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