Understanding ASPE Section 1625, Comprehensive Revaluation of Assets and Liabilities

2 | Understanding ASPE Section 1625, Comprehensive Revaluation of Assets and Liabilities

Four questions for private business owners: Comprehensive Revaluation of Assets and LiabilitiesA better working world begins with asking better questions. Better questions lead to better answers. To help preparers of financial statements with Canadian accounting standards for private enterprises (ASPE) Section 1625, Comprehensive Revaluation of Assets and Liabilities, we’ve summarized the key aspects of the section and offer relevant practical considerations for private mid-market companies through four commonly asked questions.

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What is a comprehensive revaluation of assets and liabilities?

A comprehensive revaluation of assets and liabilities results in a revision of a reporting entity’s assets and liabilities, including in some cases the recognition of previously unrecognized assets such as intangible assets or goodwill, to their fair value as of the date that a certain event takes place. Comprehensive revaluations of assets and liabilities can be divided into two treatments, “push-down accounting” and “fresh start accounting,” which are explained below.

When is a comprehensive revaluation of assets and liabilities appropriate?

Paragraph 1625.04 indicates the conditions that are required to be satisfied for an enterprise’s assets and liabilities to be comprehensively revalued:

(a) All or virtually all of the equity interests in the enterprise have been acquired, in one or more transactions between non-related parties, by an acquirer who controls the enterprise after the transaction or transactions; or

(b) The enterprise has been subject to a financial reorganization, and the same party does not control the enterprise both before and after the reorganization;

and in either situation new costs are reasonably determinable.

The comprehensive revaluation of assets and liabilities in the first context above is known as push-down accounting and in the second context above, it is known as fresh start accounting.

As indicated in paragraph 1625.03(b), a financial reorganization is a 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 on the enterprise.

As further explained in paragraph 1625.15, an enterprise in financial difficulty may undergo a financial reorganization under a statutory process (such as the Companies’ Creditors Arrangement Act) or otherwise.

Regardless of the process for the financial reorganization, when the result is a substantial realignment of the non-equity and equity interests, through dilution of or changes in rights and entitlements, financial statements would reflect the revised relationships between creditors and shareholders.

To learn more about these items or for application guidance, please contact our Private Mid-Market practice at privatecompanyinfo@ca.ey.com.

Understanding ASPE Section 1625, Comprehensive Revaluation of Assets and Liabilities | 3

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What should an enterprise disclose related to a comprehensive revaluation of assets and liabilities?

The financial statement disclosures that an enterprise should provide are included in paragraphs 1625.45–1625.48, and differ between whether a comprehensive revaluation of assets and liabilities was undertaken as a result of the application of push-down accounting or fresh start accounting. Financial statement disclosures related to a comprehensive revaluation of assets and liabilities should also be provided in both the period in which they are first revalued as well as the following period.

Generally, the following disclosures should be provided:

� The date the comprehensive revaluation of assets and liabilities was applied, the date or dates of the purchase transaction that led to the application of push-down accounting or the date of the financial reorganization

� A description of the situation resulting in the application of push-down accounting or a description of the financial reorganization

� The amount of the change in each major class of assets, liabilities and shareholders’ equity resulting from the application of the comprehensive revaluation of assets and liabilities

To learn more about these items or for application guidance, please contact our Private Mid-Market practice at privatecompanyinfo@ca.ey.com.

How is a comprehensive revaluation of assets and liabilities accounted for?

Acquisition of an enterprise Financial reorganization

Application Comprehensive revaluation of assets and liabilities is optional (not required).

Comprehensive revaluation of assets and liabilities is required.

Measurement Assets and liabilities are comprehensively revalued based on the fair values as determined in accordance with Section 1582, Business Combinations, as at the date of acquisition.

Assets and liabilities are comprehensively revalued as of the date of the financial reorganization based on the values established in the negotiation of claims among non-equity and equity interests and shall not exceed the fair value of the enterprise as a whole, if known. When the financial reorganization does not establish values for identifiable individual assets and liabilities, values are to be estimated on a basis consistent with Section 1582.

Intangible assets and goodwill Previously unrecognized intangible assets and goodwill as determined in accordance with Section 1582 shall be recognized.Only assets and liabilities of the acquired enterprise would be recorded. For example, if the acquisition was financed by debt, the acquired enterprise would not recognize the debt unless it was a liability of the acquired enterprise.

Previously unrecognized intangible assets as determined in accordance with Section 1582 may be recognized, but goodwill is not recognized.

Impact on shareholders’ equity The portion of retained earnings that has not been included in the consolidated retained earnings of the acquirer or is not related to any continuing non-controlling interests in the enterprise shall be reclassified to either share capital, contributed surplus or a separately identified account within shareholders’ equity. The same treatment accorded to retained earnings is also applied to other shareholders’ equity accounts.

Retained earnings that arose prior to the reorganization shall be reclassified to share capital, contributed surplus or a separately identified account within shareholders’ equity.

Presentation of revaluation adjustment

The revaluation adjustment shall be accounted for as a capital transaction and recorded as either share capital, contributed surplus or a separately identified account within shareholders’ equity.

The revaluation adjustment shall be accounted for as a capital transaction and recorded as share capital, contributed surplus or a separately identified account within shareholders’ equity.

Transaction costs N/A – transaction costs would be incurred and recognized by the acquirer and not pushed down to the subsidiary.

Expenses directly incurred in effecting a financial reorganization shall be accounted for as a capital transaction.

Prior period figures Prior period figures are included in the financial statements.

Generally, prior period figures are not included in the financial statements.

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1567865 ED NoneThis publication contains information in summary form, current as of the date of publication, and is intended for general guidance only. It should not be regarded as comprehensive or a substitute for professional advice. Before taking any particular course of action, contact Ernst & Young or another professional advisor to discuss these matters in the context of your particular circumstances. We accept no responsibility for any loss or damage occasioned by your reliance on information contained in this publication.

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