Year: 2023

Why is Operational Resiliency Important?

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During a crisis, companies need to be able to continue to deliver core products and services. Companies that fail to prepare for unexpected challenges can suffer a host of negative consequences that include reputational damage and financial loss.

Creating a business model that anticipates and has a plan to rebound from disaster will ultimately achieve a high degree of operational resiliency.

This article drills down on the importance of operational resiliency in today’s business atmosphere and breaks down the steps that companies can take now to plan, prepare, respond, and recover from a crisis.

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Employment Insurance: Misconduct

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An August 24, 2023, Federal Court of Canada case reviewed whether the taxpayer’s employment had ceased due to misconduct, which would render the taxpayer ineligible for employment insurance. The taxpayer worked at a community health care centre that required all employees to provide proof of full vaccination against COVID-19 unless they provided evidence of a valid medical reason or they had a valid human rights reason (including religion) in accordance with the Ontario Human Rights Code for not being vaccinated. The Social Security Tribunal found that the taxpayer lost his employment due to his own misconduct because he was aware of his employer’s vaccination policy and the consequences of not complying. The Court found that this decision was not unreasonable.

ACTION ITEM: An employee’s cessation of employment due to their failure to comply with the employer’s vaccination policy may result in that individual being ineligible for employment insurance.

CBVs and Legal Matters

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In this article, we discuss some of the ways a Chartered Business Valuator (CBV) is often asked to assist in various legal matters.

CBVs and Litigation

In litigation, CBVs are often involved as either independent “expert witnesses” or non-independent litigation consultants.

Expert Witnesses
  • An expert witness is an opinion witness of the court. An opinion witness does not have direct involvement in the matter that is before the proceeding until after the incident occurred, and is relied on to provide an opinion on the matter based on their specific expertise. This is different from a fact witness, which is a person who has direct involvement in the matter.
  • An expert is a person with specialized skills, knowledge, experience, or training in a specific subject matter area that is pertinent to the legal proceeding. To be an expert witness, the expert must be clear of any conflicts.
  • Prior to becoming an expert witness, the expert prepares an expert report to be used as evidence in litigation. Experts must be accepted by the court and qualified as an expert witness at the time of trial to testify in a proceeding related to matters of their specific expertise.
  • An expert witness must be independent and objective, and it is their duty to assist the court impartially on matters relevant to their area of expertise.
CBVs as Expert Witnesses

CBVs are regularly relied on in legal proceedings to assist in the following areas:

  • Disputes where a business valuation is required;
  • Dispute-related matters such as shareholder, intellectual property, contract, and matrimonial disputes;
  • Quantification of economic/ financial losses; or
  • Other conclusions of a financial nature.

A CBV may be asked to prepare an independent written report, which will be entered as an exhibit in litigation. This report is known as an “expert report”, which is a written communication containing a conclusion as to the quantum of financial loss, or any conclusion of a financial nature in the context of litigation or a dispute, prepared by an expert acting independently. In situations where the fair market value of a business or asset/liability is required, an expert report may contain a valuation conclusion.

A CBV may also prepare a limited critique report, which has the purpose of commenting on another expert’s report but does not include a separate financial conclusion. In a limited critique report, comments are provided with respect to the approach and techniques used and calculations in the original report, subjective matters such as the selection of discount rates, and whether the original report is suitable for the purpose at hand.

CBVs as Litigation Consultants

A CBV can also assist clients in litigation matters as a litigation consultant. In this case, the CBV will act as an advisor to legal counsel to promote the interests of their client. In this situation, a CBV is not considered independent, and would not be able to act as an independent expert witness during the trial or in other future litigation on this matter. In this role, a CBV generally acts as an advisor to legal counsel, will provide advice, support their client in various processes, and may advocate on their client’s behalf. Because certain valuation principles and topics are often subject to interpretation and professional judgment, the consultant is often relied on to assist the client to advance their own position in the litigation process. The litigation consultant can assist with such issues as strategy and cross-examination. A CBV acting as a litigation consultant is not independent and will not be required to testify. In some situations where a CBV is engaged as a litigation consultant, the CBV may be covered by litigation privilege.

CBVs and Family Law

CBVs are regularly involved in family law matters. CBVs are most often involved in assisting in valuation determinations related to the division of property on marriage breakdown and the determination of income for spousal or child support purposes.

If you have any questions regarding how a CBV can assist you in legal matters, please contact a member of our Financial Services Advisory Team (FSAT) team.

NOTE: This article is not intended to be legal advice. Please contact a lawyer to discuss the legal implications discussed in this article further.

REVIVAL OF A CORPORATION: Tax Collection

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A June 12, 2023, Court of King’s Bench of Alberta case reviewed CRA’s application to revive a corporation dissolved in 2020. The former sole shareholder opposed the application. The corporation’s capital losses (as quantified during an audit of the 2013 and 2014 years) were used in 2017 and 2018. CRA sought to revive the corporation and issue notices of assessment for 2017 and 2018.

Revival granted

Under the Alberta Business Corporations Act, a creditor has standing to ask that a dissolved corporation be revived. While taxpayers remain liable for tax when income is earned, the liability does not become a debt until taxes are assessed. As no notice of assessment had been issued, CRA had no standing as a creditor. They would only become a creditor if they issued a notice of assessment. This created a circularity issue as an assessment could not be issued to a dissolved corporation. However, the Court has the power to designate someone as an “interested person,” allowing the designated person to revive a dissolved corporation. The Court found that CRA had a valid interest in the revival and sought this remedy to further its interest; that is, to issue a notice of assessment to convert the taxpayer’s liability for taxes into a debt. While the revived corporation would have no assets, no property, no directors, and no shareholders, a dissolved corporation that has been revived is deemed to always have existed. CRA argued that they could pursue the former shareholders on the basis that assets were transferred on dissolution to non-arm’s length parties for less than fair market value consideration. Similar rules are applicable in other provinces.

ACTION ITEM: Dissolving a corporation may not protect former shareholders from CRA taking measures to collect a tax debt.

SURCHARGE TO ACCEPT PAYMENT VIA CREDIT CARD: GST/HST?

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As of October 2022, merchants could charge an additional fee for accepting payment via credit card. In a March 28, 2023, Technical Interpretation, CRA opined that the additional fee would be a separate exempt supply of a financial service and, therefore, not subject to GST/HST if all of the following conditions are met:

  • the fee is charged to the cardholder solely for the acceptance of the use of the credit card as a payment method and is not charged if another payment method is used;
  • the fee is imposed by (and is thus the revenue of) the merchant who provides to the cardholder the property or service that is purchased with the use of the credit card and not by a person who acts as a billing agent or payment service provider in facilitating the payment;
  • the fee is subject to the relevant credit card network rules relating to surcharging, including rules regarding the calculation and level of the surcharge; and • the fee is shown and charged separately to the cardholder.

ACTION ITEM: If charging an additional fee to accept credit cards, ensure you satisfy the above conditions to ensure the fee is not subject to GST/HST.

ENHANCED GST RESIDENTIAL RENTAL REBATE: Increased Incentives

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On September 14, 2023, the Department of Finance provided details on a proposal to enhance the existing GST rental rebate. In general, the existing rebate provides a 36% rebate of the GST component of the price paid by landlords to construct, or purchase newly constructed, rental property. The existing rebate begins to be phased out for properties valued at over $350,000 and is eliminated at $450,000.

The proposal would increase the rebate from 36% to 100% and remove the phase-out thresholds for properties with a value over $350,000. The proposal would apply to certain rental housing projects that begin construction between September 14, 2023, and December 31, 2030, inclusive, and complete construction by December 31, 2035.

To qualify for the enhanced rebate, new residential units would need to meet the requirements for the existing rental rebate and be in buildings meeting the following criteria:

  • the property must contain at least four private apartment units (units must have a private kitchen, bathroom, and living area) or at least 10 private rooms or suites (examples of residences for students, seniors, and people with disabilities were provided); and
  • at least 90% of the residential units in the building must be designated for long-term rental.

Projects that convert existing non-residential real estate, such as an office building, into a residential complex would also be eligible if all other conditions are met. Public service bodies would also be eligible to access the enhanced rebate.

The enhanced rebate will not apply to other properties, such as individuallyownedcondominiumunits, single-unithousing, duplexes, triplexes, or housing co-ops; however, the existing rebate would still be available. Substantial renovations of existing residential complexes would not be eligible.

On September 21, 2023, the Bill to enact these measures was introduced in the House of Commons. This Bill did not include all the criteria for eligible projects but provided that the remaining specifics would be set by regulation in the future.

ACTION: If involved in developing multi-unit residential rental property, consider whether you are eligible for this enhanced GST rental rebate.

Managed services can deliver results for businesses

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Effectively utilizing managed services is becoming a critical success factor for companies of all sizes and in all industries. Often times, a board might recommend maintaining an in-house model to manage risks, but that may not be completely realistic anymore.

With risks coming quicker and from many more directions, adopting a managed services strategy may be the best option.

In this article from RSM Canada, they explore how organizations can use managed services to assist with supporting smaller back-office functions or to fill an executive role, or staff an entire department such as human resources or finance.

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Minority Shareholdings – Does a
Minority Discount Apply?

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Who are minority shareholders?

A minority shareholder is any shareholder who does not own a controlling interest in a public or privately-held company.

What is a minority discount?

In a notional valuation context, a minority discount is when the pro rata value of a particular minority shareholding is reduced to reflect the disadvantages of owning a minority interest of an asset or security
as a whole. Typically, a minority shareholding realizes a discount for:

  • The inherent lack of marketability or illiquidity, which refers to assets or securities that cannot be sold and converted to cash without a loss in value. Minority shareholdings are generally viewed as less marketable or liquid than a controlling interest, therefore attracting fewer potential buyers resulting in a discount. Sometimes referred to as Discount for Lack of Marketability or DLOM; and
  • The lack of control over the company’s operations and the ability to influence the future direction of the company and the distribution of profits/dividends. Sometimes referred to as Discount for Lack of Control or DLOC.

The level of minority discount can range significantly depending on the facts of the particular situation and ownership interest held.

Minority shareholders in a publicly traded company vs. a privately-held company

Minority shares in a publicly traded

company, where shares are widely held and large volumes of share are frequently traded, usually has a minimal illiquidity discount. While minority shareholders have no control over the direction of the public company, they can choose whether to sell or hold the company’s shares. As a result, there is often no significant discount for illiquidity or lack of control.

In contrast, a privately-held company’s en bloc value may already reflect a general illiquidity discount as there is no ready market available to buy or sell shares in a privately-held company. A further discount for

illiquidity may apply specifically to a minority shareholder, compared to a controlling shareholder of the same privately-held company.

Factors influencing discount

While the specific methods and possible empirical evidence are outside of the scope of this article, the quantum of the discount for lack of control and lack of marketability, which are sometimes combined into one discount, is dependent on several factors, including the following factors:

  • Shareholder’s level of involvement in the business.
  • A shareholder who is on the board of directors or involved in the daily operations of the business would generally have a lower quantum of discount than a shareholder who has no involvement in the business operations or governance.
  • Relationship and size of the shareholding relative to the other shareholdings.
  • In scenarios where there are no controlling shareholder, the relationship and combination of the size of the subject shareholding with other minority shareholders must be considered to determine if the subject shareholder can influence decisions.
  • Additionally, the applicable minority discount may be less or a potential premium may be available, if the other minority shareholders want to purchase the subject’s shares in order to become a majority shareholder.

Shareholders’ agreements

  • Clauses that influence liquidity or control will have influence on the quantum of a discount, such as restrictions on share transfer, rights of first refusal, or tag-along/drag-along provisions.

Nuisance value

  • Shareholders who hold just enough shareholdings to prevent or delay the plans of a controlling shareholder are considered to have “nuisance value” and may have a lower quantum of discount.
  • It is difficult to determine the discount for nuisance value in a notional valuation.

Family or group control

  • Shareholders who act in concert and in aggregate owns over 50% of the shares, may not have an applicable minority discount. However, a third party who enters into a shareholder agreement may have a significant minority discount applied to the value of their shares.

Dividends

  • A history of dividend distribution is an indication of return on investment and may indicate less of a minority discount.

Prior sales of minority shareholdings

  • Prior transactions provide insight regarding the quantum of any minority discount.
To apply a minority discount or not?

To determine whether a minority discount applies, consider the following two factors: the purpose of the valuation and the valuator’s professional judgment. If the valuation were to determine the value of the minority’s interest for the purpose of a sale to a non-related party, a minority discount would apply. The quantum of the discount that applies to the sale requires a valuator’s professional judgment and analysis.

In shareholder disputes involving oppression, one of the remedies is to have the corporation purchase the oppressed minority shareholder’s interest at fair value. In this case, a minority discount would not apply.If you have any questions or require assistance with determining if a minority discount is applicable and the quantum of the discount, please contact a member of our Financial Services Advisory Team (FSAT) team.

Federal Economic Statement 2023

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Executive summary

On November 21, 2023, the Minister of Finance, Chrystia Freeland, released Canada’s 2023 Fall Economic Statement (2023 Economic Statement). The Economic Statement introduces several new tax measures that focus on Canada’s plan for affordable housing and building a strong economy in the form of clean energy credits and addressing international tax gaps.

The Economic Statement also affirms the government’s intention to proceed with previously announced tax measures, including by providing clarifications to certain priority economic areas.

Economic Statement 2023

Business tax measures

Clean hydrogen investment tax credit

The 2023 Economic Statement provides further details on the clean hydrogen investment tax credit (Clean Hydrogen ITC), originally proposed in the 2023 Federal Budget (Budget 2023), outlines key design elements of the credit, including eligible projects, credit rates, and carbon intensity measurement. The federal government plans to continue reviewing low-carbon hydrogen production pathways leading up to Budget 2024.

Budget 2023 highlighted that the Clean Hydrogen ITC would provide support for clean ammonia production, offering a 15% credit rate with specific conditions. The 2023 Economic Statement extends eligibility of the credit to property converting clean hydrogen into ammonia, subject to sufficient production capacity, transportation feasibility, and hydrogen sourcing criteria. The 2023 Economic Statement also addresses the conditions necessary for the inclusion of power purchase agreements and similar instruments for calculating project’s carbon intensity (CI). Eligibility is contingent on sourcing electricity from hydro-, solar- or wind-powered generation that:

  • first commenced production on or after March 28, 2023, and no more than one year before the initial CI assessment; and,
  • is located in the same province or territory and connected to the electricity grid of that province or territory. 

The Clean Hydrogen ITC’s positive environmental impact aligns with the federal sustainable development strategy, aiming to reduce greenhouse gas emissions by 40% to 45% below 2005 levels by 2030 and achieve net-zero emissions by 2050.

Clean Technology and Clean Electricity Investment Tax Credits

The 2022 Fall Economic Statement introduced a 30% refundable clean technology investment tax credit for eligible taxpayers investing in clean technology property between March 28, 2023, and 2035, subject to a phase-out in 2034. Budget 2023 added a 15% refundable clean electricity investment tax credit for eligible property starting from Budget 2024 until 2034.

Notably, the 2023 Economic Statement extends the eligibility of these tax credits to encompass systems that support the generation of electricity, heat, or a combination thereof, from waste biomass.

The expanded eligibility for the clean technology investment tax credit applies to property acquired on or after the day of the 2023 Economic Statement, as long as it has not been used before acquisition. For the clean electricity investment tax credit, eligibility starts from the Budget 2024 release date and extends to projects that have not commenced construction before March 28, 2023.

Exception on dividend received deduction by financial institutions

In Budget 2023, the government proposed to disallow financial institutions from claiming a deduction for dividends received on shares of other corporations resident in Canada where those shares are mark-to-market property. This measure is intended to better calculate the income of financial institutions from securities consistent with the purpose of the mark-to-market property rules.

The 2023 Economic Statement offers relief from the above amendments by allowing financial institutions to continue to claim the deduction on dividends received on “taxable preferred shares”. Financial institutions will need to review their holdings to fully understand the tax impact of losing this deduction on securities that do not qualify for the exemption.

These changes are proposed to apply to dividends received on or after January 1, 2024.

Supporting the adoption of employee ownership trusts

First introduced in Budget 2022, employee ownership trusts (EOTs) serve as a mechanism to allow employees to purchase a business without requiring them to pay directly to acquire the shares of the business. EOTs also serve as a valuable option for owners planning business succession.

To further incentivize the use of EOTs, the 2023 Economic Statement expands on the proposals contained in Budget 2023. The government proposes to exempt the first $10 million in capital gains realized from the sale of a business to an EOT from taxation. This incentive will apply to the 2024 to 2026 tax years. Details on the exemption will be provided at a future date.

Concessional loans

When a taxpayer receives government assistance in the course of earning income from business or property, the amount of assistance may reduce the amount of related expenses, property costs, or may result in a potential inclusion in the taxpayer’s overall income.

Historically, non-forgivable and concessional loans from public authorities were not considered government assistance, until a pivotal 2021 decision by the Tax Court of Canada. This ruling, upheld in 2022 by the Federal Court of Appeal, changed the treatment of concessional loans, considering their full principal amount as government assistance.

Addressing this shift, the 2023 Economic Statement proposes a crucial amendment to the Income Tax Act. The proposed change aims to exclude bona fide concessional loans with reasonable repayment terms from public authorities as government assistance. If enacted, this amendment will take effect on the day of the 2023 Economic Statement, signaling a swift government response to evolving tax law.

International tax measures

Underused Housing Tax

The Underused Housing Tax Act (UHTA) requires affected owners of residential property in Canada to file an annual return starting for the 2022 calendar year. Where the residential property is considered vacant or underused, the owner is required to pay an annual federal 1% tax. The implementation of the UHTA has caused significant confusion and most recently necessitated a second administrative extension to the filing and payment deadline regarding the 2022 calendar year. In particular, if affected owners file their returns and pay the underused housing tax for the 2022 calendar year by April 30, 2024 (previously extended to October 31, 2023), the CRA will waive all penalties and interest otherwise applicable.

In light of feedback received on the UHTA, the 2023 Economic Statement proposes several amendments to the legislation. The UHTA was originally positioned in Budget 2021 as a tax on property owned by non-Canadian individuals and entities. Despite this intention, certain Canadian owners of residential property were also required to file returns and potentially pay tax. The amendments proposed in the 2023 Economic Statement will bring the UHTA closer in line with its original objective by expanding the definition of “excluded owner”. Excluded owners are not required to file a UHTA return or pay tax on their property. “Specified Canadian corporations”, partners of “specified Canadian partnerships” and trustees of “specified Canadian trusts” will now be considered excluded owners. The definitions of “specified Canadian partnership” and “specified Canadian trust” will also be expanded. These changes will apply for 2023 and subsequent calendar years.

The other proposed changes to the UHTA are:

  • Decreasing the minimum failure to file penalty from $5,000 for individuals and $10,000 for corporations to $1,000 and $2,000, respectively, for 2022 onwards;
  • Introducing an exception for residential properties held as a place of residence or lodging for employees in rural areas for 2023 onwards; and,
  • Exempting unitized (“condominiumized”) apartment buildings from the definition of “residential property” for 2022 onward, and limiting the “vacation property” exemption to only one residential property for a calendar year for 2024 onward, in addition to other technical changes alluded to but not described.
Canada’s intention to proceed with implementing global minimum tax

The 2023 Economic Statement reiterates Canada’s commitment to international efforts to reform corporate taxation, particularly through the implementation of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) Pillar Two, aimed at establishing a global minimum tax rate.

Canada intends to enact the Global Minimum Tax Act (GMTA) to implement Pillar Two of the inclusive framework, with an effective date after December 31, 2023. Pillar Two (and the GMTA by extension) would establish a global minimum tax rate of 15% on the profits of large multinational corporations, regardless of where they maintain tax residency. Tax revenue is projected to exceed $3.1 billion by fiscal year 2029 from the Pillar Two international tax reform.

The 2023 Economic Statement also includes an exemption from the application of the GMTA for income from shipping companies to align with global treatment.

Indirect tax measures

Removing GST from new co-op rental housing

The federal government proposed on September 14, 2023, to remove the goods and services tax (GST) from new purpose-built rental housing construction projects to incentivize the rapid construction of new homes. The federal government has also called on provinces to remove provincial sales taxes on rental property construction. Consistent with the federal government, Ontario plans to offer full HST rebates for long-term rental units, as previously announced in the 2023 Ontario Fall Economic Statement.

In the 2023 Economic Statement, co-operative housing corporations that provide long-term rental accommodation will also be eligible to benefit from the GST exemption, subject to additional conditions. The exemption will not apply to substantial renovations of existing residential properties to prevent the displacement of existing renters.

The GST exemption will apply to construction projects that are initiated between September 14, 2023, and December 31, 2030, and fully completed before 2036.

Other tax measures

Non-compliant short-term rentals

The Economic Statement outlines the federal government’s proactive measures to address the growing issue of non-compliant short-term rentals in major Canadian cities like Montréal, Toronto, and Vancouver.

The federal government plans to deny income tax deductions for expenses related to earning short-term rental income, including interest expenses, in provinces and municipalities that have prohibited such rentals. This denial of deductions is also extended to cases where short-term rental operators are non-compliant with provincial or municipal licensing, permitting or registration requirements. These measures are set to take effect from January 1, 2024.

Intention to proceed with previously announced measures

Subject to amendments resulting from public consultations and legislative processes, the government intends to proceed with previously announced tax measures. These measures include, but are not limited to:

  • The introduction of:
    • Hybrid mismatch arrangements rules;
    • Excessive interest and financing expenses limitations (EIFEL) regime and;
    • Substantive Canadian-controlled private corporations.
  • Amendments to:
    • Alternative minimum tax for high-income individuals;
    • Intergenerational business transfers;
    • General anti-avoidance rule and;
    • Information requirements for claiming input tax credits for GST/HST purposes, back from the 2021 Federal Budget. 

As some of these measures are slated to come into effect in 2024, middle-market companies should consider proactive changes to ensure readiness for these new measures.

This article was written by Clara Pham, Daniel Mahne, Farryn Cohn, Sigita Bersenas, Cassandra Knapman, Olukayode Akinbosede, Elizabeth Ojesekhoba and originally appeared on 2023-11-21 RSM Canada, and is available online at https://rsmcanada.com/insights/tax-alerts/2023/federal-economic-statement-2023.html.

The information contained herein is general in nature and based on authorities that are subject to change. RSM Canada guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM Canada assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM Canada Alliance provides its members with access to resources of RSM Canada Operations ULC, RSM Canada LLP and certain of their affiliates (“RSM Canada”). RSM Canada Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM Canada. RSM Canada LLP is the Canadian member firm of RSM International, a global network of independent audit, tax and consulting firms. Members of RSM Canada Alliance have access to RSM International resources through RSM Canada but are not member firms of RSM International. Visit rsmcanada.com/aboutus for more information regarding RSM Canada and RSM International. The RSM trademark is used under license by RSM Canada. RSM Canada Alliance products and services are proprietary to RSM Canada.

DJB is a proud member of RSM Canada Alliance, a premier affiliation of independent accounting and consulting firms across North America. RSM Canada Alliance provides our firm with access to resources of RSM, the leading provider of audit, tax and consulting services focused on the middle market. RSM Canada LLP is a licensed CPA firm and the Canadian member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM Canada Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how DJB can assist you, please contact us.

New Financial Statement Disclosure Requirements for the Construction Industry and Enhanced Guidance Issued for the Percentage of Completion Method under ASPE

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The Accounting Standards Board has issued significant application guidance for entities utilizing the percentage of completion method (POC) for revenue recognition under Canadian Accounting Standards for Private Enterprises (ASPE). This will specifically affect the construction industry since the POC is utilized in accounting for revenue on long term contracts. Also, there are new disclosure requirements outlined in the ASPE revenue recognition standard which mandate specific details that companies operating in the construction sector must now include in their financial statements.

Next steps:

With the enhanced guidance issued, entities should review their existing methods to ensure they are following the new requirements. Entities will want to evaluate their methods to ensure they have selected  the appropriate basis for progress measurement, the type of costs for inclusion in the POC calculation (such as whether it is appropriate to include uninstalled materials or equipment when an input method is used) and the method of calculating amounts of revenue and costs recorded in the reporting period. Identifying contract costs and reviewing your process to allocate general costs to a specific contract will be an important consideration under the new amendments. Lastly, entities should review their processes to compare total contract costs to expected contract revenue and recognize an expected loss when total contract costs exceed contract revenue.

New disclosures:

The additional guidance added specific disclosure requirements to Section 3400 of the ASPE Accounting Handbook for any contracts accounted for using the percentage of completion method. These new disclosures provide users of the financial statements with information regarding the significant estimates and assumptions involved in calculating revenue using this method. An enterprise is required to disclose each of the following for contracts in progress at the end of the reporting period accounted for using the percentage of completion method: (a) The method or methods of measuring the degree of completion; (b) The aggregate amount of costs incurred and recognized profits (less recognized losses) to date; (c) The aggregate amount of advances received; (d) The aggregate amount of holdbacks withheld; and (e) Uncertainties affecting the measurement of the degree of completion.  These disclosures are required for entities with fiscal year ends beginning on or after January 1, 2022. These new disclosures make take time and effort to accumulate this information.

If you need assistance with implementing these amendments and new disclosure requirements, please reach out to your trusted advisor at DJB.

Included is an article authored by RSM Canada, some helpful insights on the percentage of completion method.

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