COURSE UPDATE PA1: Issues in Professional Practice Spring Session 3 Practice Exam 1 Q2 solution For distribution to course directors, lecturers, markers, tutors and students. Practice Exam 1 – Q2 solution The solution and the competency grid to Question 2 should read as follows (deletions crossed out, additions in bold): Accounting for capital assets and cash donation received Before the introduction of IFRS the CICA Handbook was set up in such a way that the expenditure method was acceptable. However, since the introduction of IFRS on January 1 2011, governments have been mandated to use the Public Sector Accounting Section of the Handbook, which means the Township must account for its capital assets as follows: The first parcel of land falls within the definition of a tangible capital asset under PS 3150, according to which the land should be measured at cost. The second parcel of land and the $5 million cash donated to the Township falls within the definition of “Restricted Assets” under PS 3100, given the external restriction placed on its use by the donor. Accordingly, the inflow should be recognized as revenue in the Township’s financial statements in the period in which the land is used for the stated purpose. Until such time, the inflow should be reported as a liability because the Township will have to return the land and the cash to the Children’s Hospital should they not use it for the purposes as stated in the will. Accounting for the cash donation received The $5 million cash donation by Martin James Jr. meets the definition of “Endowment Contribution” because it is a gift in perpetuity. Accordingly, endowment contributions may be accounted for either in the deferral method or the restricted fund method, at the choice of the organization. Under the deferral method, the donation should be recognized as a direct increase in the Township’s net assets in the current period (Section 4410.29). Interest earned on the donation would be accounted for in the statement of operations, in the appropriate deferred contributions balance or in net assets, depending on the nature of restrictions. Under the restricted fund method, the donation should be recognized as revenue of the specific endowment fund in the current period (Section 4410.60). The endowment fund balance would represent the accumulation of resources subject to both externally and internally imposed restrictions specifying that they be maintained permanently. Interest earned on the donation would be recognized in the statement of operations in the appropriate restricted fund. PA1-11-CU34-ALL (Spring Session 3 Practice Exam 1 Q2 solution) Page 1 of 2 Issued by CGA-Canada May 23, 2012 COURSE UPDATE PK:FA:05 — Interprets and advises on the organization’s reporting obligations (determining appropriate basis of accounting, determining required reporting to shareholders and to government and regulatory agencies) Baseline question: Does the candidate identify and advise on the appropriate accounting treatment for the cash donation made by Martin’s estate? Performance Level 0. NR/Inc 1 1. Substantially below 2. Below 3. Meets Solution Key Did not attempt or insufficient response to evaluate, OR incorrect. Identified that the cash donation would be would be treated as an “Endowment Contribution,” restricted asset but does not elaborate. Further identified that endowment contributions cash may be accounted for using either the deferral method or the restricted fund method as a liability, but does not elaborate. Identified AND advised on the appropriate accounting treatment for the cash donation as follows: The cash donation would be treated as a liability an “Endowment Contribution” using either of the following options: in the Township’s financial statements until the period in which the land and cash is used for the stated purpose. At that time, it should be recorded as revenue. The deferral method OR The restricted fund 4. Exceeds Other Identified AND advised on appropriate requirements related to accounting for endowment contributions restricted assets AND explained the accounting for endowment contributions restricted assets specific to this case Revenue recognition for Contributions is according to Section 4200 3100 of the PSA Handbook. Other PA1-11-CU34-ALL (Spring Session 3 Practice Exam 1 Q2 solution) Page 2 of 2 Issued by CGA-Canada May 23, 2012