, or by a prescribed federal Crown
corporation listed in REG 7100 or by any combination thereof.
Private good
A private good is one that the consumption of the good by one person destroys it for use by
anyone else.
Private incentives
Incentives for information production in the absence of regulation. Private incentives may include
contractual obligations and market forces.
Private information search
Information generated by investors.
Private placement
A private placement is the direct sale of securities by an issuing firm to a small number of
investors.
Privatization
Transferring public financing and/or production of goods and services to the private sector.
Privity
Privity is the relationship of direct involvement between parties to a contract.
Pro forma earnings per share
Pro forma earnings per share is a calculation of EPS to reflect certain significant transactions
occurring between the fiscal year-end date and the date of financial statement preparation. An
adjustment is made for actual conversions and other specific changes in capital structure
occurring after year-end carried back to the year preceding the year the transaction actually
occurred. This is done for both basic and fully diluted EPS. It is used to measure pension
expense.
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Pro forma financial date
The pro forma financial date is the presentation of financial statements “as if” an event had
occurred on the date of the statement of financial position.
Pro forma financial statements
Pro forma financial statements are projected financial statements that are based on forecasts of
future operating conditions.
Probable (CICA Part I IFRS)
More likely than not. IFRS 5.A. See Highly probable, More likely than not.
Problem-recognition (as an audit method phase)
Problem-recognition, as an audit method phase, is the phase of formulating an audit objective
related to a financial assertion.
Procedural justice
Procedural justice focuses on procedures rather than results in determining what is fair.
Proceeds
Proceeds are amounts of consideration received in exchange of a transaction.
Proceeds of disposition (POD)
Proceeds of disposition (POD) of a property include the sales price of property sold (voluntary
disposition), the compensation received for lost, destroyed, damaged, or expropriated property
(involuntary disposition), and in the case of property surrendered by a debtor to a creditor, the
amount calculated under subsection 79(3). In the case of a deemed disposition such as on death,
emigration, or change in use of an asset, there will be deemed POD, usually at the FMV of the
property, and upon transfer of property between parties who do not deal at arm’s length
(voluntary disposition), there may be deemed POD if the sales price is less than the FMV of the
property.
Proceeds of the discounted note
The proceeds of the discounted note refer to the maturity value of a discounted note minus the
interest deducted in advance by the bank.
Process costing
Process costing is a costing method used in those industries that produce homogeneous products
on a continuous basis.
Process costing system
A process costing system is a costing system used in those manufacturing situations where a
single, homogeneous product, such as cement or flour, is produced for relatively long periods of
time.
Process reengineering
Process reengineering is an approach to improvement that involves completely redesigning
business processes in order to eliminate unnecessary steps, reduce errors, and reduce costs.
Process value analysis (PVA)
Process value analysis (PVA) is a systematic approach to gaining an understanding of the
activities required to make a product or perform a service. PVA identifies all resource consuming
activities involved in the manufacturing or service processing and labels these activities as being
either value-added or non-value-added in nature.
Process-based trust
Process-based trust is tied to past and expected future exchanges. Individuals rely on
transaction-specific information to infer that necessary trust exists for an exchange to occur in
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the future. First- or second-hand information from a trusted informant provides a starting point
for exchange.
Processing department
A processing department is any location in a factory where work is performed on a product and
where materials, labour, or overhead costs are added to the product.
Product costs
The product costs are costs attached to units of product. They are considered assets (that is,
inventory) until they are sold, at which time they become expenses (that is, cost of goods sold).
Direct materials, direct labour, and manufacturing overhead are considered product costs.
Product diversity
Product diversity is a range of products that differ substantially in volume, lot size, or complexity
of design.
Production budget
A production budget is a detailed plan showing the number of units that must be produced
during a period in order to meet both sales and inventory needs.
Production orders
Production orders are internal documents that specify the materials and labour required and the
timing for the start and end of production.
Production report
A production report is a report that summarizes all activity in a department’s Work in progress
account during a period and that contains three sections: a quantity schedule, a computation of
equivalent units, unit costs, and a cost reconciliation.
Productive capacity capital maintenance
Productive capacity capital maintenance is the concept that income results only after preserving
physical capacity. If the closing net assets, usually measured in current replacement dollars,
exceeds opening net assets, then income is present.
Productive output (PO) amortization
Productive output (PO) amortization is a method of calculating amortization expense that bases
amortization on current production output as related to expected productive output.
Product-level activities
Product-level activities are those activities that relate to specific products; such activities are
performed on behalf of specific products as needed to support production. For example,
maintaining a parts inventory would be a product-level activity.
Professional judgment
Professional judgment is the ability of a professional to make appropriate choices based on
established standards/criteria while recognizing the facts and circumstances surrounding the
specific choices to be made, especially when there is latitude or discretion involved in the
application of those criteria. This is a skill that develops over time as a result of having to make
difficult interpretations of financial information.
Professional liability
Liability owed by persons failing to live up to the standard expected of a reasonable member of a
group with special expertise.
Professional skepticism
An attitude that includes a questioning mind, being alert to conditions which may indicate
possible misstatement due to error or fraud, and a critical assessment of evidence.
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Profit
Profit means the amount determined using ordinary commercial principles unless the provisions
of the ITA require a departure from such principles. Generally, GAAP is the starting point for this
measurement. An accurate picture of income (profit) for the year must be consistent with the
ITA, case law, and well accepted business principles.
Profit centre
Profit centre describes the organizational architecture in which managers are delegated decision
rights over input mix, product mix, and sales prices and quantities, but investment is determined
at a higher level of the firm.
Profit graph
A profit graph is an alternative form of the cost-volume-profit graph that focuses more directly on
how profits change with changes in volume.
Profit margin
Profit margin is the ratio of a company’s net income to its revenues. This measures the average
proportion of each dollar of revenue that ends up as profit.
Profit or loss (CICA Part I IFRS)
Total of income less expenses, excluding the components of other comprehensive income. IAS
1.7
Profitability index
A profitability index, also known as the benefit/cost ratio of a capital-expenditure project, is
defined as the ratio of discounted after-tax cash inflows divided by discounted after-tax outflows.
Projects for which this ratio exceeds 1 show a positive return and are deemed acceptable.
Program description (computer program documentation)
The program description contains a program flowchart, a listing of the program source code, and
a record of all program changes.
Program driven
Program driven is a computer data processing system that is started when a specific program is
loaded into the computer to process all transactions that fit that program and its related files. It
is characterized by batch processing.
Program evaluation
The examination of whether programs achieved their intended outcomes and, in particular,
whether programs actually caused the observed outcomes.
Programmatic reporting (NFPO)
Also called reporting by program. Disclosure format for organizations that offer several different
programs. Its purpose is to provide information by significant operating sectors, similar to the
purpose of segment disclosures. Often, only a statement of operations is reported for each
program and the statement of financial position is presented for the organization as a whole.
NFPOs and some governments frequently use programmatic reporting.
Progressive tax
A progressive tax is a tax system characterized by increasingly higher tax rates on successive
increments of taxable income.
Project costs (product costs)
Project costs are direct costs related to products held for resale or some other specific business
activity (a project).
Projected benefit method
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The projected benefit method is a method of calculating employer contributions for defined
benefit plans that an employer must make in order to fund the pension to which the employee is
currently entitled. It is based on the projected estimate of the employee’s salary at the
retirement date.
Projected likely misstatement (PLM)
The projected likely misstatement (PLM) is the auditors’ best estimate of misstatement based on
the errors found in a sample.
Promissory note
A promissory note is a written commitment to pay a stated obligation by a specific date. It
represents formal evidence of a credit arrangement.
Proper period
Proper period refers to ensuring that transactions are accounted for in the period they occurred
in.
Property
Property is property of any kind whatever whether real or personal or corporeal or incorporeal
and includes a right of any kind whatever, a share or a chose in action, money, a timber resource
property, and the work in progress of a business that is a profession. Any tangible or intangible
thing, such as a personal residence, an apartment, a computer, or a franchise could be
considered property.
Property dividends
Property dividends are dividends paid with non-cash assets such as investments in the securities
of another company held by the corporation, real estate, merchandise, and other non-cash assets
as designated by the board. The assets are written up to market value on declaration.
Property, plant, and equipment (PPE) (CICA Part I IFRS)
Tangible items that:

(a) are held for use in the production or supply of goods or services, for rental to others, or
for administrative purposes; and

(b) are expected to be used during more than one period. IAS 16.6. See Inventories.
Property, plant, and equipment (PPE) (CICA Part II ASPE) [CICA Part V Prechangeover accounting standards]
Identifiable tangible assets that meet all of the following criteria:

(i) are held for use in the production or supply of goods and services, for rental to others,
for administrative purposes or for the development, construction, maintenance or repair of
other property, plant, and equipment;

(ii) have been acquired, constructed or developed with the intention of being used on a
continuing basis; and

(iii) are not intended for sale in the ordinary course of business.
Spare parts and servicing equipment are usually carried as inventory and recognized in net
income as consumed. However, major spare parts and standby equipment qualify as property,
plant, and equipment when an entity expects to use them during more than one period. Similarly,
if the spare parts and servicing equipment can be used only in connection with an item of
property, plant, and equipment, they are accounted for as property, plant, and equipment.
3061.03. See Inventories.
Proportional approach
Used with the split accounting approach to accounting for compound securities when both
components’ market values are determinable.
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Proportional method
The proportional method, in a lump-sum purchase, is a method of assigning each asset
purchased a value according to the ratio of its fair value to the value of the group.
Proportional method of allocating values of bundled securities
The proportional method of allocating values of bundled securities allocates the total
consideration received for a bundle of securities based on the relative market value of each
security.
Proportionate consolidation (CICA Part I IFRS)
Method of accounting whereby a venturer's share of each of the assets, liabilities, income and
expenses of a jointly controlled entity is combined line by line with similar items in the venturer's
financial statements or reported as separate line items in the venturer's financial statements. IAS
31.3
Proportionate consolidation (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Method of accounting and reporting whereby a venturer's pro rata share of each of the assets,
liabilities, revenues and expenses that are subject to joint control is combined on a line by line
basis with similar items in the venturer's financial statements. This method of accounting differs
from full consolidation in that only the venturer's portion of all assets, liabilities, revenues and
expenses is taken up rather than the full amount, offset by non-controlling interests. 3055.03
Proportionate liability
A legal liability regime where a party found to be partly liable is only responsible for paying a part
of the damages in proportion to their share of the blame.
Proprietary information
Proprietary information is information that, if released, would directly affect future cash flows of
the firm. Examples are technical information about valuable patents, and plans for strategic
initiatives such as takeover bids or mergers. The costs to the managers and firm of releasing
proprietary information can be quite high.
Non-proprietary information is information that does not directly affect firm cash flows. It
includes financial statement information, earnings forecasts, details of new financing, and so on.
The audit is also included in non-proprietary information.
Proprietary theory of consolidation
One of three theoretical approaches to consolidation when a non-controlling interest exists.
Under the proprietary theory, only the percentage of the subsidiary’s assets and liabilities that is
legally owned by the parent’s shareholders is reported in the consolidated financial statements.
This theory considers that there is only one group of shareholders in the consolidated economic
entity — the shareholders of the parent company. Consequently, the consolidated statements do
not recognize the equity of non-controlling shareholders. This theory is not accepted under
Canadian GAAP.
Prospect theory
The prospect theory was put forward by Kahneman and Tversky. It is an alternative to the
rational decision theory. According to prospect theory, an investor considering a risky investment
(called a “prospect”) will separately evaluate prospective gains and losses. The investor’s utility
for a gain is risk averse, whereas the investor’s utility for a loss is greater than the rate of utility
for a gain of the same value and resembles risk-taking behaviour. In prospect theory it is also
assumed that investors weight their payoff probabilities, with low payoffs being over-weighted
and high payoffs being under-weighted.
Prospective application (CICA Part I IFRS)
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Change in accounting policy and of recognizing the effect of a change in an accounting estimate,
respectively, are:

(a) applying the new accounting policy to transactions, other events and conditions
occurring after the date as at which the policy is changed; and

(b) recognizing the effect of the change in the accounting estimate in the current and
future periods affected by the change. IAS 8.5.
See Accounting policies, Change in accounting estimate, Retrospective application.
Prospective application (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Change in accounting policy and of recognizing the effect of a change in an accounting estimate
is, unless otherwise defined in other primary sources of GAAP (see section 1100) are:

(i) applying the new accounting policy to transactions, other events and conditions
occurring after the date as at which the policy is changed; and

(ii) recognizing the effect of the change in the accounting estimate in the current and future
periods affected by the change. 1506.05.
See Accounting policies, Change in accounting estimate, Retrospective application.
Prospectus
A prospectus is a legal document prepared by a corporation in the context of a public sale of
securities that must contain full, true, and plain disclosure of all material facts related to the
offering.
Provision for obligations of uncertain amount (CICA Part I IFRS)
Liability of uncertain timing or amount. IAS 37.10 See Recognition threshold for provision.
Provision for income tax
The provision for income tax is the expense (or recovery) of income tax charged for the period.
Proxy
A proxy is a revocable power of attorney given by a shareholder to another person entitling that
person to vote their shares at a shareholders’ meeting. The firm’s current board of directors
generally solicit proxies.
Prudence
Qualitative characteristic of financial statements set out in the CICA Framework for the
Preparation and Presentation of Financial Statements.
Under the restructured CICA Handbook, prudence replaces conservatism. Although prudence is
similar to conservatism, it emphasizes “that assets or income are not overstated and liabilities or
expenses are not understated” (IASB Framework, paragraph 37) whereas conservatism suggests
that it is better to understate than overstate assets and equity. See Conservatism principle.
PSAB
Public Sector Accounting Board.
PST
PST, also known as Provincial Sales Tax, is a tax collected by retailers on customer purchases.
Public companies
Public companies are corporations whose debt, or stock, are publicly traded on stock exchanges
or over-the-counter markets. Ownership is available to the general public. Public companies are
subject to the standards in Part I of the CICA Handbook for accounting and reporting
requirements as well as other regulations imposed by the exchange on which they trade.
Public corporation
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A public corporation is a corporation that is resident in Canada and that has a class of shares of
the capital stock of the corporation listed on a prescribed stock exchange in Canada.
Public enterprise [CICA Part V Pre-changeover accounting standards]
Enterprise that:

has issued debt or equity securities that are traded in a public market (a domestic or
foreign stock exchange or an over-the-counter market, including local or regional markets);

is required to file financial statements with a securities commission; or provides financial
statements for the purpose of issuing any class of securities in a public market. [1100.02,
3465.09(j)]
Public good
A public good is one in which the consumption of the good by one person does not destroy it for
use by another. An example of a public good would be a lighthouse.
Public interest theory
The public interest theory takes the view that regulation should maximize social welfare. This
theory suggests that regulation is the result of a public demand for correction of market failures.
The theory assumes that each regulation balances off the social costs with the social benefits of
that regulation.
Public offering
A public offering is the sale of securities by an issuing corporation to the general investing public.
Public practice
Firms that provide accounting, auditing, taxation, and other services for other companies and
individuals.
Public sector
Federal, provincial, territorial, and local governments. It also encompasses government business
enterprises (GBEs), government not-for-profit organizations, and other government
organizations.
See Public Sector Accounting (PSA) Handbook.
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Public Sector Accounting (PSA) Handbook
The CICA approved accounting standards for public sector organizations. The PSA Handbook
applies as follows:

Governments must present their financial statements in accordance with the PSA
Handbook.

Government business enterprises (GBEs) must present their financial statements in
accordance with IFRS.

Government business-type organizations are no longer a separate category in the PSA
Handbook. These organizations have the choice of presenting their financial statements in
accordance with IFRS or the PSA Handbook. Organizational and user needs should be the
primary factors in deciding which set of standards is more appropriate.

Government not-for-profit organizations currently must report their financial statements in
accordance with Part V of the CICA Handbook — Accounting. As of January 1, 2012, they
must report their financial statements in accordance with the CICA Public Sector Accounting
(PSA) Handbook which will include the 4400 series substantially as they now appear in Part
V of the CICA Handbook — Accounting. Use of the 4400 series is optional.

(Non-governmental) not-for-profit organizations currently must report their financial
statements in accordance with Part V of the CICA Handbook — Accounting. As of January
1, 2012, they must report their financial statements in accordance with either Part I or Part
III of the CICA Handbook — Accounting. Early adoption is permitted.

Other government organizations have the choice of presenting their financial statements in
accordance with IFRS or the PSA Handbook. Organizational and user needs should be the
primary factors in deciding which set of standards is more appropriate.
Public-private partnerships
Formal arrangements between governments and private-sector organizations concerning shared
vision, authority, information, planning, decision making, financial risk, responsibility, and
accountability.
Purchase (as a form of consolidation)
Purchase, as a form of consolidation, is where two companies’ financial statements are combined.
One is identified as the acquirer and one the acquiree. The latter’s net assets are recorded at fair
value at the date of acquisition.
Purchase cutoff
Recording purchase transactions in the proper period, including accruals of payments not due
until the following period.
Purchase discount
A purchase discount is a cash discount taken against an amount owed to a supplier of goods.
Purchase lease
A lease whereby ownership is intended to change hands at the end of the lease term.
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Purchase method (business combination) (PE GAAP) [per-IFRS GAAP]
The purchase method of business combinations was used in Canada until the effective date of
section 1582 and IFRS. In many respects, it is similar to the acquisitions method. It has some key
differences, though. Most notably, the acquirer using the purchase method reports the net assets
of the acquired company at the price paid, with any excess paid over the fair value being
recorded as goodwill. The acquisitions method requires that the net identifiable assets of the
acquiree be recorded at fair value irrespective of the price paid.
The purchase method of accounting was used to account for all business combinations. [CICA
Part V Pre-changeover accounting standards 1581.09] The purchase method can take either of
the following two forms:

Direct purchase of net assets, under which combining takes place in the accounting records
of the acquirer;

Purchase of acquiree’s shares (Parent/Subsidiary), under which combining takes place when
consolidated financial statements are prepared.
The purchase method requires the identification of an acquirer. Identifying the acquirer is
important because the acquirer recognizes the fair value of the assets acquired and liabilities
assumed from the other party to the combination. [CICA Part V Pre-changeover accounting
standards 1581.11]
The purchase method is no longer permitted, but there are transition provisions in IFRS 3 and
section 1582.
See Acquisition method, Business combination, Pooling of interests method.
Purchase order
A purchase order is a business paper used by the purchasing department of a firm to place an
order with a vendor. It authorizes the vendor to ship the ordered merchandise at the stated price
and terms.
Purchase price discrepancy (PPD)
The amount paid in excess of the book value of the acquired company’s net assets. Difference
between the amount paid by an acquiring company for shares and its proportionate interest in
the net book value of the assets of the acquired company at the date of acquisition. Under IFRS,
it is called acquisition differential.
Purchase requisition
A purchase requisition is a business paper used to request that the purchasing department buy
the needed merchandise or other items.
Purchasing power parity theory
The basic idea of the purchasing power parity theory explaining movements in foreign exchange
rates is that a currency represents purchasing power over goods and services and that the
market forces operate so as to keep purchasing power constant across different countries.
Push down accounting (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Technique that attributes revised values to the assets and liabilities reported in the financial
statements of an enterprise based on a purchase transaction or transactions of its equity
interests. Application of the technique results in the acquirer's cost being assigned to the assets
and liabilities of the acquired enterprise. 1625.03
Put bond
A bond that the holder may choose either to exchange for par value at some date or to extend
for a given number of years. If the price is above par, the put is a “premium put.”
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Put options on ordinary shares (CICA Part I IFRS)
Contracts that give the holder the right to sell ordinary shares at a specified price for a given
period. IAS 33.5
Puttable instrument (CICA Part I IFRS)
Financial instrument that gives the holder the right to put the instrument back to the issuer for
cash or another financial asset or is automatically put back to the issuer on the occurrence of an
uncertain future event or the death or retirement of the instrument holder. IAS 32.11
Q ratio
A Q ratio, also called Tobin’s q ratio, is the market value of all of a firm’s outstanding equity and
debt securities divided by the replacement cost of all the firm’s assets.
Qualified audit report
A qualified audit report is a type of modification to the auditor’s opinion. It is issued when the
auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements,
individually or in the aggregate are material, but not pervasive, to the financial statements; or
the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion,
but the auditor concludes that the possible effects on the financial statements of undetected
misstatements, if any, could be material but not pervasive.
Qualified farm property
Qualified farm property is real property including ECP that is owned by an individual, the
individual’s spouse or common-law partner, parent, or child, or by a family farm partnership, or is
a share of a family farm corporation, whereby the property is used in the business of farming in
Canada.
Qualified fishing property
Qualified fishing property is real property including ECP that is owned by an individual, the
individual’s spouse or common-law partner, parent, or child, or by a family fishing partnership, or
is a share of a family fishing corporation, whereby the property is used in the business of fishing
in Canada.
Qualified small business corporation shares (QSBCS)
A qualified small business corporation share (QSBCS) is a share that meets the following three
tests:

at the time of disposition (the determination time) the share must be a share of a small
business corporation owned by an individual, the individual’s spouse or common-law
partner, or a partnership related to the individual;

the share cannot be owned by anyone other than the individual disposing of the share, or a
person related to the individual, throughout the 24-month period immediately preceding the
determination time; and

throughout the 24-month period immediately preceding the determination time, the share
must have been a share of a CCPC whereby more than 50% of the fair market value of the
assets of which were attributable to assets used principally in an active business carried on
primarily in Canada by the corporation or a corporation related to it. If a corporation doesn’t
meet the 50% asset test, the corporation may be able to add shares or indebtedness of a
connected corporation to meet the test. However, before shares or debt of a connected
corporation can be added to the assets of the corporation being sold, a further asset use
test must be met. One of the corporations must use at least 90% of its assets and the
shares and debt of a connected corporation in an active business carried on primarily in
Canada and the other corporation must meet the above-mentioned 50% asset use test.
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Qualifying asset (CICA Part I IFRS)
Asset that necessarily takes a substantial period of time to get ready for its intended use or sale.
IAS 23.5. Depending on the circumstances, any of the following may be qualifying assets:

(a) inventories;

(b) manufacturing plants;

(c) power generation facilities;

(d) intangible assets;

(e) investment properties. IAS 23.7.
Financial assets and inventories that are manufactured, or otherwise produced, over a short
period of time, are not qualifying assets. Assets that are ready for their intended use or sale
when acquired are not qualifying assets. IAS 23.7. See Borrowing costs.
Qualifying enterprise (differential reporting) [CICA Part V Pre-changeover
accounting standards]
An enterprise is a qualifying enterprise for purposes of the differential reporting options set out in
an Accounting Standard, Accounting Guideline or Abstract of Issue Discussed by the Emerging
Issues Committee when and only when: it is a non–publicly accountable enterprise; and its
owners unanimously consent to the application of differential reporting options in accordance
with paragraph 1300.13. [1300.06] The selection of the differential reporting options establishes
the basis for preparing a qualifying enterprise's financial statements within generally accepted
accounting principles and should be consented to in writing by all of the owners prior to the date
of completion of the financial statements. [1300.13]
Qualifying insurance policy (CICA Part I IFRS)

Insurance policy issued by an insurer that is not a related party (as defined in IAS 24
Related Party Disclosures) of the reporting entity, if the proceeds of the policy:

(a) can be used only to pay or fund employee benefits under a defined benefit plan; and

(b) are not available to the reporting entity's own creditors (even in bankruptcy) and cannot
be paid to the reporting entity, unless either:
o
(i) the proceeds represent surplus assets that are not needed for the policy to meet
all the related employee benefit obligations; or
o
(ii) the proceeds are returned to the reporting entity to reimburse it for employee
benefits already paid. IAS 19.7
Qualitative characteristics (qualitative criteria)
Qualitative characteristics are a set of criteria by which measurement options and accounting
policies are evaluated.
Qualitative method
The qualitative method is used when organizations make decisions for reasons other than dollar
returns. Both qualitative and quantitative methods should be used.
Quality
Quality is the conformance of a product or service to customer expectations in terms of features
and performance.
Quality circles
Quality circles are small groups of employees that meet on a regular basis to discuss ways to
improve quality of output.
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Quality function deployment
Quality function deployment is the process that takes the concept of customer wants and needs,
functional characteristics, technical specifications, and costs to a sophisticated level of analysis. It
converts the customers’ demands into quality characteristics by developing a design quality for
the finished product.
Quality of conformance
Quality of conformance is the degree to which the product meets its design specifications and is
free from defects that might affect appearance or performance.
Quality of design
Measures how closely the characteristics of products or services match the needs and wants of
customers.
Quality review
A quality review is the study of a firm’s quality control policies and procedures. It is an audit of a
firm’s quality of audit practice.
Quality-cost report
The quality-cost report is a report that lists all of the quality-related activities recorded in the
accounting system along with their costs (both direct and indirect) by the four categories of
prevention, appraisal, internal failure, and external failure.
Quantifiability
Quantifiability is the ability to attach a number to an event or transaction.
Quantitative characteristics
Focus on areas that can be measured and deal in numbers. Quantitative gets its origins from the
word quantity.
Quantity schedule
A quantity schedule is the part of a production report that shows the flow of units through a
department during a period.
Quarterly tax instalments
Quarterly tax instalments must be made by individuals who are not employees or by taxpayers
who have sizable income from a source other than employment.
Quick ratio
The quick ratio is a liquidity ratio comparing monetary current assets to current liabilities. It
excludes non-monetary current assets that may distort the current ratio.
Cur r ent
assets (I nvent or
s i e
Pr epai ds)
Cur r ent
l i abi lsi t i e
Quick ratio =
Racketeering acts
Racketeering acts are acts of engagement in illegal activities such as fraud in the sales of
securities, mail fraud, or wire fraud.
Random sample
A random sample is a set of sampling units chosen so that each population item has an equal
likelihood of being selected in a sample.
Random walk
A random walk is a time-series analysis of a sequence that fluctuates randomly over time.
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Rate regulated enterprise (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Enterprise that meets all of the following criteria:

(i) the rates for regulated services or products provided to customers are established by or
are subject to approval by a regulator or a governing body empowered by statute or
contract to establish rates to be charged for services or products;

(ii) the regulated rates are designed to recover the cost of providing the services or
products; and

(iii) it is reasonable to assume that rates set at levels that will recover the cost can be
charged to and collected from customers in view of the demand for the services or products
and the level of direct and indirect competition. This criterion requires consideration of
expected changes in levels of demand or competition during the recovery period for
amounts recorded as recoverable under the rate formula. 3465.02
Rate regulated long-lived assets (CICA Part II ASPE)
Long-lived assets held for use in operations meeting all of the following criteria:

(i) The rates for regulated services or products provided to customers are established by or
subject to approval by a regulator or a governing body empowered by statute or contract to
establish rates to be charged for services or products.

(ii) The regulated rates are designed to recover the cost of providing the services or
products.

(iii) It is reasonable to assume that rates set at levels that will recover the cost can be
charged to and collected from customers in view of the demand for the services or products
and the level of direct or indirect competition. This criterion requires consideration of
expected changes in levels of demand or competition during the recovery period for any
capitalized costs. 3475.03
Rate regulated property, plant, and equipment (CICA Part II ASPE) [CICA Part V Prechangeover accounting standards]
Items of property, plant, and equipment held for use in operations meeting all of the following
criteria:

(i) The rates for regulated services or products provided to customers are established by or
are subject to approval by a regulator or a governing body empowered by statute or
contract to establish rates to be charged for services or products;

(ii) The regulated rates are designed to recover the cost of providing the services or
products;

(iii) It is reasonable to assume that rates set at levels that will recover the cost can be
charged to and collected from customers in view of the demand for the services or products
and the level of direct and indirect competition. This criterion requires consideration of
expected changes in levels of demand or competition during the recovery period for any
capitalized costs. 3061.03
Ratio
A ratio is one number divided by another as a measure of relative proportionality.
Rational
Rational means that people rank their preferences in a logically consistent manner.
Rational expectations
Rational expectations state that the market does not systematically misinterpret the valuation
implications of a supply of information, but rather puts a valuation on securities that is on
average correct or unbiased.
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Raw materials inventory
Raw materials inventory refers to goods on hand for direct use in manufacturing or further
processing of goods for sale.
Real accounts
Real accounts, also known as permanent accounts, are general ledger accounts that are not
closed to retained earnings at the end of an accounting period. They are statement of financial
position accounts.
Real assets
Real assets are real estate property, land, and buildings.
Realizable value
The realizable value is the expected proceeds from converting assets into cash.
Realization
Realization is the process of converting an asset, liability, or commitment into a cash flow.
Realization (recovery) of an asset
A concept of deferred income tax accounting. The realization or recovery of an asset is made
through the sale or use of the asset. For some asset transactions, the realization has no tax
consequence because its carrying amount immediately after acquisition is the same as the tax
base. For other assets (for example, the use of equipment acquired for business purposes) tax
consequences exist. Accounting standards determine whether the use of the asset gives rise to
revenue or expense. For a given period, the amount of the asset recovered may represent a
portion (or the totality) of the carrying amount (book value).
When combined, the revenues and expenses resulting from the recovery of assets and
settlement of liabilities determine the accounting net income before tax.
Realized revenue
Realized revenue is revenue for which cash has been received.
Rearrangements
Rearrangements are the costs of reinstallation, rerouting, or rearranging factory machinery to
increase efficiency.
Reasonable assurance
Reasonable assurance is the highest level of conclusions an auditor can render exemplified by the
standard unqualified report.
Reasonable foreseeability test
Test of whether a duty of care is owed in a negligence claim, based on what a person should
have anticipated would be the consequences of his or her actions.
Recapture
Recapture of CCA occurs when the UCC balance of a particular pool of assets is negative even if
there are assets still remaining in the pool. This negative balance is recapture and is fully taxable
as business or property income.
Receipts
Receipts are cash inflows.
Receivables
Receivables are monetary accounts that will be paid to the corporation in the future. They may
be accounts, notes, interest, taxes, and so on.
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Receiving report
A receiving report is a form used within the business to notify the appropriate persons that
ordered goods were received and to describe the quantities and condition of the goods.
Reciprocal allocation approach to allocating service department costs
The reciprocal allocation approach to allocating service department costs is a method that gives
full recognition to interdepartmental services. This method uses simultaneous allocations of each
department involved.
Reciprocal services
Reciprocal services are services provided between service departments.
Reciprocal transfer
A reciprocal transfer is a transfer, or transaction, in which the firm both transfers and receives
resources. For example, the sale of goods for cash would be a reciprocal transfer.
Reclassification adjustments (CICA Part I IFRS)
Adjustments to profit or loss in the current period that were recognized in other comprehensive
income in the current or previous periods. IAS 1.7
Reclassification of financial instruments
Changing the category of a financial instrument into or out of the original classification. CICA
precludes reclassification of a financial instrument into or out of the trading category while it is
held or issued. IFRS 1 provides a limited ability for an election on the date of transition to IFRS.
See Classification of financial assets.
Recognition (CICA Part II ASPE) [CICA Part V Pre-changeover accounting standards]
Including or recording an item in the financial accounts and statements of an entity. 1000.36.
See Recording.
Recognition of financial instruments
The initial recognition of a financial instrument is made using regular way purchases of financial
assets. The term regular-way refers to a purchase or sale of a financial instrument whereby the
contracted terms for delivery are within a "time frame established generally by regulation or
convention in the marketplace concerned" [3855.19(n)]
Recognition threshold for provision
Under CICA Part I IFRS, the threshold for recording a provision for obligations of uncertain
amount is probable (defined as more likely than not).
Under CICA Part II and Part V, the threshold is "likely."
Recording
The entries of transactions that a company makes in its accounting records. There are two
methods of recording transactions in investments, the cost method and the equity method.
The cost method requires the following:

The investment is initially recorded at cost.

Earnings from such investments are recognized (recorded in the books as investment
income) only when received or receivable.
The equity method requires the following:

The investment is initially recorded at cost.

Thereafter, adjustments of the carrying value by the investor’s pro rata share of postacquisition earnings (losses) of the investee are computed by the consolidation method.
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
The carrying value is reduced by profit distributions received or receivable from the
investee.
Recourse (factoring of accounts receivable)
Recourse in factoring of accounts receivable occurs when the risk of non-payment on factored
accounts receivable remains with the vendor. If the finance company cannot collect the full
amount of the factored receivables, the vendor company must make good on the deficiency. As
the risk of default and ultimate liability remains with the vendor company, the receivables and
the liability typically remains on its statement of financial position.
Recoverable amount (CICA Part I IFRS)
Higher of an asset's fair value less costs to sell and its value in use. IAS 16.6, IFRS 5.A
Recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs
to sell and its value in use. IAS 36.6
Recurring operating contingent loss exposure
Recurring operating contingent loss exposure is a risk that normally exists in the undertaking of
the business’ operations that merits no special reporting treatment. This is because the loss
exposure is part of the normal risks of being in that specific business.
Redeemable securities
Redeemable securities are securities in which the condition of the security issue allows the
company to repurchase its securities for a specified price at a period in time prior to maturity.
Redemption of shares
A redemption of shares, also known as a share redemption, occurs when a shareholder sells his
shares back to the corporation and usually results in a deemed dividend. The deemed dividend
received by a shareholder on a share redemption is equal to the excess of the amount paid on
the redemption over the paid-up capital of the shares.
Furthermore, there are two tax consequences that occur when shares are redeemed:

a deemed dividend arises if the amount paid on the redemption is higher than the paid-up
capital of the shares; and

a disposition of the share for POD equal to the amount paid on the redemption less the
amount of any deemed dividend calculated.
Redemption value
The redemption value is the amount that must be paid to call and retire a preferred share.
Redistributive function
The state’s responsibility for transferring resources from citizens with ample resources to citizens
with a shortage of resources.
Reengineering
The fundamental rethinking and redesign of business processes to achieve improvements in
critical measures of performance such as cost, quality, service, speed, and customer satisfaction.
Referral fees
Referral fees are fees received for recommending another’s services, and fees paid to obtain a
client. Such fees may or may not be based on a percentage of the amount of any transaction.
CGAs are not to accept referral fees.
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Refundable dividend tax on hand (RDTOH)
A corporation’s refundable dividend tax on hand (RDTOH) at the end of a taxation year is equal
to the total of:

the refundable portion of Part I tax:
the least of:

26 2/3% of aggregate investment income,

26 2/3% of taxable income for the year in excess of the amount qualifying for the SBD, or

the Part I tax payable for the year excluding the corporate surtax

Part IV tax payable on dividends

RDTOH at the end of the preceding taxation year

less the preceding year’s dividend refund.
Note that for more complex situations it is best to look at page 6 of the T2 Corporation Income
Tax Return for the calculation.
Refundable portion of Part I tax
See Refundable dividend tax on hand.
Refundable tax credits
Refundable tax credits are credits which, if they exceed tax payable, are refunded to the
individual. Refundable tax credits include the refundable medical expense credit, employee and
partner GST/HST rebate, refund of investment tax credit, and provincial or territorial credits, such
as the BC sales tax credit, BC venture capital tax credit, and BC mining and exploration tax credit.
Note that each province or territory has its own set of credits.
Refundable tax on investment income
Under section 123.3, there is a refundable tax for CCPCs on investment income equal to 6 2/3%
of the lesser of:

the aggregate investment income as defined under subsection 129(4)
and

the taxable income less the amount on which the SBD is calculated, if any.
Refundable taxes (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Taxes that are based on certain types of income and that are refundable when certain amounts
are paid to shareholders. 3465.02
Refunding (of a bond)
Refunding of a bond is the replacement of one bond issue with another bond issue. It may be
used to extinguish debt covenants or allow refinancing at a lower market rate.
Registered pension plan (RPP)
A registered pension plan (RPP) is a pension plan legally registered with the provincial pension
commissioner and must comply with provincial pension legislation. A plan must be registered in
order for pension contributions to be tax deductible.
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Registered pension plan (RPP) (for tax purposes)
A registered pension plan (RPP) is one of three tax-assisted retirement savings plans that allow
an individual to accumulate amounts on a tax-deferred basis in order to build a retirement fund.
An RPP is a plan set up by an employer for its employees and must be registered by CRA. An RPP
is a formal arrangement where the employer contributes periodic payments on behalf of an
employee to a trust for the employee’s retirement. There are two types of RPPs:

money purchase plan, in which pension benefits are determined at the time of retirement
on the basis of the accumulated contributions to the plan; and

defined benefit plan, in which retirement benefits are determined in advance according to a
formula calculated by an actuary and in which the required contributions are based on the
amount of the benefit.
Registered retirement savings plan (RRSP)
A registered retirement savings plan (RRSP) is one of three tax-assisted retirement savings plans
that allow an individual to accumulate amounts on a tax-deferred basis in order to build a
retirement fund. An RRSP is a formal arrangement between a contributor and a plan
issuer/trustee, such as a bank, trust company, brokerage house, insurance company, or credit
union whereby individuals who have eligible earned income may contribute to RRSPs for their
own benefit or for their spouse’s benefit. An RRSP must be registered with CRA in order for
contributions to be eligible deductions.
Registrar
A registrar is a fiduciary who keeps the shareholder list and from time to time determines the
shareholders eligible to receive dividends (shareholders on record on a dividend record date) and
those entitled to vote at the annual meeting.
Regression analysis
The name of one standard series of mathematical manipulations used to analyze two sets of data
recorded from past events.
Regression line
A regression line is a straight line fitted to an array of plotted points. For example, in cost
analysis, the slope of the line, denoted by the letter b in the linear equation Y = a + bX,
represents the average variable cost per unit of activity. The point where the line intersects the
cost axis, denoted by the letter a, represents the average total fixed costs. Y is the total cost and
X is the volume.
Regular way purchase or sale (CICA Part I IFRS) [CICA Part V Pre-changeover
accounting standards]
Purchase or sale of a financial asset in accordance with a contract whose terms require delivery
of the asset within the time frame established generally by regulation or convention in the
marketplace concerned. [3855.19(n)], IAS 39.9 See also Recognition of financial instruments.
Regulated accounting policies (RAP)
Regulated accounting policies (RAP) are those accounting policies that are specified in specific
statues or regulations pertaining to specific regulated industries. RAP is not GAAP.
Reinsurance assets (CICA Part I IFRS)
Cedant's net contractual rights under a reinsurance contract. IFRS 4.A. See Cedant.
Reinsurance contract (CICA Part I IFRS)
Insurance contract issued by one insurer (the reinsurer) to compensate another insurer (the
cedant) for losses on one or more contracts issued by the cedant. IFRS 4.A
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Reinsurer (CICA Part I IFRS)
Party that has an obligation under a reinsurance contract to compensate a cedant if an insured
event occurs. IFRS 4.A
Related party (CICA Part I IFRS)
A party is related to an entity if:

(a) directly, or indirectly through one or more intermediaries, the party:
o
(i) controls, is controlled by, or is under common control with, the entity (this
includes parents, subsidiaries and fellow subsidiaries);
o
(ii) has an interest in the entity that gives it significant influence over the entity; or
o
(iii) has joint control over the entity;

(b) the party is an associate (as defined in IAS 28 Investments in Associates) of the entity;

(c) the party is a joint venture in which the entity is a venturer (see IAS 31 Interests in
Joint Ventures);

(d) the party is a member of the key management personnel of the entity or its parent;

(e) the party is a close member of the family of any individual referred to in (a) or (d);

(f) the party is an entity that is controlled, jointly controlled or significantly influenced by, or
for which significant voting power in such entity resides with, directly or indirectly, any
individual referred to in (d) or (e); or

(g) the party is a post-employment benefit plan for the benefit of employees of the entity,
or of any entity that is a related party of the entity. IAS 24.9
Related party (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Where one party has the ability to exercise, directly or indirectly, control, joint control or
significant influence over the other. Two or more parties are related when they are subject to
common control, joint control, or common significant influence. Related parties also include
management and immediate family members (see paragraph 3840.04). 3840.03
Related party transaction (CICA Part I IFRS)
Transfer of resources, services, or obligations between related parties, regardless of whether a
price is charged. IAS 24.9
Related party transaction (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
A transaction in which one of the parties has the ability to influence the actions and policies of
the other party(ies) because of a relationship. It is a transfer of economic resources or
obligations between related parties or the provision of services by one party to a related party,
regardless of whether any consideration is exchanged. The parties to the transaction are related
prior to the transaction. When the relationship arises as a result of the transaction, the
transaction is not one between related parties. 3840.03
Related persons
Related persons are individuals connected by blood relationship, marriage or common-law
partnership, or adoption. Related persons also include a corporation and a person(s) who
controls the corporation and to any person(s) related to the controlling person(s) or group, as
well as any two corporations if they are controlled by the same person(s) and to any person(s)
related to the controlling person(s) or group.
Relative ethics
The view that all moral standards are matters of individual or societal likes and dislikes.
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Relative performance evaluation
Relative performance evaluation is when performance is judged relative to a comparison group or
person instead of an absolute standard. Relative performance evaluation works best when
random events affect all divisions and all managers being compared. It is also useful in a state of
high common uncertainty.
Relative risk
Relative risk is the condition of more or less inherent risk.
Relevance
Relevance is information that is useful or influential for decision-makers. Such information is
timely and has predictive value and feedback value.
See Conceptual Framework for Financial Reporting.
Relevant costs
Relevant costs are future costs that differ between alternatives. To be relevant, a cost must be
differential; however, not all differential costs are relevant. For example, machine A may have
cost $1,000,000 and machine B $500,000. These costs differ, but since they occurred in the past
they are likely not to be relevant to a current decision. Whether an individual cost is relevant or
not depends on the decision being made and the circumstances surrounding that decision.
Relevant financial statements
Relevant financial statements are those that give information to investors about the firm’s future
economic prospects.
Relevant range
The relevant range is the range of activity within which assumptions relative to variable and fixed
cost behaviour are valid.
Reliable financial information
Financial information that is precise and free from bias.
Reliability
Reliability is information that can be depended upon as accurate. Reliable information is
representationally faithful, verifiable, and free from bias.
See Conceptual Framework for Financial Reporting.
Reload feature (CICA Part I IFRS)
A feature that provides for an automatic grant of additional share options whenever the option
holder exercises previously granted options using the entity's shares, rather than cash, to satisfy
the exercise price. IFRS 2.A
Reload feature (stock option) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Option granted with a reload feature is an option that provides for automatic grants of additional
options whenever an employee exercises previously granted options using shares of stock, rather
than cash, to satisfy the exercise price. At the time of exercise using shares, the employee is
automatically granted a new option, called a reload option, for the same number of shares used
to exercise the previous option. 3870.07
Reload option (CICA Part I IFRS)
New share option granted when a share is used to satisfy the exercise price of a previous share
option. IFRS 2.A
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Remuneration
Remuneration is other forms of monetary compensation encompassing all types of compensation
that may be received by employees for services rendered in the course of their employment in
addition to salary and wages. It includes bonuses, tips, commissions, gifts, directors’ fees, and
payments received for accepting an employment or as consideration for an agreement by the
employee to do or not to do something before or after the termination of employment.
Rental income (or loss)
Rental income (or loss) refers to the income or loss earned from the ownership of properties that
are rented or leased to another person. In most cases rental income is income from property;
however, there are some instances where rental income would be considered business income.
These exceptions include a corporation whose principal business is to earn rental income and
which employs six or more full-time employees, a business with short-term rentals of small
equipment, a motel, hotel, and similar hospitality business, and a long- or short-term business of
leasing moveable property.
Rental real estate (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Real estate held primarily to generate income through rental to others (that is, not held for sale
in the ordinary course of business). It includes rental property under development and developed
property that is intended to be held for rental. In addition, it includes land designated for
development as rental property. 3061.03
Reorder point
The reorder point is the point in time when an order must be placed to replenish depleted stocks.
It is determined by multiplying the lead time by the average daily or weekly usage. If the
company experiences problems in demand, delivery, or processing of orders, they may need a
buffer called a safety stock. This will change the reorder point to lead time multiplied by average
daily or weekly usage plus safety stock.
Reorganization of capital of a corporation
A reorganization of capital of a corporation is when all the shares of a particular class of the
capital stock of a corporation held by a taxpayer are reclassified or exchanged for another class
of shares of the same corporation. A rollover of the ACB of the old shares to the new shares
occurs; thus, there are no immediate tax consequences for the shareholder.
Repairs
Repairs are expenditures made to keep a plant asset in normal, good operating condition. It is
treated as a period expense.
Re-performance (in test of controls procedure)
Re-performance, in a test of controls procedure, occurs when auditors perform again the
arithmetic calculations and the comparisons the company people were supposed to have
performed.
Replacement cost
Replacement cost is the cost to reproduce or replace a given asset, usually a supplier’s price.
Replacement system of amortization
The replacement system of amortization is a method of calculating amortization expense
commonly used by public utilities. Amortization is calculated with reference to current
replacement cost of asset retired.
Replication
Replication is the process of re-performing a selection procedure and getting the same sample
units.
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Report form statement of financial position
The report form statement of financial position is a statement of financial position with a vertical
format that shows the assets above the liabilities and the liabilities above the owner’s equity.
Reportable condition
A reportable condition is a significant deficiency in the design or operation of a company’s
internal control structure which could adversely affect the organization’s ability to record,
process, summarize, and report financial data in conformity with GAAP.
Reporting
Reporting refers to the published financial statements.
Reporting currency
The reporting currency is the currency in which a company presents its financial statements.
Reporting enterprise (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Entity whose financial statements include transactions entered into by the entity in a foreign
currency or whose statements incorporate foreign currency financial statements of a foreign
operation. 1651.03
Reporting unit (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Level of reporting at which goodwill is tested for impairment and is either an operating segment
or one level below (referred to as a component). A component of an operating segment is a
reporting unit when the component constitutes a business for which discrete financial information
is available and segment management regularly reviews the operating results of that component.
However, two or more components of an operating segment are aggregated and deemed a
single reporting unit when the components have similar economic characteristics. An operating
segment is deemed to be a reporting unit when all of its components are similar, when none of
its components is a reporting unit or when it is comprised of only a single component. 3064.08.
See Cash-generating unit, Operating segment.
Representational faithfulness (validity)
Representational faithfulness occurs when information reported accurately reflects the actual
events and transactions.
Representative sample
A representative sample is a sample that mirrors the characteristics of the population.
Request for proposal (RFP)
A document that an enterprise sends to a vendor inviting the vendor to submit a bid for
hardware, software, services, or any combination of the three. An organization typically issues
the RFP in order to assess competing bids.
Research (CICA Part I IFRS) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Original and planned investigation undertaken with the prospect of gaining new scientific or
technical knowledge and understanding. 3064.08, IAS 38.8
Research and development costs
Research and development costs are costs of activities undertaken by firms to create new
products and processes, improve old ones, and discover new knowledge that may be of value in
the future. All of these types of costs are expensed except those development expenses that
meet specified criteria.
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Reservation of audit opinion
Reservation of audit opinion occurs when a statement is issued by an auditor indicating that an
unqualified opinion cannot be formed as to the conformity of financial information with the
specified accounting standards for that financial information.
Reservation utility
The reservation utility is the lowest utility an individual must obtain. If they don’t obtain that
utility from the given activity they will do something else.
Reserve recognition accounting (RRA)
An American accounting standard that requires that publicly traded oil and gas companies
disclose the estimated present value of future receipts. Future receipts from oil and gas must be
priced at year-end levels rather than at the more “ideal” prices expected to be in effect when the
oil and gas is actually sold. Under RRA, revenue is recognized when reserves are proved, thus
improving the relevance of estimates
Reserves
Reserves are estimated amounts that depend on the occurrence of a future event. Reserves are
disallowed as a deduction against income unless otherwise specifically authorized by the ITA.
Deductible reserves must be reasonable and may only be claimed with respect to amounts
included in the income of the current year or of a previous year. Examples of reserves are
reserves for doubtful accounts, reserves for goods and services to be delivered after the year
end, reserves for deposits on returnable containers, manufacturer’s warranty reserve, and
reserves for unpaid amounts. Note that the ITA disallows a deduction for all contingent liabilities
and sinking funds because they are potential liabilities that may not materialize.
Residence criterion
The residence criterion is the primary basis for the liability for tax in Canada. Residence allows
CRA to impose tax on a large group of persons that have strong social and economic ties with
Canada.
Resident — Corporation
Under common law CRA considers that whenever central management and control of a
corporation is exercised in Canada, that corporation is deemed to be a corporation resident in
Canada. This extends to corporations incorporated outside Canada that maintain a management
function within Canada. Furthermore, corporations are deemed Canadian resident corporations if
they were incorporated in Canada after April 26, 1965, regardless of where the shareholders
reside. Those corporations incorporated in Canada before April 27, 1965, which later become
Canadian resident corporations under common law, or which later carried on business in Canada
are also deemed Canadian resident corporations.
Resident — Individual
An individual is resident in Canada for tax purposes if Canada is the place where he, in the
settled routine of his life, regularly, normally, or customarily lives. If an individual leaves Canada
the following factors will be taken into consideration in determining whether or not the individual
will remain a resident of Canada for tax purposes while abroad: permanence and purpose of stay
abroad; residential ties within Canada; residential ties elsewhere; and regularity and length of
visits to Canada. Thus, a person who is resident in Canada is liable for Part I tax on his world
income.
Residual assets
Any assets left after all other claims on the firm have been satisfied and those on which the
ordinary shareholders have claim.
Residual losses in agency theory
Residual losses in agency theory are agency costs that cannot be reasonably reduced to zero.
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Residual risk
Risk that cannot be transferred from a government organization or agency to a private or nonprofit organization through a partnership or other arrangement and hence is that part of the
overall risk that the government organization or agency retains.
Residual value (CICA Part I IFRS)
Estimated amount that an entity would currently obtain from disposal of an asset, after deducting
the estimated costs of disposal, if the asset were already of the age and in the condition
expected at the end of its useful life. IAS 16.6
Residual value (CICA Part III ASNFPO)
Estimated net realizable value of a capital asset at the end of its useful life to an organization.
[4430.05(g)]
Residual value (intangible asset) (CICA Part I IFRS) (CICA Part II ASPE) [CICA Part
V Pre-changeover accounting standards]
Estimated amount that an entity would currently obtain from disposal of the asset, after
deducting the estimated costs of disposal, if the asset were already of the age and in the
condition expected at the end of its useful life. 3064.08, IAS 38.8
Residual value (leased property) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Estimated fair value of the leased property at the end of the lease term. 3065.03
Residual value (property, plant, and equipment) (CICA Part II ASPE) [CICA Part V
Pre-changeover accounting standards]
Estimated net realizable value of an item of property, plant, and equipment at the end of its
useful life to an enterprise. 3061.03
Response rate
The response rate for positive confirmations is the proportion of the number of confirmations
returned to the number sent. Generally this will be after the audit team prompts recipients with
second and third requests. Research studies have shown that response rates range from 66 to
96%.
Responsibility
To say that person A is morally or legally responsible for choosing option X is to say that there
are relevant moral or legal standards to apply to A's choice and that A could have met these
standards.
Responsibility accounting
Responsibility accounting is a system of accounting in which costs are assigned to various
managerial levels according to where control of the costs is deemed to rest, with the managers
then held responsible for differences between budgeted and actual results.
Restricted contribution (CICA Part III ASNFPO)
Contribution subject to externally imposed stipulations that specify the purpose for which the
contributed asset is to be used. A contribution restricted for the purchase of a capital asset or a
contribution of the capital asset itself is a type of restricted contribution. [4410.02(b)]
Restricted farm loss
Restricted farm losses are those incurred in a farming operation where the taxpayer’s primary
source of income is neither farming nor farming and some other source. A taxpayer in these
circumstances is only permitted to deduct in the loss year the lesser of:

the actual farm loss, and
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
$2,500 plus half the next $12,500 of losses for a year (maximum $8,750). Farm losses in
excess of $8,750 become restricted farm losses and may not be utilized during the year.
Restricted farm losses are deductible under paragraph 111(1)(c) and may be carried back three
years and carried forward 20 years but can only be deducted against income from a farming
business earned in the carryover year.
Restricted fund (CICA Part III ASNFPO)
Self-balancing set of accounts the elements of which are restricted or relate to the use of
restricted resources. Only restricted contributions, other than endowment contributions, and
other externally restricted revenue are reported as revenue in a restricted fund. Allocations of
resources that result from the imposition of internal restrictions are recorded as interfund
transfers to the restricted fund. [4410.02(e)]. See Fund accounting, Endowment fund, Restricted
fund method of accounting.
Restricted fund method of accounting (CICA Part III ASNFPO)
Specialized type of fund accounting that involves the reporting of details of financial statement
elements by fund in such a way that the organization reports total general funds, one or more
restricted funds, and an endowment fund, if applicable. Reporting of financial statement
elements segregated on a basis other than that of use restrictions (for example, by program or
geographic location) does not constitute the restricted fund method. [4400.02(d)] See Deferral
method of accounting, Fund accounting.
Restricted retained earnings
Restricted retained earnings are a portion of retained earnings required to be segregated for a
specified purpose under the direction of a legal contract or corporate law.
Restricted shares
Restricted shares are shares with special characteristics such as ordinary shares with no (or
restricted) voting rights. These shares may be useful in limiting exposure to undue concentration
of control or to purposely divert control to designated shareholders.
Restricted stock (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Shares of stock for which sale is contractually or governmentally restricted for a given period of
time. 3870.07
Restrictions (CICA Part III ASNFPO)
Stipulations that specify how resources must be used. External restrictions are imposed from
outside the organization, usually by the contributor of the resources. Internal restrictions are
imposed in a formal manner by the organization itself, usually by resolution of the board of
directors. Restrictions on contributions may only be externally imposed. Net assets or fund
balances may be internally or externally restricted. Internally restricted net assets or fund
balances are often referred to as reserves or appropriations. [4400.02(b)]
Restructuring
Restructuring is a business reorganization where the entity stays in the same line of business, but
has streamlined its activities. The costs of restructuring are usually shown as an unusual item on
the income statement.
Restructuring (CICA Part I IFRS)
Programme that is planned and controlled by management, and materially changes either:

(a) the scope of a business undertaken by an entity; or

(b) the manner in which that business is conducted. IAS 37.10
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Results-based management
Management philosophy that is focused on results rather than on inputs and activities. Resultsbased management generally shifts the focus from bureaucratic control over inputs and
processes to control over outputs and outcomes.
Retail inventory method
The retail inventory method is a method of estimating inventories based on actual markups and
markdowns during the period. The organization calculates its inventory at retail and then
converts to the cost price using a cost-to-retail ratio.
Retail method cost ratio
The retail method cost ratio is the ratio of goods available for sale at cost to goods available for
sale at retail prices.
Retained earnings (CICA Part II ASPE)
Accumulated balance of income less losses arising from the operation of the business, after
taking into account dividends, refundable taxes, and other amounts that may properly be
charged or credited thereto. When the accumulation is a negative figure, the single word deficit
is a suitable designation. 3251.03
Retainer fee approach to service department allocation
The retainer fee approach to service department allocation is a method in which other
departments are charged a flat amount each period regardless of usage of the service involved.
Retirement benefit plans (CICA Part I IFRS)
Arrangement whereby an entity provides benefits for employees on or after termination of
service (either in the form of an annual income or as a lump sum) when such benefits, or the
contributions towards them, can be determined or estimated in advance of retirement from the
provisions of a document or from the entity's practices. IAS 26.8
Retirement of debt
Elimination of debt. Debt can be retired through open market purchase, by calling the debt
directly from the investor, or through refunding.
Retirement of a long-lived asset (CICA Part II ASPE)
Other than temporary removal from service, including its sale, abandonment, recycling, or
disposal in some other manner, but not its temporary idling. 3110.03
Retirement system of amortization
The retirement system of amortization is a method of calculating amortization expense commonly
used by public utilities. Amortization is calculated with reference to original cost of retired assets.
Retiring allowance
A retiring allowance is an amount received, other than a pension, superannuation, or death
benefit, upon or after retirement from employment (which includes the termination, elimination,
or expiration of employment) in recognition of long service, loss of an office or employment, or
as damages for the loss of the office or employment, that is, for wrongful dismissal. It may be
received by the employee, or after the employee’s death, by a dependant, a relation of the
employee, or the deceased’s legal representative.
Retractable debt
Retractable debt is debt that provides the holder with the option to cash in the security to full
face value some time before its specified maturity.
Retractable securities
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Retractable securities are securities that allow investors to force repayment or repurchase of
securities by the company at an established redemption price at a specific point in time prior to
maturity.
Retroactive application with restatement of prior periods
Retroactive application with restatement of prior periods involves applying an accounting change
to events and transactions from the date of origin of each event or transaction. All summary
financial information/statements for earlier periods are restated to reflect such application, and
opening retained earnings for all periods are restated for the cumulative effect on earnings.
Retroactive application without restatement of prior periods
Retroactive application without restatement of prior periods involves applying an accounting
change to events and transactions from the date of origin of each event or transaction. The
summary financial information/statements for earlier periods are not restated to reflect such
application, but opening retained earnings for the current year is restated for the cumulative
effect on earnings.
Retroactive effect of a change in accounting policies
The retroactive effect of a change in accounting policies is the income effect of a retroactive
change in policy, adjusted to opening retained earnings net of tax.
Retrospective application (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Applying a new accounting policy to transactions, other events and conditions as if that policy
had always been applied. 1506.05, IAS 8.5. See Accounting policies, Prospective application.
Retrospective restatement (CICA Part I IFRS) (CICA Part II ASPE) [CICA Part V Prechangeover accounting standards]
Correcting the recognition, measurement and disclosure of amounts of elements of financial
statements as if a prior period error had never occurred. 1506.05, IAS 8.5
Return
Return is a corporation’s level of earnings.
Return on assets
Return on assets is the measure of income before interest expense earned in relation to the
assets employed by an entity. This is calculated by expressing net income as a percentage of
average total assets. Also can be calculated as Profit margin times total asset turnover.
Return on common (ordinary) shareholders’ equity
Return on common (ordinary) shareholders’ equity measures the success of a company in
reaching the goal to earn net income for its owners. Calculated as follows:
Return on common shareholders’ equity = (net income-preferred dividends)
Average common shareholder’s equity
Return on equity
Return on equity is a measure of the historical after-tax return to shareholders for the period.
The focus is on the common equity. Income available to ordinary shareholders is compared to
common equity.
Return-on-investment (ROI)
See Accounting rate of return and Dupont method.
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Return on long-term equity
Return on long-term equity is a measure of return on long-term capital assets based on income
before interest expense.
Return on plan assets (CICA Part I IFRS)
Interest, dividends and other revenue derived from the plan assets, together with realized and
unrealized gains or losses on the plan assets, less any costs of administering the plan (other than
those included in the actuarial assumptions used to measure the defined benefit obligation) and
less any tax payable by the plan itself. IAS 19.7
Return on sales
Return on sales is another name for profit margin. It is calculated as the ratio between a
company’s net income to its revenues.
Revenue (CICA Part I IFRS)
Gross inflow of economic benefits during the period arising in the course of the ordinary activities
of an entity when those inflows result in increases in equity, other than increases relating to
contributions from equity participants. IAS 18. 7 Revenue includes only the gross inflows of
economic benefits received and receivable by the entity on its own account. Amounts collected
on behalf of third parties such as sales taxes, goods and services taxes and value added taxes
are not economic benefits which flow to the entity and do not result in increases in equity.
Therefore, they are excluded from revenue. Similarly, in an agency relationship, the gross inflows
of economic benefits include amounts collected on behalf of the principal and which do not result
in increases in equity for the entity. The amounts collected on behalf of the principal are not
revenue. Instead, revenue is the amount of commission. IAS 18.8
Revenue (CICA Part II ASPE) [CICA Part V Pre-changeover accounting standards]
Inflow of cash, receivables or other consideration arising in the course of the ordinary activities of
an enterprise, normally from the sale of goods, the rendering of services, and the use by others
of enterprise resources yielding interest, royalties and dividends. Revenue is net of items such as
trade or volume discounts, returns and allowances, claims for damaged goods, and certain excise
and sales taxes. Excise and sales taxes to be netted against revenue would normally include
those imposed at the time of sale and would normally exclude those imposed prior to the time of
sale on either the goods or their constituents. 3400.03
Revenue expenditure
A revenue expenditure is an expenditure that should appear on the current statement of profit
and loss as an expense and be deducted from the period’s revenues because it does not provide
a material benefit in future periods.
Revenue recognition convention
Revenue recognition convention is the recognition and reporting of revenues that have met the
recognition criteria. Revenues typically must be earned, measurable, and realizable before
recognition.
Revenue recognition principle
Revenue should be recognized at the time it is earned.

a) The inflow of assets associated with revenue does not have to be in the form of cash;

b) Revenue is earned at the time services are rendered or at the time title to goods sold is
transferred;

c) The amount of revenue equals cash received plus the cash equivalent (fair value) of
other assets received;

d) revenue is recognized when earned and expenses are recognized when consumed, not
when cash is exchanged.
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Reverse split
A reverse split is the opposite of a stock split whereby the number of outstanding shares is
reduced in order to increase the price of each share.
Reverse takeover
A reverse takeover occurs when the company that initiates the business combination issues
shares such that the shareholders of the acquired company gain control of the combined entity.
The substance of the transaction is that the acquired company becomes the acquirer. The issuing
company is deemed to be a continuation of the acquirer. The acquirer is deemed to have gained
control over the assets and business of the issuing company in consideration for the issue of
capital.
Although reverse takeovers are rare events, most often they are used by active private
companies as a means to obtain a stock exchange listing without having to go through the listing
procedures established by the stock exchange.
Reversing entries
Reversing entries are optional entries recorded at the beginning of a new year that prepare the
accounts for simplified journal entries, by reversing accrual adjusting entries.
Review engagement
A review engagement is an examination of the financial statements by an independent
accountant for general consistency with specified standards and reasonableness of presentation.
This generally does not require the reviewer to seek external third-party corroborating evidence.
Review services
Review services are services the accountant performs that are lesser in scope than an audit for
the purpose of giving a negative assurance report on financial statements.
Revolving fund
Statutory parliamentary authority to use the revenues generated from an activity to finance it.
This authority generally continues from one year to the next without further authority from
Parliament. (Source: 1995 Report of the Auditor General of Canada, Exhibit 24.3)
Rights
Rights are options in financial matters with a relatively short life span that are originally given to
existing shareholders to buy additional shares at a specified subscription price. Rights may be
exercised by the current shareholders or they may be sold.
Rigidity of contracts
The rigidity of contracts follows from the fact that contracts tend to be hard to change once
signed.
Risk
In accounting, risk is understood as the volatility of earnings. In ethics and decision theory, risk is
taken as product of the magnitude of harm (H) and the probability of its occurrence (where 1 is
certainty) according to the formula R = H (1-p).
Risk assessment models
Models that provide a strategic way to think about the management of risk in government
involving the identification and understanding of risk, the development of risk management
strategies, the implementation of these strategies, and the obtainment of feedback for the
purposes of organizational learning and improvement.
Risk aversion
Risk aversion is the tendency for most people to avoid or minimize risk.
Risk criteria
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Factors (such as political, moral, legal, privacy, or constitutional) to be considered when making
informed judgments about the extent of acceptable risks to be assumed by an organization or
shared with or transferred to another organization.
Risk management
Systematic approach to setting the best course of action under uncertainty by identifying,
understanding, acting on, and communicating risk issues.
Risk model
The risk model is a method of assessing an audit using the following formula:
Audit risk = risk of material misstatement  detection risk (inherent risk  control risk) 
detection risk
AR = IR  CR  DR
also
Audit risk = inherent risk  control risk  analytical procedures risk 
risk of incorrect acceptance
AR = IR  CR  AP  RIA
Risk neutral
Risk neutral is when people are indifferent between certain equivalents and uncertain
equivalents.
Risk of assessing the control risk too high
The risk of assessing the control risk too high is the probability that the test of controls
(compliance) evidence in the sample indicates high control risk when the actual (but unknown)
degree of compliance would justify a lower control risk assessment.
Risk of assessing the control risk too low
The risk of assessing the control risk too low is the probability that the test of controls
(compliance) evidence in the sample indicates low control risk when the actual (but unknown)
degree of compliance does not justify such a low control risk assessment.
Risk of incorrect acceptance
The risk of incorrect acceptance is the probability that the test of detail procedures will fail to
detect material errors.
Risk of incorrect rejection
The risk of incorrect rejection is the probability that the test of detail procedures will indicate that
a balance is materially misstated when, in fact, it is not.
Risk of material misstatement
The auditor’s assessment of combined inherent and combined risk.
Risk premium
A risk premium is a payment required to compensate for accepting a higher level of risk.
Rollover of assets
The rollover of assets is where assets are transferred to a corporation at their tax cost provided
that certain formal procedures are adhered to. This transfer is generally referred to as a
“rollover” because the shareholder’s potential taxable income is rolled over to the corporation;
however, it is not eliminated, just deferred until the asset is actually disposed of by the
corporation.
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RRSP deduction limit
The RRSP deduction limit of a taxpayer for a taxation year is:
ABRC
where
A = the taxpayer’s unused deduction room at the end of the preceding taxation year
B = the amount, if any, by which

the lesser of the RRSP dollar limit of the year and 18% of the taxpayer’s earned income
for the preceding taxation year
exceeds

the taxpayer’s pension adjustment for the preceding taxation year
C = the taxpayer’s net past service pension adjustment for the year
R = the taxpayer’s total pension adjustment reversal for the year
RRSP dollar limit
The RRSP dollar limit for a calendar year is the money purchase limit for the previous year for
years prior to 1995, and for 1996 to 2002 is $13,500. For 2003, the limit is $14,500; for 2004,
$15,500; for 2005, $16,500; for 2006 $18,000; for 2007, $19,000, with subsequent years
increasing by $1,000 until 2011 when it will be indexed.
RRSP unused deduction room
The unused deduction room of a taxpayer at the end of a taxation year is:
A  B  R  (C  D)
where
A = the taxpayer’s unused deduction room at the end of the preceding taxation year
B = the amount, if any, by which

the lesser of the RRSP dollar limit of the year and 18% of the taxpayer’s earned income
for the preceding taxation year
exceeds

the taxpayer’s pension adjustment for the preceding taxation year
C = the taxpayer’s net past service pension adjustment for the year
D = the taxpayer’s RRSP contribution and RPP contribution, if any, for the year
R = the taxpayer’s total pension adjustment reversal for the year
Run-to-run
Run-to-run is sequential computer processing operations using the same date.
Safe harbour
A safe harbour is the concept that the plaintiff in a lawsuit must show that the auditor did not act
in good faith when reporting on a forecast. This effectively places the burden of proof on the
plaintiff.
Safety stock
Safety stock is the difference between average usage of materials and maximum usage of
materials that can reasonably be expected during the lead time. This is used when there are
usage uncertainties or delivery uncertainties.
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Salary or wages
Salary or wages means the income, including taxable benefits, of a taxpayer from an office or
employment and includes all fees received for services not rendered in course of the taxpayer’s
business but does not include superannuation or pension benefits or retiring allowances.
Sale (of accounts or notes receivable)
A sale of accounts or notes receivable is the same as factoring. The sale is at a discount.
Sale-leaseback transaction (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Sale of property with the purchaser leasing the property back to the seller. 3065.03
Sales allowances
Sales allowances are a reduction in the price of merchandise caused when the customer chooses
to keep merchandise that is defective in some way.
Sales cutoff
The recording of sales transactions in the proper period.
Sales discount
Sales discounts are cash discounts taken by customers against an amount owed to the seller.
Sales equivalency
Sales equivalency is the additional sales volume that must be generated under the present
operating structure in order to increase profit by an amount identical to a given cost reduction.
Sales forecast
A sales forecast is estimated future sales.
Sales mix
The sales mix is the relative combination in which a company’s products are sold. Sales mix is
computed by expressing the sales of each product as a percentage of total sales.
Sales returns
Sales returns are merchandise that was previously recorded as a sale and has been returned by
the customer for full credit.
Sales-type lease (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
A sales-type lease is a type of capital lease where the lessor, usually a manufacturer or dealer,
uses leases as a means of selling a product. A sales type lease has two profit components:

1) the profit on the sale of the product, and

2) interest (finance) revenue from the lease.
A sales-type lease is a type of capital lease that, from the point of view of the lessor, transfers
substantially all the benefits and risks incident to ownership of property to the lessee and, at the
inception of the lease, the fair value of the leased property is greater or less than its carrying
amount, thus giving rise to a profit or loss to the lessor (usually a manufacturer or dealer).
3065.03
Under CICA Part I IFRS, called a finance lease.
See Direct financing lease, Finance lease, Operating lease.
Sales-volume variance
The difference between the flexible-budget amount and the static-budget amount; unit selling
prices, unit variable costs, and fixed costs are held constant.
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Salvage value (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Estimated net realizable value of an item of property, plant, and equipment at the end of its life.
Salvage value is normally negligible. 3061.03
Sample
A sample is a set of sampling units.
Sample audit review file (SARF)
A sample audit review file (SARF) is a technique similar to systems control audit review file
except instead of programming auditors’ test criteria, a random selection scheme is programmed.
Sampling error
Sampling error is the amount by which a projected likely misstatement amount could differ from
an actual (unknown) total as a result of the sample not being exactly representative.
Sampling error-adjusted upper limit
The sampling error-adjusted upper limit is the sample deviation rate adjusted upward to allow for
the idea that the actual population rate could be higher.
Sampling risk
Sampling risk is the probability that an auditor’s conclusion based on a sample might be different
from the conclusion based on an audit of the entire population.
Sampling unit
A sampling unit is one logical unit from a population, such as a customer’s account or an
inventory item.
Scattergraph method
The scattergraph method is a method of separating a mixed cost into its fixed and variable
elements. Under this method, a regression line is fitted to an array of plotted points by simple
visual inspection.
Schedule of accounts payable
A schedule of accounts payable is a list of the balances of all the accounts in the accounts
payable ledger that is summed to show the total amount of accounts payable outstanding. The
schedule will often be aged to indicate how long the individual account balances have been
outstanding.
Schedule of accounts receivable
A schedule of accounts receivable is a list of the balances of all the accounts in the Accounts
receivable ledger that is summed to show the total amount of accounts receivable outstanding.
This schedule is often aged to indicate how long the individual account balances have been
outstanding.
Schedule of cost of goods manufactured
The schedule of cost of goods manufactured is a schedule showing the direct materials, direct
labour, and manufacturing overhead costs incurred for a period and assigned to Work in progress
and completed goods.
Schema
A schema is the entire set of data elements in a computerized data base.
Scope
The entity and its financial statements that will be covered by the audit engagement and the
client documents and records to be examined to provide the necessary audit evidence.
Scope limitations
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Scope limitations are conditions in which the auditors are unable to obtain sufficient competent
evidence.
Search for unrecorded liabilities
The search for unrecorded liabilities is a set of procedures designed to yield audit evidence of
liabilities that were not recorded in the reporting period.
SEC
See Securities and Exchange Commission.
Second audit partner
The second audit partner is one who reviews the work of the audit team.
Second partner review
The second partner review occurs when working papers and financial statements, including
footnotes, are given a final review on large engagements by a partner not responsible for client
relations.
Second-best contract
The second-best contract is the most efficient contract short of first-best. The agency cost of the
second-best contract is the irreducible minimum resulting from the unobservability of the agent’s
effort and resulting moral hazard problem.
Secondary trading
Secondary trading is trading in previously issued securities. As opposed to primary distributions,
securities merely change hands, but no flow of funds from investors to an issuing corporation
takes place.
Secret reserves (on issue of shares)
Secret reserves on issue of shares occur when a company issues shares for non-cash
consideration and the value of such consideration exceeds the recorded value of the shares
issued. The company has essentially received an unrecorded asset (or secret reserve) from which
it will receive benefit.
Secured creditor
A creditor who has claim on property of the debtor, giving priority over other creditors.
Securities and Exchange Commission (SEC)
Federal agency that regulates the U.S. financial markets. The SEC also oversees the securities
industry and promotes full disclosure in order to protect the investing public against malpractice
in the securities markets.
Segment of a business
A segment of a business refers to the operations of a company that involve a particular line of
business or class of customer, geographic location, or other. The assets, activities, and financial
results of the operation must be distinguishable from other parts of the business.
Segmented reporting
Segment reporting is supplementary information provided by companies reporting certain
financial results by industry and/or geographic region. See Operating segment.
Segmented information
Segmented information is disclosure note information concerning geographic and business
segments of an entity.
Self-checking number
A self-checking number is a basic code number with its check digit.
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Self-imposed budget
A self-imposed budget is a method of budget preparation in which managers with responsibilities
over cost control prepare their own budget figures. The managers’ supervisors review these
budget figures and any questions are then resolved in a face-to-face meeting.
Self-insurance
Self-insurance is when a company does not purchase third party insurance coverage and instead
bears the risk of losses itself.
Self-interested people
Self-interested people care only about their own well-being.
Self-sustaining foreign operation (CICA Part I IFRS) (CICA Part II ASPE) [CICA Part
V Pre-changeover accounting standards]
Foreign operation that is financially and operationally independent of the reporting enterprise
such that the exposure to exchange rate changes is limited to the reporting enterprise's net
investment in the foreign operation is said to be self-sustaining. 1651.03 The term is not used in
IFRS, but it is roughly equivalent to operations in which the functional currency of the subsidiary
differs from that of the parent.
Self-sustaining foreign operations are translated in accordance with IAS 21.38-50. The method
requires that most year-end figures on the statement of financial position be translated at the
current rate. The income statement is translated at historic rates for the dates on the transaction.
Often an average rate for the year is used as a proxy. Equity accounts are translated at historic
rates at the date of the transaction. This results in an increase in accumulated other
comprehensive income — unrealized exchange gains (losses) during the year if the Canadian
dollar has weakened in relation to the foreign currency because the net assets denominated in
foreign currency are worth more Canadian dollars. Similarly, if the Canadian dollar has
strengthened during the year, the net assets denominated in foreign currency are worth less in
Canadian dollar terms, so a decrease in accumulated other comprehensive income — unrealized
exchange gains (losses) occurs.
See Foreign currency transactions approach, Foreign operation, Integrated foreign operation.
Selling expenses
Selling expenses are the expenses of promoting sales by displaying and advertising the
merchandise, making sales and delivering goods to customers.
Selling price/cost variance
The selling price/cost variance is a measure of the net income gained or lost through failure to
maintain control over selling price and over the various costs that a company may incur.
Senior governments
In Canada, the federal, provincial, and territorial governments. See Junior governments.
Senior securities
Senior securities are preferred shares that have prior claims to earnings over ordinary shares and
convertible debt that has a senior interest claim.
Sensitivity
A property of a performance measure that indicates that the measure responds appropriately and
well to management effort.
Sensitivity analysis (ethical)
A good test for determining what is or is not a morally relevant factor in a case is to ask what
features of the case would have to change in order to get you to alter your moral judgment
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about the case. If your initial judgment is unchanged, then the feature is morally irrelevant. If,
however, you alter your moral judgment, the feature is morally relevant.)
Sensitivity analysis (financial)
A sensitivity analysis shows the impact on earnings, cash flows or fair values of financial
instruments resulting from changes in relevant commodity prices, interest rates, and foreign
exchange rates.
Separate entity assumption
The separate entity assumption states that accounting information reflects the assumption that a
corporation and its shareholders and stakeholders are separate economic entities.
Separate financial statements (CICA Part I IFRS)
Financial statements presented by a parent, an investor in an associate, or a venturer in a jointly
controlled entity, in which the investments are accounted for on the basis of the direct equity
interest rather than on the basis of the reported results and net assets of the investees. IAS 27.4,
IAS 28.2, IAS 31.3
Sequential processing
Sequential processing is a method of arranging processing departments in which all units flow in
sequence from one department to another.
Serial bonds
Serial bonds are debt offerings where specific portions of the debt issue mature periodically over
the issue’s life. In effect the bonds have staggered maturities depending on the serial number
that they bear.
Service auditor
An auditor who, at the request of the service organization, provides an assurance report on the
controls of a service organization.
Service department
A service department is a department that provides support or assistance to operating
departments and that does not engage directly in production or in other operating activities of an
organization.
Service life
The service life is the length of time in which a plant asset will be used in the operations of the
business.
Service organization
A service organization is another business that executes and/or records transactions on behalf of
the client.
Service period (stock option) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Period or periods during which the employee performs the service in exchange for stock options
or similar awards. If the service period is not defined as an earlier or shorter period, the service
period is presumed to be the vesting period. 3870.07
Service plan reports
See Performance report.
Service potential (CICA Part III ASNFPO)
Service potential is used to describe the service capacity or output of a capital asset and is
normally determined by reference to attributes such as useful life, associated operating costs,
physical output capacity, and quality of output. [4430.05(h)]
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Service potential (property, plant, and equipment) (CICA Part II ASPE) [CICA Part V
Pre-changeover accounting standards]
Output or service capacity of an item of property, plant, and equipment and is normally
determined by reference to attributes such as physical output capacity, associated operating
costs, useful life, and quality of output. 3061.03
Service-hours amortization
Service-hours amortization is a method of calculating amortization expense that bases
amortization expense on current service hours used as related to total service hours expected.
Settlement (employee benefits) (CICA Part II ASPE)
Transaction in which an entity substantially discharges or settles all, or part, of an accrued
benefit obligation. A settlement is a transaction that is irrevocable, relieves the entity of primary
responsibility for the accrued benefit obligation and eliminates the significant risks associated
with the accrued benefit obligation and the assets used to effect the settlement. Examples of
transactions that constitute a settlement include:

(i) making lump-sum cash payments to employees in exchange for their rights to receive
specified benefits; and

(ii) purchasing non-participating insurance contracts. 3461G
Settlement date (foreign currency hedge)
The date a hedge is unwound and the foreign currency denominated payable/receivable is paid
or collected.
Settlement-date accounting
IFRS allows two methods to account for recognizing and derecognizing a financial asset: Tradedate accounting and settlement-date accounting. Trade date is the date on which a company
makes a commitment to purchase or sell an asset; it should be distinguished from the date on
which the physical exchange of financial instruments takes place. Settlement date is the date on
which a company receives the asset it has purchased or delivers the asset it has sold; it should
be distinguished from the date on which the payment or the collection of the proceeds is made.
Settlement (debt)
Settlement of debt is the repayment of debt by the borrower for an amount less than or equal to
the amount owing.
Settlement of liability (tax)
Concept of deferred income tax accounting. For some liabilities, as in the repayment of a loan
payable, settlement has no tax consequences. For others, as in the case of payment of a liability
for pension cost in the year of settlement, temporary differences exist. Pensions follow the
accrual basis for financial statement purposes and the cash basis for tax returns. Accounting
standards determine whether the settlement of a liability gives rise to an increase in revenue or a
decrease in expense. For a given period, the settlement may represent a portion (or the totality)
of the carrying amount of the liability.
When combined, the revenues and expenses resulting from the recovery of assets and
settlement of liabilities determine the accounting net income before tax.
Setup
Setup involves activities that must be performed whenever production is switched over from
making one type of item to another.
Setup costs
Setup costs are labour and other costs involved in getting facilities ready for a run of a different
production item.
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Shadow price
Shadow price is an opportunity cost. It is the highest valued benefit forgone when an action is
taken within the structure of linear programming. Shadow prices indicate the rate at which
optimal objective functions (that is, profit maximization) change as constraints increase or
decrease by one unit. A shadow price is an imputed marginal value assigned to individual
resources by linear programs.
Share issue costs
Share issue costs are costs incurred in issuing equity securities including registration fees,
underwriter commissions, legal and accounting fees, printing costs, clerical costs, promotional
costs, and so on. These costs may be offset against proceeds in share capital, debited to retained
earnings, or set up as a separate asset.
Share option (CICA Part I IFRS)
Contract that gives the holder the right, but not the obligation, to subscribe to the entity's shares
at a fixed or determinable price for a specified period of time. IFRS 2.A
Share-based payment arrangement (CICA Part I IFRS)
Agreement between the entity and another party (including an employee) to enter into a sharebased payment transaction, which thereby entitles the other party to receive cash or other assets
of the entity for amounts that are based on the price of the entity's shares or other equity
instruments of the entity, or to receive equity instruments of the entity, provided the specified
vesting conditions, if any, are met. IFRS 2.A
Share-based payment transaction
Transaction in which the entity receives goods or services as consideration for equity instruments
of the entity (including shares or share options) or acquires goods or services by incurring
liabilities to the supplier of those goods or services for amounts that are based on the price of the
entity's shares or other equity instruments of the entity. IFRS 2.A
Shareholder agreement
An agreement between two or more shareholders that is distinct from the corporation’s charter
and by-laws.
Shareholder benefits and appropriations
Any event or transaction that improves the taxpayer’s economic position is a shareholder benefit.
Note that there does not have to be an intention to confer a benefit for an amount to be included
in income. If the transaction is a bona fide business transaction, no benefit is conferred. The
value of the benefit is generally based on the FMV of the benefit. Included in shareholder
benefits are exchanges of property, additions or improvements made to a shareholder’s building,
the personal use of corporate property, property transferred to a shareholder for inadequate or
no consideration, expenditures benefiting the taxpayer’s spouse or children, embezzlement of
funds by the shareholder, and the forgiveness of a debt owed by the shareholder to a
corporation.
Shareholder loans and benefits
Shareholder loans occur when shareholders or shareholder/employees “borrow” money from
corporations. A loan to a shareholder, or any other indebtedness, is included in the shareholder’s
income in the year in which the funds are borrowed if the loan is not repaid within one year of
the corporate year end. As well, an imputed interest benefit is calculated on the loan and is
included in income. Shareholder/employees may borrow, in their capacity as employees and not
in their capacity as shareholders, from corporations in the normal course of business. These loans
are not considered to be income, but they have to be repaid in after-tax dollars from other
remuneration received by the shareholder/employee. Loans to shareholder/employees are not
considered income if the employer’s business is the lending of money and if the loan was used to
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acquire a dwelling for the individual’s inhabitation, to acquire shares from the treasury, or to
acquire an automobile used to perform employment duties. These loans must be adequately
documented and bona fide arrangements need to be made for the repayment of the loan within
a reasonable time period.
Shareholders
Shareholders are the owners of a corporation.
Shareholders of record
Shareholders of record are the shareholders of a corporation as reflected in the record of the
corporation.
Shares
Shares are units of ownership in a corporation.
Shares sold on subscription basis
Shares sold on a subscription basis are shares sold to prospective shareholders by an initial
agreement to purchase a specified number of shares on credit with payments due in the future.
Shares are not issued until they have been fully paid for.
Short selling
Short selling is the sale of shares or commodities that a seller does not currently own. The seller
borrows the shares or commodities and sells them with the intent to replace them by later
repurchasing the shares or commodities in the market at a lower price. Thus, short selling
provides a vehicle for speculation in a market characterized by anticipated price declines.
Short term
Short term is the period of time over which productive capacity cannot be changed and must be
considered a constraint.
Short-term commercial paper
Short-term commercial paper is short-term notes payable.
Short-term employee benefits (CICA Part I IFRS)
Employee benefits (other than termination benefits) that are due to be settled within 12 months
after the end of the period in which the employees render the related service. IAS 19.7. See
Compensation, Termination benefits.
Short-term investments
Short-term investments are investments that are capable of liquidation in a ready market that
management intends to hold for the short term.
Shrinkage
Shrinkage is inventory losses that occur as a result of shoplifting or deterioration.
SIC
Standing Interpretations Committee. See International Financial Reporting Standards.
Signal
An action taken by a high-type manager that would not be rational if that manager was low-type.
Signalling
Signalling is a method of conveying information through an action taken that would not be
rational unless the information were valid.
Signalling theory
Theory that studies the conditions under which the marketplace will perceive the release of
information as credible.
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Significant influence (CICA Part I IFRS)
Power to participate in the financial and operating policy decisions of an entity, but is not control
over those policies. Significant influence may be gained by share ownership, statute or
agreement. IAS 24.9, IAS 28.2, IAS 31.3 See Control.
Significant influence (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Ability to affect the strategic operating, investing, and financing policies of the enterprise.
3840.03
Simple capital structure
A simple capital structure is a capital structure that does not include any rights or options to
purchase ordinary shares or any securities that are convertible into ordinary shares.
Simple extension
Simple extension is the calculation of projected likely misstatement based on sample evidence
using the difference and ratio methods.
Simple interest
Simple interest is the principal amount multiplied by the period’s interest rate. It excludes any
compounding effect.
Single person decision theory
Single person decision theory is based on the viewpoint of an individual who must make a
decision under conditions of uncertainty. State probabilities are no longer objective. The theory
sets out a procedure for allowing additional information to be obtained to revise the decisionmaker’s subjective assessment of the probabilities of what might happen after the decision is
made.
Single proprietorship
A single proprietorship is a business owned by one individual that is not organized as a
corporation. This is also known as a sole proprietorship.
Single-step format
The single-step format is presenting a statement of profit and loss with no subtotal. All revenues
and all expenses are included in one category each.
Sinking fund amortization
Sinking fund amortization is a method of allocating costs in which amortization expense is lowest
in an asset’s early years but increases over time. This method is used for highly leveraged assets
based on the assumption that the interest charges for the asset will be higher in the asset’s early
years and will decrease over time.
Sinking-fund payments
Sinking-fund payments are payments by the issuing corporation to provide for periodic retirement
of debt or preferred shares.
Skewness
Skewness is the property of the concentration of a large proportion of the dollar amount in an
account in a small number of the population items.
Slander
Spoken defamation. See also Libel.
Small Business Corporation (SBC)
A small business corporation (SBC) is a CCPC, all or substantially all (90% or more) of the fair
market value of the assets of which are used principally (more than 50%) in an active business
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carried on in Canada by the corporation or a related corporation, or shares or debt of other
connected small business corporations, or a combination of those two requirements.
Small business deduction (SBD)
The small business deduction (SBD) is only available to a CCPC and is equal to a prescribed
percentage of the least of a CCPC’s

active business income,

taxable income (net of income sheltered by foreign tax credits), and

the prescribed business limit for the year.
Smoke/fire concept
The smoke/fire concept means that there can be more exposure to error (smoke) than actual
error (fire). This concept is an analogy used for the test of controls sampling in the determination
of a tolerable deviation rate.
Social outcomes
General and possibly vague concepts of social welfare such as a healthy and skilled population.
Social welfare
Well-being or utility of members of a society.
Sojourn
Sojourn has the meaning of living in a place temporarily without becoming a resident of that
place.
Sole proprietorship
A sole proprietorship is a form of business organization in which the owner faces unlimited
liability and where, effectively, the owner’s business and personal finances are not separate.
Solvency ratios
Solvency ratios are ratios designed to assess the ability of a company to make both the interest
and principal payments on its long-term obligation.
Sophisticated preparers
Include accounting and management professionals who volunteer or who are paid employees of
the NFPO and are typically proficient and knowledgeable in accounting.
Source documents
Source documents are documents that are the source of information recorded with accounting
entries. They are also known as business papers.
Source theory
Under the source theory income is perceived as the product of the asset and capital as the asset
itself; thus, income can only originate from a productive source. Using the metaphor of the fruit
and the tree to illustrate the source theory: income represents the fruit and capital represents the
tree. Any gain realized on the disposition of the tree is capital since only the fruit is income.
Special journal
A special journal is a journal with a non-flexible, pre-determined format in which only specific
transactions that fit the format can be recorded.
Special obligations
Obligations that are binding only on specific persons, for example, the obligations parents have
to look after their own children or the obligations promise-makers have to keep their word. Most
duties of beneficence — particularly, those involved in removing harms or providing an actual
good to others — are positive.
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Special resolution
A special resolution is required to make changes to a corporation’s bylaws including shareholder
rights and the capital structure of the business. Generally, under statutes governing corporate
activity, special resolutions require a two-thirds majority vote to pass.
Special stock dividend
A special stock dividend is a stock dividend of a different class already held by the recipient. It is
recorded at market value.
Special termination benefits (CICA Part II ASPE)
Benefits that are not contractual termination benefits and that are offered to employees for a
short period of time, normally not exceeding 12 months, in exchange for employees' voluntary or
involuntary termination of employment. 3461G. See Compensation, Contractual termination
benefits, Termination benefits.
Specialists
Specialists are persons skilled in fields other than accounting and auditing who are not members
of the audit team.
Specific cost identification
Specific cost identification is a method of inventory costing that identifies the specific invoice cost
of the specific units sold for costs of goods sold.
Specified investment business
A specified investment business is a business the principal purpose of which is to derive income
from property, such as interest, dividends, rents, and royalties. However, where a corporation
employs in the business throughout the year more than five full-time employees, or any other
corporation associated with the corporation provides the services that would have been provided
by its own employees and the corporation would have employed more than five full-time
employees, then its income is considered to be ABI and not income from a specified investment
business.
Specified non-resident
A specified non-resident is one who is a specified shareholder or one who is not dealing at arm’s
length with a specified shareholder, regardless of whether that shareholder is resident in Canada.
Specified shareholder
A specified shareholder is a person who, either alone or together with persons with whom he is
not dealing at arm’s length, owns 10% or more of the issued shares of any class of the
corporation.
Speculating
Speculating is trading aimed at making a profit as prices change. A speculator has no interest in
actually taking delivery of an asset.
Spin-off
A spin-off is the separation of a consolidated business by distributing the shares of a subsidiary of
the corporation to the parent company’s individual shareholders on a pro rata basis.
Split accounting approach
An approach to accounting for financial instruments in which each component of a compound
security is valued separately on issuance and accounted for separately.
Spot exchange rate (FX) (CICA Part I IFRS)
The spot exchange rate is the current rate of exchange for immediate delivery of one currency
against another. Also called spot rate. (CICA Part I IFRS) IAS 21.8. See also Closing rate, Twotransaction approach.
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Spot price
The spot price is the price of an asset to be delivered immediately.
Staff positions
Staff positions are positions in an organization that are only indirectly related to the achievement
of the organization’s basic objectives. Such positions are supportive in nature in that they provide
service or assistance to line positions or to other staff positions.
Standard cost
Standard cost is a pre-determined, expected cost per unit. This is sometimes used for inventory
valuation if not materially different from cost. Used as part of variance analysis.
Standard cost card
A standard cost card is a detailed listing of the standard amounts of materials, labour, and
overhead that should go into a unit of product, multiplied by the standard price or rate that has
been set.
Standard cost per unit
The standard cost per unit is the expected cost of a unit of product as shown on the standard
cost card. It is computed by adding the standard material cost per unit to the standard labour
cost per unit and the standard manufacturing overhead cost per unit.
Standard deviation
The standard deviation is a statistical measure that is commonly viewed as a reasonable measure
of risk. It measures the variability of a random variable around its expected value or mean, and
equals the square root of the variance.
Standard hours allowed
The standard hours allowed is the time that should have been taken to complete the period’s
output as computed by multiplying the number of units produced by the standard hours per unit.
Standard hours per unit
The standard hours per unit is the amount of labour time that should be required to complete a
single unit of product, including allowances for breaks, machine downtime, cleanup, rejects, and
other normal inefficiencies.
Standard price per unit
The standard price per unit is the price that should be paid for a single unit of materials,
including allowances for quality, quantity purchased, freight-in, receiving, and other such costs
and net of any discounts allowed.
Standard quantity allowed
The standard quantity allowed is the amount of materials that should have been used to
complete the period’s output as computed by multiplying the number of units produced by the
standard quantity per unit.
Standard quantity per unit
Standard quantity per unit is the amount of materials that should be required to complete a
single unit of product including allowances for normal waste, spoilage, rejects, and similar
inefficiencies.
Standard rate per hour
The standard rate per hour is the labour rate that should be incurred per hour of labour time,
including allowances for employment taxes, fringe benefits, and other such labour costs.
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Standard recording system
Standard recording system is the practice of recording an asset upon payment of cash before
goods or services are received and recording a liability upon cash receipt before goods or
services are provided.
Standard setting
Standard setting is the regulation of a firm’s external information production decisions by some
central authority.
Stated interest rate
The stated interest rate is the rate that determines periodic interest payments. It is also referred
to as the coupon, nominal, or contractual rate.
Statement of changes in equity
In pre-changeover accounting standards, called the statement of retained earnings. See Financial
statements.
Statement of changes in fund balances (NFPO)
Statement showing changes in fund balances for a not-for-profit organization, similar to the
statement of changes in equity for a for-profit entity. Also called statement of changes in net
assets. See Financial statements.
Statement of changes in owners’ equity
Statement of changes in owners’ equity is a financial statement that shows the beginning balance
of owners’ equity, the changes in equity that resulted from new investments by the owners, net
income (or net loss), withdrawal, and the ending balance.
Statement of changes in partners’ equity
The statement of changes in partners’ equity is a financial statement that shows the total capital
balances at the beginning of the period, any additional investments by the partners, the net
income or loss of the period, and the ending capital balances.
Statement of comprehensive income (CICA Part I IFRS)
As a minimum, the statement of comprehensive income includes line items that present the
following amounts for the period:

(a) revenue;

(b) finance costs;

(c) share of the profit or loss of associates and joint ventures accounted for using the
equity method;

(d) tax expense;

(e) a single amount comprising the total of:
o
(i) the post-tax profit or loss of discontinued operations and
o
(ii) the post-tax gain or loss recognised on the measurement to fair value less costs
to sell or on the disposal of the assets or disposal group(s) constituting the
discontinued operation;

(f) profit or loss;

(g) each component of other comprehensive income classified by nature (excluding
amounts in (h));

(h) share of the other comprehensive income of associates and joint ventures accounted for
using the equity method; and

(i) total comprehensive income.
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An entity shall disclose the following items in the statement of comprehensive income as
allocations for the period:


(a) profit or loss for the period attributable to:
o
(i) non-controlling interests, and
o
(ii) owners of the parent.
(b) total comprehensive income for the period attributable to:
(i) non-controlling interests, and
(ii) owners of the parent.
See Financial statements, Other comprehensive income, Total comprehensive income.
Statement of comprehensive income [CICA Part V Pre-changeover accounting
standards]
Financial statement with the same prominence as other financial statements that should show:
(a) net income for the period; (b) each component of revenue, expense, gain and loss that, in
accordance with primary sources of GAAP, is recognized in other comprehensive income,
classified by nature; and the total of (a) and (b). [1530.04] See Financial statements, Other
comprehensive income.
Statement of financial position
Under the restructured CICA Handbook, the financial statement formerly called the balance
sheet. Financial statement providing information that helps users understand a company’s
financial status by listing the types and dollar amounts of assets, liabilities and equity as of a
specific date. See Financial statements.
Statement of operations (NFPO)
A statement required of not-for-profit organizations (NFPOs) that lists revenues, expenses, and
the excess of revenues over expenses. It is similar to the statement of profit and loss of a forprofit organization. Sometimes called the statement of receipts and expenditures. See Financial
statements.
Statement of profit and loss
Under the Restructured CICA Handbook, the financial statement formerly called the income
statement. See Financial statements.
Statement of retained earnings
Financial statement showing the closing balance from the previous year, the items that affect the
balance in retained earnings and the total balanced to the amount in the current financial
statements . Now called the statement of changes in equity. See Financial statements.
States of nature
States of nature are uncertain future events such as the state of the economy.
Static budget
A static budget is a budget designed to cover only one level of activity and in which actual costs
are always compared against budgeted costs at this one activity level.
Statistical process control (SPC)
Statistical process control (SPC) is a technique whereby workers use charts to monitor the quality
of the parts or components that pass through their workstations.
Statistical sampling
Statistical sampling is audit sampling that uses the laws of probability for selecting and evaluating
a sample from a population for the purpose of reaching a conclusion about the population.
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Statutory law
Statutory law consists of all the prohibitions enacted by a legislature.
Step acquisition
See Step purchase.
Step method of service department cost allocation
The step method of service department cost allocation is a method in which the costs are
allocated to other service departments as well as to operating departments in a sequential
manner. The sequence starts with the service departments that provide the greatest amount of
service to other departments.
Step purchase
Acquisition of blocks of an investee’s shares as a result of two or more purchases. There are a
number of different ways this can be brought about, including contracted agreements to acquire
a given percentage on set dates or options to buy remaining stock by a specific date. A company
having control of a subsidiary with its initial share purchase can increase its ownership of the
subsidiary with another step purchase of shares on the open market. No change in the basis of
accounting for investments is required because the parent company still controls the subsidiary.
Similarly, a corporation holding enough shares of another corporation to exert significant
influence can acquire a second block of shares that allows it to control the investee. The change
in the basis of accounting for investments from the equity method to consolidation is not a major
one, since the equity method provides for the same adjustments to income as consolidation.
IFRS 3.41-42 provide guidance on business combinations achieved in stages.
Step-variable cost
A step-variable cost is a cost that is obtainable only in large pieces and that increases only in
response to fairly wide changes in the activity level. (An example of a step-variable cost would be
the cost of maintenance workers.)
Stewardship
Stewardship is an objective of financial reporting to external parties that emphasizes
management care or responsibility for assets.
Stock appreciation rights (stock option) (CICA Part II ASPE) [CICA Part V Prechangeover accounting standards]
Awards entitling employees to receive cash, stock, or a combination of cash and stock in an
amount equivalent to any excess of the market value of a stated number of shares of the
enterprise's stock over a stated price. Such awards include arrangements such as stock options
that are settled on a net cash or net equity basis. The form of payment may be specified when
the rights are granted or may be determined when they are exercised; in some plans the
employee may choose the form of payment. 3870.07. See Award.
Stock dividend
A stock dividend includes any dividend paid by a corporation to the extent that it is paid by the
issuance of shares of any class of the capital stock of the corporation.
Stock option (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Contract that gives the holder the right, but not the obligation, either to purchase or to sell a
certain number of shares of stock at a predetermined price for a specified period of time.
3870.07. See Stock-based compensation plan.
Stock option plans and corresponding benefits
An agreement to issue shares to employees gives rise to a stock option plan. Stock option plans
enable an employee to acquire shares in the employing corporation at an amount below market
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value. A taxable benefit arises and is included in employment income when the option is sold if
the company is a CCPC. However, for any other corporation that is not a CCPC, the taxable
benefit is included in employment income at the time the option is exercised, unless an election is
filed. If the election is filed, the benefit is included in income when the shares are sold.
Stock right
A stock right is a form of derivative instrument allowing the holder to purchase securities of a
company at a specified price during a specific period.
Stock’s beta
See Beta.
Stock split
A stock split occurs when existing shares are divided or split, with several new shares issued for
every original outstanding share. The market price of the share should adjust accordingly. This is
often done to bring the stock price down to a predetermined level.
Stock warrants
Stock warrants are stock rights that are attached to other securities granting the holder the right
to purchase securities of a company at a specific price at a specific time.
Stock-based compensation plan (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Compensation arrangement under which one or more employees receive shares of stock, stock
options, or other equity instruments, or the enterprise incurs a liability(ies) to the employees in
amounts based on the price of the enterprise's stock. 3870.07
Straightforward maximization
In game theory, the non-cooperative solution in which each player plays the Nash equilibrium
because there is no incentive to change their play.
Straight-line amortization
Straight-line amortization is an amortization method where the annual expense is equal over the
asset’s life. The amortizable amount is divided by the asset’s useful life.
Straight-line interest method
The straight-line interest method is a method of determining interest expense on long-term debt
by amortizing the discount (or premium) in equal amounts over the life of the loan. Interest
expense is the sum of actual cash interest costs and discount (or premium) amortization. This
method is acceptable under GAAP only if the results are not materially different from the effective
interest method.
Strategic cost management
Strategic cost management is accounting information used to support internal decisions (within a
firm), and which should facilitate the development and implementation of business strategy.
Strategy pair
A strategy pair is a statement of the strategy chosen by each player.
Stratification
Stratification, in relation to account balances and audit sampling, refers to subdividing a
population before taking a sample.
Striking price
Striking price is the price at which call or put options are exercised.
Strong reciprocity
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Predisposition to cooperate with others and to punish (at personal cost, if necessary) those who
violate the norms of cooperation, even when it is implausible to expect that these costs will be
recovered at a later date.
Structure of the ITA
The structure of the ITA is composed of a number of sections, parts, divisions, and subdivisions.
Subjective probabilities of states of nature
Probabilities that are not known but must be assessed by the firm or decision maker.
Subjective morality
What you believe to be right or wrong, morally good or bad. Contrast to objective morality.
Subordinate debt
Subordinate debt is debt that can only be repaid after other creditors (senior) debt have been
paid.
Subschema
A subschema is a certain portion of a computerized database.
Subscription (with reference to shares)
A subscription is a contractual commitment by an investor to purchase unissued shares and
become a shareholder.
Subsequent events
Subsequent events are events that occur after the year-end but before the audited financial
statements are issued. These events may be recorded or disclosed depending on their nature.
Under CICA Part I IFRS, events after the balance sheet date are reviewed up to the date the
financial statements are authorized for issue (e.g. board approval). The date of authorization and
who gave the authorization is disclosed in the notes to the financial statements. IAS 10.3
CICA Part V Pre-changeover accounting standards requires review up to the date that financial
statements are substantially complete.
See Events after the reporting period.
Subsidiarity
Government functions should be located at the lowest level of government at which they can be
done effectively. See Localism.
Subsidiary (CICA Part I IFRS)
Entity, including an unincorporated entity such as a partnership, that is controlled by another
entity (known as the parent). IAS 27.4, IAS 28.2. See Control, Parent.
Subsidiary (CICA Part II ASPE) [CICA Part V Pre-changeover accounting standards]
An enterprise or investee company in which the investor company (the parent) controls the
investee and has the right and ability, along with the related risks, to obtain future economic
benefits from the resources of the enterprise, usually by holding in excess of 50% of the voting
shares. 1590.03. See Control, Parent company.
Subsidiary ledger
A subsidiary ledger is a support ledger for the general ledger accounts. The general ledger has
master, or control accounts, and the subsidiary ledger has the many separate individual accounts
that comprise the control account. An example would be the accounts receivable subsidiary
ledger that consists of the individual customers’ balances and which when totalled equals the
balance in the accounts receivable account in the general ledger.
Substance over form
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Substance over form is the concept that accounting information should represent what it purports
to represent, the economic substance of a transaction, not just its legal form.
Substantive audit procedures
See Substantive tests of details (auditing).
Substantive justice
Substantive justice adds to formal justice by indicating what makes cases like or unlike each
other. Thus, with few exceptions, race and gender are to be regarded as irrelevant to
employment decisions.
Substantive tests of details (auditing)
Substantive audit procedures are transaction detail audit and analytical procedures designed to
detect material misstatements in account balances and footnote disclosures.
Substantive-purpose audit program
A substantive-purpose audit program is a list of account balance-related procedures designed to
produce evidence about assertions in financial statements.
Substantively enacted income tax rate
A substantively enacted income tax rate is where a tax rate is specified in sufficient detail to be
applied in practice. At a minimum, the rate must have been drafted in legislative or regulatory
form and tabled in Parliament or presented in council.
Successful-efforts approach to oil and gas accounting
The successful-efforts approach to oil and gas accounting capitalizes only the costs of successful
wells and expenses dry holes.
SUCH sector
Schools, universities, colleges, and hospitals.
Summary financial statements
The set of financial statements that provides the most complete information, including all GAAPrequired disclosures as well as the consolidation of all the required entities that make up the
government reporting entity. See Condensed financial statements.
Sum-of-the-years-digits amortization
The sum-of-the-years-digits amortization is a method of accelerated amortization where
amortization is calculated by multiplying the amortizable cost by a fraction whose denominator is
the sum of the years’ digits.
Sum-of-the-years-digits (SYD) method
The sum-of-the-years-digits (SYD) method is a system to amortize the cost of a capital asset in
which the allocated cost is greater in the early periods of the asset’s life; a fraction with the SYD
as a base is used in the calculation.
Sunk cost
A sunk cost is a past cost. It is irrelevant to future decisions because the expenditure has already
been made and cannot be changed regardless of the alternative selected.
Superannuation or pension benefit
A superannuation or pension benefit includes any amount received from a superannuation or
pension fund or plan.
Superficial loss
A superficial loss is an actual loss realized by a taxpayer that is disallowed when the following
circumstance occurs. If an identical property is acquired or reacquired by a taxpayer or an
affiliated person within 30 days before the disposition and 30 days after the disposition that
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created the loss, the loss is disallowed. The loss disallowed is a superficial loss and is usually
added to the ACB of the reacquired property. The superficial loss rules prevent a solely taxmotivated disposition.
Supervision
Supervision, in payroll processing, is the concept that all authorization of all pay base data
(hours, job number, and so on) must be by an employee’s immediate supervisor.
Supplementary estimates
Supplementary estimates are budget documents prepared later during the government’s fiscal
year to address events that are unforeseen when the initial budget is prepared. See Estimates
(government).
Supplies inventory
Supplies inventory is an inventory of items on hand not held for resale, but rather to be used in
production or maintenance activities.
Supply chain
An integrated system of suppliers, subcontractors, manufacturers, distributors, and retailers
collaborating with the purpose of adding value to the output for the customer.
Support payments and child support payments
Support payments are payments to a spouse, former spouse, or the natural parent of a child of
the payer as an allowance for the support of the recipient or for the support of the recipient’s
children. The support payments must be payable on a periodic basis, the recipient must have
discretion as to the use of the amounts, and the support amounts must be paid to meet the
needs of the recipient and/or the children of the recipient and not to provide capital for the
recipient. Furthermore, the support payments must be made under a court order or, in the case
of a spouse or former spouse only, under a written separation agreement.
Swap
A swap is an agreement between two parties to exchange future cash flows. For example, in
what is called a vanilla-interest-rate swap, one firm swaps its fixed coupon rate debt obligation
for the floating rate obligations of another firm.
Synergy
Synergy is the economies realized in the merger of two companies.
Systematic random sample
A systematic random sample is a random sample chosen by calculating a skip interval, n, and
selecting every nth population unit in a frame.
Systematic risk
Systematic risk is risk that cannot be diversified away from a given portfolio and usually consists
of economy-wide factors.
Systems control audit review file (SCARF)
Systems control audit review file (SCARF) is the method in which auditors build into the data
processing programs special limit, reasonableness, or other audit tests for selection of
transactions for audit.
Systems development and documentation standards manual
Systems development and documentation standards manual is the computer documentation
containing standards that ensure a) proper user involvement in the systems design and
modification process, b) review of the specifications of the system, c) approval by user
management and data processing management, and d) controls and auditability.
T-accounts
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A T-account is an accounting form in the shape of a T used to demonstrate transactions. The left
side of the T is used for debits and the right side for credits.
Tailored accounting policies (TAP)
Tailored accounting policies (TAP) are those accounting policies used by an organization to reflect
individual or unique needs different than GAAP. A disclosed basis of accounting.
Tainting percentage
The tainting percentage is the ratio of misstatement in a sampling unit to the recorded amount of
the sampling unit.
Takeover market
The takeover market is the market for the entire firm. If a manager does not maximize firm
value, the firm may be subject to a takeover bid that, if successful, frequently results in the
replacement of the manager.
Taking a bath
Taking a bath is an earnings management technique that involves further lowering already too
low report earnings so as to increase the probability of receiving a bonus the following year by
increasing profitability. The firm will write off assets, provide for future costs, and otherwise take
all costs now to avoid taking them in the future.
Tandem plan (stock option) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Award with two (or more) components in which exercise of one part cancels the other(s).
3870.07. See Award.
Tangible capital asset
Tangible capital assets are those capital assets of an enterprise (such as property, plant, and
equipment) that have physical characteristics or presence.
Target costing
Target costing is a cost-planning method used during the research, development, and
engineering cycle that focuses on products requiring discrete manufacturing processes and
reasonable short life cycles. It can also be defined as the production cost of a proposed product
such that when the product is sold it generates the desired profit margin. With target costing,
more consideration is given in the early stages of product development to what the customer
wants and needs and what they are willing to pay. The product is then designed around a cost
objective.
Target reduction rate
A target reduction rate is a mechanism used by kaizen that is a ratio of the target reduction
amount and the cost base.
Tax avoidance
Tax avoidance is viewed as acceptable tax planning, generally with the thought that if the ITA
does not disallow something categorically, it is acceptable. Alleged loopholes or grey areas in the
legislation are used to achieve tax planning objectives. CRA has in place the General Antiavoidance Rule (GAAR) to provide guidance as to what is an avoidance transaction or not.
Tax base of an asset or liability (CICA Part I IFRS)
For an asset or liability, the amount attributed to that asset or liability for tax purposes. IAS 12.5
Tax basis of an asset (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
When an amount related to an asset is deductible in determining taxable income over one or
more periods, the tax basis at the end of a period is that amount less all amounts already
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deducted in determining taxable income of the current and prior periods. When an amount
related to an asset is deductible in determining taxable income only when the asset is disposed of
or permanently withdrawn from use, the tax basis of the asset is that amount. When the cost of
an asset is not deductible in determining taxable income, but any proceeds of a disposal of the
asset would not be included in the determination of taxable income, the tax basis of the asset is
equal to the carrying amount. When the amount related to an asset that will be deductible in
determining future taxable income depends on whether the asset is utilized or sold, the tax basis
of the asset is the greater of those amounts. 3465.12 Under IFRS, it is called tax base of an asset
or liability.
Tax basis of a liability (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Carrying amount less any amount that will be deductible for income tax purposes in respect of
that liability in future periods. 3465.13 See also Tax basis of an asset.
Tax conventions
Tax conventions or treaties are legal and binding agreements signed with various foreign
countries. They take precedence over the ITA and their goal is to avoid double taxation where
persons transact in both countries, prevent tax evasion, facilitate and encourage business
transactions between the countries, determine the distribution of tax revenues to the
governments of the contracting countries, and exchange tax-related information.
Tax deductions at source
When an individual is an employee, the ITA requires that the employer deduct tax at source from
wages and salaries, including the amount of taxable benefits received by employees, and then
remit that tax to CRA on the employee’s behalf.
Tax deferral
Tax deferral is a fundamental type of tax planning that allows a person to legally defer taxes on
certain types of income to a later date due to specifications in the ITA that allow that income to
be recognized in a subsequent year or by allowing certain deductions in the current taxation
year.
Tax evasion
Tax evasion is a deliberate violation of the ITA, such as the making of a false or deceptive
statement on a return or supporting schedule; destroying records; making false entries or
omitting entries in the accounting books; or willfully attempting to evade compliance with the ITA
or the payment of tax. It generally results in criminal charges.
Tax expense (tax income) (CICA Part I IFRS)
Aggregate amount included in the determination of profit or loss for the period in respect of
current tax and deferred tax. IAS 12.5 Tax expense (tax income) comprises current tax expense
(current tax income) and deferred tax expense (deferred tax income). IAS 12.6
Tax-free savings account (TFSA)
The tax-free savings account (TFSA) allows taxpayers to earn investment income, including
interest, dividends, and capital gains, on a tax-free basis. See sections 146.2 and 207 of the
Income Tax Act.
Tax loss
Tax loss is the gross taxable loss of the company. It is accounting income adjusted for temporary
and permanent differences as required by the Income Tax Act resulting in a net loss for tax
purposes. This may be used as a carryback (for refund) or a carryforward (to avoid taxes
otherwise payable in the future).
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Tax shield
A tax shield is the savings in tax payments that result from being allowed to claim an expense,
thereby reducing taxable income.
Taxable amount of the dividend
The taxable amount of the dividend is the grossed-up amount of the taxable dividend that an
individual must include in its income. For corporate shareholders, the taxable amount of the
dividend is the same as the taxable dividend.
Taxable benefits
Taxable benefits are non-cash benefits provided to employees by their employer. Taxable
benefits arise only when the employee receives an economic advantage, and it is conferred in
respect of, in the course of, or by virtue of the employment. The ITA brings into employment
income the value of the benefits of any kind received by employees, subject to a few exceptions.
Taxable benefits include automobile standby charges, gifts in cash or in kind, group term life
insurance, holiday trips, housing, board and lodging, interest-free and low-interest loans,
provincial hospitalization and medical insurance plans, stock options, recreational facilities, and
moving expenses.
Taxable Canadian corporation
A taxable Canadian corporation means a corporation that is a Canadian corporation and is not
exempt from Part I tax due to a statutory provision.
Taxable Canadian property (TCP)
Taxable Canadian property (TCP) includes:

real property situated in Canada;

property used in carrying on a business in Canada;

a share of the capital stock of a corporation resident in Canada that is not listed on a
prescribed exchange;

a share of the capital stock of a listed Canadian-resident corporation or non-resident
corporation if the shareholder, together with all non–arm’s length persons, owned 25% or
more of the shares of any class of the corporation’s stock at any time in the preceding 60
months;

a share of the capital stock of a non-resident corporation, not listed on a prescribed stock
exchange, 50% or more of the value of which during the preceding 60 months is
attributable to taxable Canadian property or Canadian resource properties or timber
resource properties, or real property in Canada;

a capital interest in a trust resident in Canada.
Note that there are more properties included in the taxable Canadian property definition located
in subsection 248(1). The above listing constitutes the more important of the total definition.
Taxable capital gain
A taxpayer’s taxable capital gain for a taxation year from the disposition of any property is 50%
of the taxpayer’s capital gain for the year from the disposition of that property.
Taxable dividend
A taxable dividend means a dividend other than a capital dividend or a qualifying dividend. A
taxable dividend must be received from a resident corporation. Any dividends received from nonresident corporations are just ordinary dividends. Note that the taxable dividend is the actual
amount received by a shareholder.
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Taxable income (tax loss) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Amount for a period, determined in accordance with the rules established by taxation authorities,
upon which income taxes are payable (recoverable). 3465.02
Taxable profit (tax loss) (CICA Part I IFRS)
Profit (loss) for a period, determined in accordance with the rules established by the taxation
authorities, upon which income taxes are payable (recoverable). IAS 12.5
Taxable temporary differences (CICA Part I IFRS)
Temporary differences that will result in taxable amounts in determining taxable profit (tax loss)
of future periods when the carrying amount of the asset or liability is recovered or settled. IAS
12.5
Taxable temporary differences (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Temporary differences that will result in taxable amounts in determining taxable income of future
periods when the carrying amount of the asset or liability is recovered or settled. 3465.02. See
Deferred tax assets, Deferred tax liabilities.
Taxes payable method (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Method of accounting under which an enterprise reports as an expense (income) of the period
only the cost (benefit) of current income taxes for that period, determined in accordance with the
rules established by taxation authorities. 3465.02
Technical analysis
Technical analysis is the use of patterns in past and present stock prices to predict future stock
price changes.
Technical notes
Technical notes accompany motions, draft legislation, and bills and their purpose is to help
taxpayers gain a better understanding of the proposed changes to the ITA. They are explanatory
only and do not have the force of law.
Temporal method (FX) (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Translation method that translates assets, liabilities, revenues, and expenses in a manner that
retains their bases of measurement in terms of the Canadian dollar (that is, it uses the Canadian
dollar as the unit of measure). Monetary items are translated at the exchange rate in effect at
the balance sheet date. Non-monetary items are translated at historical exchange rates, unless
such items are carried at market, in which case they are translated at the exchange rate in effect
at the balance sheet date. Revenue and expense items are translated at the exchange rate in
effect on the dates they occur. Depreciation or amortization of assets translated at historical
exchange rates is translated at the same exchange rates as the assets to which it relates.
1651.03.
Although IAS 21 does not use this term, the application of the standard leads to the same result.
See Current rate method, Translation methods.
Temporary accounts
Temporary accounts are also known as nominal accounts. These are general ledger accounts that
are closed to retained earnings at the end of an accounting period. They are usually statement of
profit and loss accounts.
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Temporary differences (tax) (CICA Part I IFRS)
Differences between the carrying amount of an asset or liability in the statement of financial
position and its tax base. Temporary differences may be either:

(a) taxable temporary differences, which are temporary differences that will result in
taxable amounts in determining taxable profit (tax loss) of future periods when the carrying
amount of the asset or liability is recovered or settled; or

(b) deductible temporary differences, which are temporary differences that will result in
amounts that are deductible in determining taxable profit (tax loss) of future periods when
the carrying amount of the asset or liability is recovered or settled. IAS 12.5.
The timing of reporting some items under the tax rules is different from that of IFRS, resulting in
temporary differences that lead to tax benefits (assets) or tax payables (liabilities) that become
part of deferred years’ tax payable calculations, which must be reported on the statement of
financial position as assets or liabilities. Some of these temporary differences will reverse in the
following year, but others may take much longer (for example, differences between accounting
depreciation of assets versus allowable CCA for tax purposes takes many years to cancel out).
Carrying amount refers to accounting records and tax base refers to the equivalent figure on
which deductions are calculated for income tax purposes under the Act. If the carrying value of
an asset or liability is the same as the tax base value, then there is no temporary difference.
See also Deductible temporary differences, Deferred tax assets, Deferred tax liabilities, Taxable
temporary differences, Tax base.
Temporary differences (tax) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Differences between the tax basis of an asset or liability and its carrying amount in the statement
of financial position. Temporary differences may be either:

(i) Deductible temporary differences, which are temporary differences that will result in
deductible amounts in determining taxable income of future periods when the carrying
amount of the asset or liability is recovered or settled; or

(ii) Taxable temporary differences, which are temporary differences that will result in
taxable amounts in determining taxable income of future periods when the carrying amount
of the asset or liability is recovered or settled. 3465.02.
See Deductible temporary differences, Deferred tax assets, Deferred tax liabilities, Future income
tax assets, Future income tax liabilities, Taxable temporary differences, Tax basis of an asset.
Temporary investment
A temporary investment is an investment in debt or equity securities that can be liquidated
quickly and is intended by management as a short-term use of cash.
Ten percent (10%) corridor method of amortizing actuarial gains and losses
The 10% corridor method of amortizing actuarial gains and losses is a method of amortizing
actuarial gains and losses only to the extent that the accumulated amount of actuarial gains and
losses exceeds 10% of the greater of 1) the accrued obligation, and 2) the value of the plan
assets at the beginning of the period.
Tender offer
A tender offer is a general offer to all shareholders of a corporation to purchase some or all
outstanding shares at a stated price.
Term (of a loan)
The term of a loan is the period or duration during which the creditor is committed to extending
a loan. The term of the loan may be shorter than the amortization period of the loan.
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Term loans
Term loans are debt financial instruments with a usual term of 1.5 to 5 years. Term loans may be
secured by charges on specified assets including land, buildings, and other capital assets.
Term preferred shares
Term preferred shares are preferred shares that allow investors to force repayment or
repurchase of the securities by the company at an established redemption price at a specific
point in time prior to maturity.
Term structure of interest rates
The term structure of interest rates, also called the yield curve, is the relationship between the
effective market yields on debt and their maturities.
Terminal loss
A terminal loss occurs if, at the end of a fiscal year, all assets have been disposed of but a UCC
balance still remains in the pool. This balance, called a terminal loss, is written off in full against
business or property income.
Termination benefits (CICA Part I IFRS)
Employee benefits payable as a result of either:

(a) an entity's decision to terminate an employee's employment before the normal
retirement date; or

(b) an employee's decision to accept voluntary redundancy in exchange for those benefits.
IAS 19.7.
See Compensation, Contractual termination benefits, Special termination benefits.
Test data
Test data is auditor-produced transactions used to audit programmed control procedures with
simulated data.
Test deck
A test deck is a sample of one of each possible combination of data fields that may be processed
through the client’s actual computer system.
Tests of controls
Tests of controls are ordinary and extended procedures designed to produce evidence about the
effectiveness of client controls that should be in operation.
Theory of constraints
The theory of constraints is a management approach that emphasizes the importance of
managing constraints.
Thin capitalization rules
Thin capitalization rules restrict the deduction for loan interest paid or payable to specified nonresidents where the capitalization is insufficient. This means that if the debts to specified nonresidents exceed the shareholders’ equity of the corporation by a ratio of more than three to one,
the thin capitalization rules would apply.
Third sector
Not-for-profit sector.
Throughput
Throughput is the total volume of production through a facility during a period.
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Throughput costing
A costing method that treats all costs except variable direct materials as period costs that are
expensed when they are incurred. Only variable direct material costs are inventoriable.
Throughput time (cycle time or manufacturing cycle time)
Throughput time, also known as cycle time, is the time required to make a completed unit of
product starting with raw materials.
Time and material pricing
Time and material pricing is a pricing method, often used in service firms, in which two pricing
rates are established — one based on direct labour time and the other based on direct materials
used.
Time period principle
Identification of a business’s activities during a specific time period. Also known as periodicity.
The time periods covered by financial reports are called accounting periods. An organization
usually uses one year as its primary accounting period. However, an organization can also
prepare interim financial reports that cover one month or a three-month period (a quarter).
Periodic reports at regular intervals ensure that decision-makers obtain timely information.
Time ticket
A time ticket is a detailed source document used to record an employee’s hour-by-hour activities
during a day.
Time value of money
The time value of money is the rate at which the value of money is traded off as a function of
time. Because money can be invested to earn a return, economic values of the same dollar
amount received at different times are not equivalent.
Timekeeping
Timekeeping is the payroll function of producing time cards or timesheets that provide a basis for
payment to hourly workers.
Timeliness
Timeliness is information delivered within an appropriately short time period so that it has
usefulness (relevance) to influence decision-makers.
See Conceptual Framework for Financial Reporting.
Times debt service earned
Times debt service earned is a measure of solvency that looks at the ratio of cash flows from
operations plus interest and tax to interest and principal. This measure looks at the ability of a
company to service its debt load, including the repayment of principal.
Times interest earned
Times interest earned is a solvency ratio that measures the ratio of net income plus interest
expense and taxes to Interest expense. It is a measure of the relative amount by which earning
can decrease before there will be insufficient net income to pay interest.
Timing (of audit procedures)
The timing of audit procedures refers to when procedures are performed: at interim before the
statement of financial position date, or at year-end shortly before and after the statement of
financial position date.
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Timing differences
Timing differences happen when an item of revenue, expense, gain, or loss arises in determining
accounting income in one period and for taxable income in another period. It is determined by
examining the current year differences between accounting and taxable income (an income
statement approach). See Temporary differences.
Tobin’s q
The sum of the balance sheet value of debt, plus all equity divided by the total assets.
Tolerable rate of deviation
The tolerable rate of deviation is the amount of dollar misstatement that can exist undetected in
an account and not cause financial statements to be considered materially misleading.
Tolerable misstatement
A monetary amount set by the auditor in respect of which the auditor seeks to obtain an
appropriate level of assurance that the monetary amount set by the auditor is not exceeded by
the actual misstatement in the population.
Tort
A tort is a legal action covering civil complaints other than breach of contract; it is normally
initiated by users of financial statements.
Total asset turnover
Total asset turnover is a measure of how efficiently a company uses its assets to generate sales.
It is calculated by dividing net sales by average total assets.
Total comprehensive income (CICA Part I IFRS)
Change in equity during a period resulting from transactions and other events, other than those
changes resulting from transactions with owners in their capacity as owners. IAS 1.7. Total
comprehensive income comprises all components of profit or loss and of other comprehensive
income. IAS 1.7.
Although this Standard uses the terms other comprehensive income, profit or loss, and total
comprehensive income, an entity may use other terms to describe the totals as long as the
meaning is clear. For example, an entity may use the term net income to describe profit or loss.
IAS 1.8. See also Other comprehensive income.
Total quality management
Total quality management is an approach to continuous improvement that focuses on customers,
and uses teams of front-line workers to systematically identify and solve problems.
Tournament
A tournament is a part of the internal labour market. A tournament winner would be a winner of
a promotion from a pool of candidates. A tournament, therefore, is a relative performance
evaluation system.
Tracing
Tracing is when an auditor selects sample items from basic source documents and proceeds
forward through the accounting and control system to find the final recording of the accounting
transaction.
Trade accounts payable
Trade accounts payable are amounts owed to suppliers for goods and services purchased on
credit.
Trade accounts receivable
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Trade accounts receivable are amounts due to a corporation due to sales of goods and services
on credit.
Trade credit
Trade credit is financing extended by a supplier to customers allowing for payment of goods or
services to be made some time after the delivery date.
Trade-date accounting
See Settlement-date accounting.
Trade discount
A trade discount is a reduction below a list or catalogue price that is negotiated in setting the
selling price of goods.
Trade name
A trade name is a unique name used by a company in marketing its products or services.
Trademark
A trademark is a unique symbol used by a company in marketing its products or services. It can
be a name, symbol, or other device that provides a distinctive identity for a product. All
expenditures incurred in the acquisition, protection, expansion, and registration of a trademark
should be capitalized.
Traditional approach
The traditional approach is a statement of profit and loss format in which costs are organized and
presented according to the functions of production, administration, and sales.
Tranche
When a security is issued in a series rather than all at once, each of the related series is referred
to as a tranche.
Transaction
A transaction is an event requiring a journal entry.
Transaction approach
The transaction approach is a method of assessing financial performance and position based on
completed transactions rather than events.
Transaction costs (agency theory)
Transaction costs are a type of agency cost. They include costs of negotiating and writing
agreements; costs of enforcing contracts and monitoring; and costs of resolving disputes.
Transaction costs (CICA Part I IFRS)
Incremental costs that are directly attributable to the acquisition, issue or disposal of a financial
asset or financial liability. An incremental cost is one that would not have been incurred if the
entity had not acquired, issued or disposed of the financial instrument. IAS 39.9
Transaction costs (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Incremental costs that are directly attributable to the acquisition, issue or disposal of a financial
asset or financial liability. An incremental cost is one that would not have been incurred if the
entity had not acquired, issued or disposed of the financial instrument. Transaction costs include
expenditures such as legal fees, reimbursement of the lender's administrative costs and appraisal
costs associated with a loan. Transaction costs do not include financing fees, debt premiums or
discounts. 3856.05 [3855.09 (o)]
Transaction date
The date, usually the same as the hedge date, on which the purchase/sale transaction occurs.
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Transaction driven
Transaction driven, also known as event driven, is computer data processing systems that start
with each transaction event; individual transactions trigger the processing activity and all relevant
files are updated.
Transaction exposure (FX)
See Foreign currency risk.
Transfer agent
A transfer agent is a fiduciary who handles the exchange of shares, cancelling the shares
surrendered by sellers and issuing new certificates to buyers.
Transfer price
Transfer price means an amount paid or payable or an amount received or receivable, as the
case may be, by a participant in a transaction as a price, rental royalty, premium, or other
payment for, or for the use, production, or reproduction of property, or as consideration for
services as part of the transaction. This can also be defined as: the price one subunit of an
organization charges for a product or service supplied to another subunit of the same
organization.
Transfer pricing
Establishing a price for the exchange of goods or services within a firm or organization.
Transfer pricing adjustment
If certain conditions are met, transfer pricing adjustments may apply to permit amendments to
the amount and the nature of the transaction with the intent of the adjustments being
establishing amounts that would have been determined if the transaction had been one that was
entered into by persons dealing at arm’s length with each other.
These conditions are as follows:

where a taxpayer or partnership and a non-resident person with whom the taxpayer does
not deal at arm’s length are participants in a transaction or a series of transactions, and

the terms or conditions of the transaction or series differ from those that would have been
made between persons dealing at arm’s length,

the transactions or series would not have been entered into between persons dealing at
arm’s length and may reasonably be considered not to have been entered into primarily for
bona fide purposes other than to obtain a tax benefit.
or
See Advance pricing agreement.
Transfer pricing methods
The transfer pricing methods recommended by the CRA are traditional transaction methods of
which there are three.

The comparable uncontrolled price method, which is a comparison of prices on transactions
for similar goods or services with independent parties.

The cost-plus method, which is a comparison with profit markups applied by independent
parties on the cost of production of similar goods or services, in order to obtain the arm’s
length sale price that should be charged by the taxpayer.

The resale price method, which is a comparison with profit markups applied by independent
parties on the sale of similar goods or services.
The requirements are such that non–arm’s length parties must conduct their transactions under
terms and conditions that would have prevailed if the parties had been dealing at arm’s length
with each other.
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Transferred-in costs
Transferred-in costs are the amount of cost attached to units of product that have been received
from a prior processing department.
Transition date to IFRS
See Date of transition to IFRS.
Translation methods (FX) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
The two methods are as follows:

(i) The Temporal Method is a method of translation that translates assets, liabilities,
revenues and expenses in a manner that retains their bases of measurement in terms of
the Canadian dollar (that is, it uses the Canadian dollar as the unit of measure). In
particular: monetary items are translated at the exchange rate in effect at the balance
sheet date; non-monetary items are translated at historical exchange rates, unless such
items are carried at market, in which case they are translated at the exchange rate in effect
at the balance sheet date; revenue and expense items are translated at the exchange rate
in effect on the dates they occur; and depreciation or amortization of assets translated at
historical exchange rates is translated at the same exchange rates as the assets to which it
relates.

(ii) The Current Rate Method is a method of translation that translates assets, liabilities,
revenues and expenses in a manner that retains their bases of measurement in terms of
the foreign currency (that is, it uses the foreign currency as the unit of measure). In
particular: assets and liabilities are translated at the exchange rate in effect at the balance
sheet date; and, revenue and expense items (including depreciation and amortization) are
translated at the exchange rate in effect on the dates on which such items are recognized
in income during the period. 1651.03
Although IAS 21 does not use these terms, the application of the standard leads to the same
result.
Translation risk (FX)
See Foreign currency risk.
Transparency
In relation to a process, being predictable and open to scrutiny.
Trap doors
Trap doors are unauthorized computer program modules used solely for fraudulent purposes.
Treasury bill
A treasury bill is an interest-bearing promissory note issued by governments with a maturity of
less than one year. The return on treasury bills issued by the federal government is essentially
risk free, as there is no risk of default and, because of the short maturities, interest-rate risk is
minimal.
Trial balance
A trial balance is a listing of all general ledger accounts, done to identify all accounts in the
ledger and ensure that they balance.
Troubled debt restructure
Trouble debt restructure is a form of financial restructuring wherein lenders accept lower
amounts of cash or other assets but will not become shareholders, as in the case of a financial
reorganization.
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Trust deed
A trust deed is also called an indenture. The contract drawn between a corporation that issues
debt and a trust company acting as trustee for the creditors. The trust deed covers the various
conditions and provisions under which the debt is issued.
Trustee
A trustee is an independent administrator of assets (usually a financial institution) that maintains
records of accounts and disburses appropriate payments.
Trusteed pension plan
A trusteed pension plan is a pension plan in which an independent trustee receives plan
contributions from the employer, invests in funds, and pays benefits as appropriate to the
pensioners.
Two-transaction approach (FX)
An approach for transactions undertaken in a foreign currency in which the operating transaction
is recorded independently of the financing transaction and is not adjusted for subsequent
changes related to currency movements. The two-transaction approach is the foundation of
many IFRS recommendations.
Type I (subsequent events)
Subsequent events that require adjustment of the dollar amounts in the financial statements and
the addition of any related disclosure in the notes.
Type II (subsequent events)
Subsequent events that require disclosure, but no adjustment of dollar amounts.
Unadjusted trial balance
An unadjusted trial balance is a trial balance prepared before adjusting journal entries.
Unbundle (CICA Part I IFRS)
Account for the components of a contract as if they were separate contracts. IFRS 4.A
Unclassified statement of financial position
An unclassified statement of financial position is a statement of financial position that presents a
single list of assets and a single list of liabilities with no attempt to divide them into classes.
Undepreciated capital cost (UCC) (tax)
The balance of a class of capital assets at the end of a taxation year is referred to as the
undepreciated capital cost (UCC) of that class. The UCC of a class is determined according to the
following formula, which takes into account all transactions that have affected the class over the
years. The formula is as follows:

capital cost of all assets included in the class from the beginning, whether they were
disposed of or not, plus

assistance repaid, plus

recapture of CCA in previous years, less

CCA claimed in previous years, less

for each disposition of property in the class, the lesser of:


the proceeds of disposition, and

the capital cost of the property
less investment tax credits or assistance received or receivable
The UCC, at the end of a taxation year, in its most simplest form is:

UCC at the beginning of the year  acquisitions  dispositions  CCA for the current year
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Note that in the year of acquisition the half-year rule applies to most assets purchased.
Exceptions include medical and dental instruments, utensils, and small tools included in class 12
and class 14 properties.
Underapplied overhead
Debit balance in the Manufacturing overhead account that arises when the amount of overhead
cost actually incurred is greater than the amount of overhead cost applied to Work in progress
during a period.
Underlying asset
The underlying asset is the asset upon whose value the value of a contingent claim, such as an
option, depends.
Underlying assumptions
Underlying assumptions are the basic foundation that underlies generally accepted accounting
principles.
Underreliance
The result of realizing the risk of assessing control risk too high.
Understandability
Understandability is the concept that accounting information can be interpreted as it was
intended by persons who possess reasonable business and economic understanding.
See Conceptual Framework for Financial Reporting.
Underwriting
Underwriting is the purchase of a new offering of securities by an investment dealer from the
issuing firm for future distribution to the public.
Unearned finance income (CICA Part I IFRS)
Difference between:

(a) the gross investment in the lease, and

(b) the net investment in the lease. IAS 17.4
Unearned revenues
Unearned revenues are liabilities created by advance cash payments from customers for products
or services in the future.
Unexpected earnings
See Abnormal earnings.
Unfunded benefit plan (CICA Part II ASPE)
Benefit plan in which an entity pays all of the costs of benefits directly to its employees, their
beneficiaries or estates, or to a third-party service provider on behalf of the employees, as the
amounts become due. 3461G
Unguaranteed residual value (CICA Part I IFRS)
Portion of the residual value of the leased asset, the realization of which by the lessor is not
assured or is guaranteed solely by a party related to the lessor. IAS 17.4
Unguaranteed residual value (lease) (CICA Part II ASPE) [CICA Part V Prechangeover accounting standards]
Portion of the residual value of leased property that is not guaranteed or is guaranteed solely by
a party related to the lessor. 3065.03
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Uniformity
Uniformity is the use of the same accounting policies in different corporations for similar
events/transactions.
Unit contribution margin (UCM)
The selling price per unit less the variable costs per unit.
Unit cost system
Unit cost system is a synonym for the LIFO inventory cost flow assumption under the periodic
system.
Unit of measurement assumption
The unit of measurement assumption is the assumption that the results of the corporation’s
operations can be meaningfully reported in terms of a standard monetary unit throughout.
Unit-level activities
Unit-level activities are activities that arise as a result of the total volume of production going
through a facility, and that are performed each time a unit is produced.
Units-of-production method
The units-of-production method is a system to amortize the cost of capital assets in which the
allocated cost is based on actual production of the asset versus its total production potential. This
method is often used for natural resources.
Unlimited liability of partners
The unlimited liability of partners is the legal relationship among general partners of a
partnership that makes each general partner responsible for paying all the debts of the
partnership if the other partners are unable to pay their shares.
Unmodified opinion
The opinion expressed by the auditor when the auditor concludes that the financial statements
are prepared, in all material respects, in accordance with the applicable financial reporting
framework.
Unqualified audit reports
Audit reports in which auditors are not calling attention to anything wrong with the audit work or
financial statements.
Unrealized capital
The unrealized capital refers to the changes to shareholder equity accounts not arising from
earnings, the company's dividend payments, or change to contributed capital. It usually comes
from a comprehensive revaluation of assets and liabilities.
Unrealized intercompany profits, gains, and losses
Gains and losses that arise subsequent to the date of an acquisition on assets which remain
within the consolidated group. They should be eliminated upon consolidation and the amount of
elimination from assets should not be affected by the existence of a non-controlling interest.
Adjustments of applicable income taxes are necessary so that assets may be presented at
historical cost to the consolidated entity.
Unremitted earnings
Unremitted earnings are the difference between an investor’s share of an investee’s net income
and the dividends actually received.
Unrestricted contribution (CICA Part III ASNFPO)
A contribution that the NFPO may use for any purpose. It is neither a restricted contribution nor
an endowment contribution. [4410.02(b)]
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Unrestricted random sample
An unrestricted random sample is a sample taken by using items in a population that are
associated with numbers in a random number table or computer program for selection of a
sample; no population stratification is involved.
Unsophisticated preparers
Generally volunteers who donate their time to the NFPO and who may or may not have the
expertise necessary to assist in fulfilling the reporting requirements.
Unsystematic risk
Unsystematic risk is firm-specific risk that is unique to a security and hence can be eliminated by
forming diversified portfolios.
Unusual items
Unusual items are items that are shown as separate items in the continuing operation section
income statement but not net of taxes. Such items are designated as unusual by management
and are often infrequent and/or not typical of normal business activities.
Uploading
Transferring responsibility for a task to an authority that represents a larger constituency within
which the original constituency is included.
Upper error limit (UEL)
The upper error limit (UEL) is the largest amount of monetary misstatement that can be
calculated using the coefficient for the decision criterion risk of incorrect acceptance.
Upstream
With regard to intercompany transactions, upstream transactions are those that occur when the
subsidiary sells goods up to the parent.
Upstream costs
Upstream costs are those costs associated with processes and costs of suppliers.
Upstream profits
Upstream profits are inter-company profits on transactions between an investor company and
investee where the investee records the profit.
Upstream sale
Intercompany sale from a subsidiary to the parent. Because this transaction is initiated by the
subsidiary and recorded in the subsidiary’s books, any non-controlling interest does share in
profits or losses on upstream sales. Profits (losses) on intercompany upstream sales are split
between the parent and any non-controlling interest in the ratio of the ownership interest. For
example, if the parent owns 80% of a subsidiary’s shares, the allocation of intercompany profits
is 80% to the parent and 20% to the non-controlling interest.
Subsidiary —> Parent (will have an impact on non-controlling interest if the subsidiary is not
100% owned)
Urgency method
The urgency method is not a long-term viable method of determining capital budgets. This
involves “firefighting” techniques of determining capital acquisitions. In other words, when a
machine breaks down and absolutely has to be replaced, then it is replaced.
Useful life (capital asset) (CICA Part III ASNFPO)
Period over which a capital asset is expected to be used by an organization or the number of
production or similar units that can be obtained from the capital asset by the organization. The
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life of a capital asset may extend beyond its useful life to an organization. The life of a capital
asset is normally the shortest of the physical, technological, and legal life. [4430.05(i)]
Useful life (lease) (CICA Part I IFRS)
Estimated remaining period, from the commencement of the lease term, without limitation by the
lease term, over which the economic benefits embodied in the asset are expected to be
consumed by the entity. IAS 17.4
Useful life of an asset (CICA Part I IFRS)
Either:

(a) the period of time over which an asset is expected to be used by the entity; or

(b) the number of production or similar units expected to be obtained from the asset by the
entity. IAS 16.6, IAS 36.6, IAS 38.8
Useful life of an asset (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Period over which an asset, singly or in combination with other assets, is expected to contribute
directly or indirectly to the future cash flows of an enterprise. 3061.03 Useful life is:

(i) the period over which an asset is expected to be available for use by an entity; or

(ii) the number of production or similar units expected to be obtained from the asset by an
entity. 3064.08
User objectives
The main user objective is to have financial statements communicate information that is useful in
making resource-allocation decisions and judgments regarding management’s stewardship. Other
objectives may include cash flow prediction, income maximization, tax minimization, and
performance evaluation.
Users (of financial statements)
This category includes, but is not limited to, investors, creditors, governments, managers,
controllers, and owners.
Utilitarianism
Utilitarianism is one of a class of approaches to ethical decision making called consequentialism.
Utilitarianism says that an action is right if, in a given situation, it leads to greater satisfaction of
desires, taking into account all those affected, than does any other available alternative.
Utilitarianism evaluates an act by its consequences.
Utility
Utility is a subjective measure of value or satisfaction. It measures an individual’s relative value of
preference for a particular outcome or event in relation to another. In finance, it is usually
associated with measuring a decision-maker’s preferences regarding monetary gains or losses.
Utility function
A utility function is a mathematical device that relates payoff amounts to the decision-maker’s
utility for those amounts.
Utility-maximizers
People are utility-maximizers. They maximize their utility by obtaining the greatest difference in
value possible between outcomes to which they attach positive and negative utility. Utility and
wealth are not synonymous. People derive positive utility from things other than wealth; leisure
time is an example.
Utmost good faith
Another term for fiduciary duty.
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Validity
Validity is the concept that information reported accurately reflects the actual events and
transactions.
Validity (as a control objective)
Validity, as a control objective, is ensuring that recorded transactions are ones that should have
been recorded.
Value-added activity
An activity that contributes directly to the customer’s value proposition.
Value added statements
Value added statements are statements that reflect the increase in the value of goods and
services as a result of a corporation’s efforts. They are part of the entity concept.
Value at risk
Value at risk is the loss in earnings, cash flows, or fair value resulting from future price changes
sufficiently large that they have a specified low probability of occurring.
Value chain
The sequence of business functions in which customer usefulness is added to products or
services.
Value engineering
Value engineering is the process of cost reduction during the design and development phase.
Value-for-money audit
An audit concept from the public sector that incorporate audits of economy, efficiency, and
effectiveness.
Value in use (CICA Part I IFRS)
Present value of the future cash flows expected to be derived from an asset or cash-generating
unit. IAS 36.6. The present value of estimated future cash flows expected to arise from the
continuing use of an asset and from its disposal at the end of its useful life. IFRS 5.A. See Cashgenerating unit.
Variable costing
Variable costing is a costing method that includes only variable manufacturing costs — direct
materials, direct labour, and variable manufacturing overhead — in the cost of a unit of product.
Variable costs
Variable costs vary in direct proportion to changes in activity. Activity is often defined as a
measure of volume, such as units of goods or services produced, but can be defined as many
other operational variables called cost drivers. Variable costs are constant on a per-unit basis.
Variable costs method
The variable costs method is a method of assigning costs to inventory that includes variable
overhead as well as direct materials and direct labour. Fixed overhead costs are excluded and
treated as period costs.
Variable overhead efficiency variance
The variable overhead efficiency variance is a measure of the difference between actual activity
(direct labour-hours, machine-hours, or some other base) of a period and the standard activity
allowed, multiplied by the variable part of the predetermined overhead rate.
Variable overhead spending variance
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The variable overhead spending variance is a measure of the difference between actual variable
overhead cost incurred during a period and the standard cost that should have been incurred,
based on the actual activity of the period.
Variance
The variance is the square of the standard deviation.
Velocity
Velocity is a measure of the speed with which goods move through the production process.
Vendee
The vendee is the buyer or purchaser of goods or services.
Vendor
The vendor is the seller of goods or services, usually a manufacturer or wholesaler.
Venture capital
Venture capital is unsecured term funds provided to a non-public firm by an outsider, often in
start-up situations. Venture financing typically entails relatively high risk. Consequently, venture
capitalists look for high potential returns.
Venturer (CICA Part I IFRS)
Party to a joint venture and has joint control over that joint venture. IAS 31.3
Venturer (CICA Part II ASPE) [CICA Part V Pre-changeover accounting standards]
Party to a joint venture, has joint control over that joint venture, has the right and ability to
obtain future economic benefits from the resources of the joint venture and is exposed to the
related risks. 3055.03
Verbal and written representations (audit evidence)
Verbal and written representations, as audit evidence, are responses to audit enquiries given by
the client’s officers, directors, owners, and employees.
Verifiability
Verifiability is the concept that independent people using an appropriate measurement method
would reach substantially the same results.
See Conceptual Framework for Financial Reporting.
Vertical analysis
Analysis using one item on each financial statement as a base amount, and expresses other
amounts as a percentage of the base. Also called common size analysis. The statement of
financial position uses total assets as the base, while the statement of profit and loss uses net
sales. See Horizontal analysis.
Vertical equity
Vertical equity means that taxpayers with a greater ability to pay tax should bear a higher burden
of tax.
Vest (CICA Part I IFRS)
To become an entitlement. Under a share-based payment arrangement, a counterparty's right to
receive cash, other assets, or equity instruments of the entity vests when the counterparty's
entitlement is no longer conditional on the satisfaction of any vesting conditions. IFRS 2.A
Vest (stock option) (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Earn the rights to. An employee's award of stock-based compensation becomes vested at the
date on which the employee's right to receive or retain shares of stock or cash under the award
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is no longer contingent on the employee remaining in the service of the enterprise or the
achievement of a performance condition (other than the achievement of a target stock price or
specified amount of intrinsic value). Typically, an employee stock option that is vested also is
immediately exercisable. 3870.07. See Award, Stock-based compensation plan.
Vested benefits (CICA Part II ASPE) [CICA Part V Pre-changeover accounting
standards]
Employee future benefits that vest are those for which, after a specific or determinable date, the
entitlement ceases to be conditional on an employee remaining in the service of an entity.
[3461.09], 3461G
Vested employee benefits (CICA Part I IFRS)
Employee benefits that are not conditional on future employment. IAS 19.7. Benefits, the rights
to which, under the conditions of a retirement benefit plan, are not conditional on continued
employment. IAS 26.8
Vesting conditions (CICA Part I IFRS)
Conditions that determine whether the entity receives the services that entitle the counterparty
to receive cash, other assets or equity instruments of the entity, under a share-based payment
arrangement. Vesting conditions are either service conditions or performance conditions. Service
conditions require the counterparty to complete a specified period of service. Performance
conditions require the counterparty to complete a specified period of service and specified
performance targets to be met (such as a specified increase in the entity's profit over a specified
period of time). A performance condition might include a market condition. IFRS 2.A
Vesting period (CICA Part I IFRS)
Period during which all the specified vesting conditions of a share-based payment arrangement
are to be satisfied. IFRS 2.A
Vicarious liability
Liability of an employer for injuries caused by employees while carrying out their employment
duties.
Volatility
Volatility is the change in an asset’s or liability’s value per unit change in the interest rate.
Volatility (stock option) (CICA Part II ASPE) [CICA Part V Pre-changeover
accounting standards]
Measure of the amount by which a price has fluctuated (historical volatility) or is expected to
fluctuate (expected volatility) during a period. Expected volatility provides much of the value of
options. Option holders benefit from the volatility of the stock because they have the right to
capture increases in the price of the underlying stock during the term of the option without
having to bear the full risk of loss from stock price decreases. 3870.07
Volume variance
A volume variance is a measure of the utilization of plant facilities. It is calculated as the
difference between the amount of fixed overhead cost applied to Work in progress during a
period and the amount of budgeted fixed overhead.
Voluntary conversion
A voluntary conversion is when the holder of convertible senior securities voluntarily submits the
convertible bond or preferred share for conversion into the appropriate number of ordinary
shares.
Voluntary disclosure
Voluntary disclosure is disclosure of information above the minimum required.
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Voluntary disposition
A voluntary disposition is a sale, exchange, or abandonment of capital assets based on decisions
of management.
Voucher
A voucher is an internal business paper used to accumulate other papers and information needed
to control the disbursement of cash and to ensure that the transaction is properly recorded.
Voucher system
A voucher system is a set of procedures designed to control the incurrence of obligations and
disbursements of cash.
Vouching
Vouching is when an auditor selects sample items from an account and goes backward through
the accounting and control system to find the source documentation that supports the item
selected.
Wage bracket withholding table
A wage bracket withholding table is a table showing the amounts to be withheld from employees’
wages at various levels of earnings.
Walk-through
A walk-through is the act of following one or a few transactions through the accounting system
and control system in order to obtain a general understanding of the client’s systems.
Warrant
A warrant is a transferable option to buy, within a given time period, a certain number of
ordinary shares for a set price.
Warranty
A warranty is an agreement that obligates the seller or manufacturer to repair or replace a
product that fails to perform properly within a specified period.
Wash transaction
A wash transaction is selective sales of investments and repurchase of the same or similar
investments in order to manufacture an accounting gain or loss. More generally, this is any
transaction that produces net results of zero, or a “wash.”
Watered stock
Watered stocks are shares issued by a company for non-cash consideration whose value has
been over-estimated. Since the value of resources received is less than the recorded value of
shares, the true value of the stock and the company is reduced.
Weaknesses
The lack of controls in particular areas that would allow material errors to get by undetected.
Weighted average
Weighted average is a method of inventory costing that uses the weighted-average cost for
inventory and cost of goods sold. Weighted average is a general term that refers to an average
cost weighted by the relative size of acquisitions at various prices.
Weighted average cost of capital (WACC)
The weighted average cost of capital (WACC) is an estimate of a firm’s cost of capital. This
estimate is usually made to evaluate potential new investments. Ideally the weights used in
computing the weighted average cost of capital should reflect the best estimate of the
proportions of capital type that will exist in the after financing capital structure. However, the
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simplifying assumption is made that the firm’s capital structure proportions and level of business
risk are unchanged by the new investment under consideration.
Weighted average ordinary shares outstanding
Weighted average ordinary shares outstanding is the calculation of shares used as the
denominator for basic EPS where shares issued/retired for net assets are included in the
calculation for only the fraction of the year they were actually outstanding or retired.
Weighted-average method (in a process costing system)
The weighted-average method is a method of accounting for cost flows in a process costing
system in which units in the beginning work-in-progress inventory are treated as if they were
started and completed during the current period.
Welfare state
A state or government that promotes public welfare through programs of public health, pensions,
unemployment compensation, public housing, and the like.
White collar crime
White collar crimes are misdeeds done with a pencil or a computer terminal.
Wholly-owned subsidiary
Wholly-owned subsidiary is an investee, all of whose shares are owned by the investor.
Wind-up of a corporation
The wind-up of a corporation is where a corporation ends its existence by disposing of all its
assets, meeting its debt obligations, and distributing all its earnings and capital to its
shareholders.
The wind-up of a subsidiary involves the transfer of all the assets of the subsidiary to its parent
corporation, followed by the termination of the subsidiary’s existence. The parent corporation
continues its normal existence.
Withdrawal
A withdrawal is a payment from a proprietorship or partnership to its owner or owners.
Withdrawals account
The withdrawals account is the account used to record the transfer of assets from a business to
its owner. This is also known as the personal account or drawing account.
Without prejudice
Words that, when used during negotiation, are a declaration that concessions, compromises, and
admissions made by a party cannot be used against that party in subsequent litigation.
Working capital
Current assets less current liabilities. The concept dates back to nineteenth century English
practice when the emphasis of financial reporting was on solvency. The distinction between
current and non-current assets and liabilities arose because, at that time, it was important for
bankers to be able to distinguish assets and liabilities that would generate or use cash in the
short term from those that would not. The cutoff can be arbitrary and is not universally relevant;
nevertheless, the classification rule has remained. Short-term sources of financing are also part
of working capital.
Working paper approach (method) of consolidation
Use of a worksheet that shows: first, the elimination of the parent’s share of the shareholders’
equity accounts of the subsidiary and the parent’s investment account thereby establishing the
difference as purchase discrepancy; second, the allocating of the purchase discrepancy to the
identifiable assets and liabilities of the subsidiary thereby establishing the goodwill that results
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from the business combination; and third, the elimination of intercompany balances and
transactions and intercompany unrealized profits, gains, and losses.
Working papers
Working papers document the work done during the audit and support the conclusions based on
that work.
Work-in-progress inventory
Work-in-progress inventory is goods requiring further processing before completion and sale.
Work-out arrangements
Work-out arrangements are agreements between lender and borrower to restructure the terms
of loan(s), usually after default.
Worksheet
A worksheet is a 10-column spreadsheet used to draft a company’s unadjusted trial balance,
adjusting entries, adjusted trial balance, and financial statements. This is an optional step in the
accounting process.
Wrongful dismissal
Dismissal without reasonable cause or notice.
Year-end audit work
Year-end audit work consists of audit procedures performed shortly before and after the
statement of financial position date.
Yield
The yield is the “real” cost of borrowing. It is the rate that equates the price of the liability to the
present value of the interest payments plus the maturity value over the appropriate compounding
periods.
Yield variance
A yield variance is the portion of the quantity variance that is not the mix variance. It occurs
when the actual yield differs from the standard yield expected from a given mix of inputs.
Zero-based budget
A zero-based budget is a method of budgeting in which managers are required to start at zero
budget levels every year and to justify all costs as if the programs involved were being initiated
for the first time.
Zero coupon bond
Bond issued with a nominal or zero rate of interest. The return on the investment is recovered at
maturity because zero coupon bonds are issued at significant discounts.
There is an embedded derivative tied to the bond — the difference in value associated with the
change in value of the DJII. Furthermore, the derivative is a forward contract and must be
assigned a value of zero at inception.
See Derivative.
Zero-sum game
A game where one player’s loss is another player’s gain.
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