Bombardier Inc. v. The Queen

Bombardier Inc. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2011-01-28
Neutral citation
2011 TCC 48
File numbers
2008-1624(IT)G
Judges and Taxing Officers
Pierre Archambault
Subjects
Income Tax Act
Decision Content
Docket: 2008-1624(IT)G
BETWEEN:
Bombardier Inc.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
____________________________________________________________________
Appeals heard on September 13, 14, 15, 16 and 17, 2010,
At Montreal, Quebec.
Before: The Honourable Justice Pierre Archambault
Appearances:
Counsel for the appellant:
Wilfrid Lefebvre
Dominic C. Belley
Counsel for the respondent:
Pierre Cossette
Annick Provencher
____________________________________________________________________
JUDGMENT
The appeals from the assessments made by the Minister of National Revenue (Minister) for the 1990, 1991, 1992, 1993, 1994, 1995, 1996, 1997, 1998, 1999, 2000 and 2001 taxation years under Part I.3 of the Income Tax Act, R.S.C., c. 1 (5th Supplement) (Act) are allowed with costs to the appellant and the assessments are referred back to the Minister for reconsideration and reassessment on the basis that the only advances to be included in the capital of the appellant under paragraph 181.2(3)(c) of the Act are the following, in accordance with the attached reasons:
1990 taxation year: $ 73,781,000;
1991 taxation year: $ 66,463,000;
1992 taxation year: $ 207,820,000;
1993 taxation year: $ 224,301,347;
1994 taxation year: $ 423,237,117;
1995 taxation year: $ 477,658, 576;
1996 taxation year: $ 250,700,000;
1997 taxation year: $ 249,400,000;
1998 taxation year: $ 332,100,000;
1999 taxation year: $ 1,246,100,000;
2000 taxation year: $ 1,482,400,000; and
2001 taxation year: $ 1,304,100,000.
In addition, in making the reassessments for the 1990, 1991, 1992, 1993, 1994, 1995, 1996, 1997 and 2000 taxation years, the Minister will make the adjustments set out in the consent to judgment dated September 13, 2010, a copy of which is attached.
Signed at Ottawa, Canada, this 28th day of January 2011.
“Pierre Archambault”
Archambault J.
Translation certified true
On this 27th day of May 2011
François Brunet, Revisor
Citation: 2011 TCC 48
Date: 20110128
Docket: 2008-1624(IT)G
BETWEEN:
Bombardier Inc.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGEMENT
Archambault, J.
[1] The provisions concerning tax on large corporations, commonly referred to as capital tax, were added to the Income Tax Act as Part I.3 as a result of the budget introduced by the Hon. Michael H. Wilson on April 27, 1989, to help reduce the federal deficit. The tax was abolished in 2006. Except for the parties themselves, for whom the amounts in issue are significant, there might be little interest for anyone in reading these reasons. However, among studious readers of tax cases, they might generate some interest, since they will show how a judge who has rendered a decision in favour of the respondent in respect of the application of that tax to advances on contracts[1] can now render a decision against the same party, even though the facts are essentially the same.
[2] In this case, Bombardier Inc. (Bombardier) has appealed from the assessments made by the Minister of National Revenue (Minister) for the 1990 to 2006 taxation years. First, Bombardier informed the Court that it was restricting the dispute to the years from 1990 to 2001, because the parties had agreed that new notices of objection would be filed regarding 2002 to 2006.[2]
[3] The notices of appeal raise a number of issues, some of which have been resolved by the mutual consent of the parties. Accordingly, the appeals by Bombardier must be allowed, at least to give effect to the settlement negotiated by the parties.
[4] Essentially, there is only one issue to be resolved, and that pertains to the inclusion of certain amounts received from customers as advances on contracts that had not yet been performed in full in Bombardier’s taxable capital.
[5] Because Bombardier manufactures and sells aircraft and rail transport equipment, the amounts affected by the assessments are significant, as the following table shows:
In $000
Years
Aerospace Division
Transportation Division
Amount declared by Bombardier
Total of advances added
1990
68,866
26,130
94,996
1991
190,706
10,428
201,134
1992
167,053
163,379
330,432
1993
270,171
172,942
443,113
1994
499,576
256,287
60,000
695,863
1995
545,126
223,439
60,000
708,565
1996
398,471
240,449
187,049
451,904[3]
1997
313,328
209,399
40,500
482,734[4]
1998
1,048,220
332,113
79,013
1,313,359[5]
1999
2,042,772
598,497
204,871
2,440,002[6]
2000
2,351,151
772,564
3,123,715[7]
2001
2,117,015
571,840
1,304,029
1,384,826
[6] The parties stated the issue as follows in the partial agreement as to the facts[8] (agreement as to the facts), from which the figures in the preceding table were taken:
[Translation]
93. Did the amounts identified as “advances” or “advances and progress billings” as set out in the note regarding “inventory” in the appellant’s financial statements, comprise advances that appear on the appellant’s balance sheet for each of the years in issue, within the meaning of subsection 181(3) and paragraph 181.2(3)(c) of the Act?
94. In the affirmative, do these amounts and the amounts shown in liabilities in the balance sheet under “advances” or “advances and progress billings in excess of related costs” constitute items that must be excluded from taxable capital under paragraph 181.2(3)(b) of the Act and that consequently may not be added to taxable capital under paragraph 181.2(3)(c) of the Act?
Contractual context
[7] There is no dispute between the parties as to the facts that are relevant for the purposes of these appeals. Not only did the parties file an agreement as to the facts but, on the basis of the admissions of fact made by Bombardier during the trial, the respondent also considered that it was no longer necessary to call its auditor to testify. The dispute between the parties arises out of the application of the provisions of the Act and the application of accounting principles to determine the value of the advances that appear in the balance sheet. Bombardier called its Vice-President responsible for financial agreements, whose role is to ensure that the financial statements comply with generally accepted accounting principles (GAAP), and its Vice-President in charge of tax affairs, who confirmed the figures relating to the amounts that Bombardier had reported as income for tax purposes, in particular under paragraph 12(1)(a) of the Act, and in relation to the deductions Bombardier claimed under paragraph 20(1)(m) of the Act. For 2000, the total amount of advances received by Bombardier, in particular, had been declared under paragraph 12(1)(a) and deducted as a reserve under paragraph 20(1)(m) of the Act.
[8] This is the statement of facts taken from the agreement as to the facts:
[Translation]
FACTS
1. The appellant operates, inter alia, (i) a business for the development, manufacture and sale of aircraft and aircraft parts and components; and (ii) a business for the manufacture and sale of public transportation equipment (train cars, etc.).[9]
2. Its fiscal year and taxation year run from February 1 to January 31 of each year.
3. The contracts that the appellant enters into with its customers for the sale of aircraft and aircraft parts and components and public transportation equipment cover the usual points found in agreements of that nature: (i) a description of the item to be produced and delivered; (ii) the price and terms of payment; (iii) terms relating to delivery; (iv) the parties’ liability; and (v) all of the other rights and obligations of the purchaser and the vendor. On this point, the parties agree that the contracts found at tabs 69 and 70 of the Compendium are standard form contracts that are representative of all contracts signed by the appellant during the period under appeal.
4. In accounting terms, the appellant recognizes its long-term contracts in accordance with the generally accepted accounting principles of Canada (“GAAP”), to the extent that there is a note to the financial statements that explains the calculation of the inventory.
5. The appellant’s financial statements for the years in issue were prepared in accordance with GAAP.
Aerospace Division (aircraft sale contracts)
6. The income from contracts for aircraft sales is recognized as work progresses, on the basis of the delivery date.
7. Contracts for aircraft sales provide that amounts calculated on the basis of the purchase price must be paid by the purchaser on predetermined dates, according to a timetable that generally starts when the contract is signed and ends with delivery.[10]
8. Subject to the additional details and information to be provided by the ordinary and expert witnesses called to testify, where applicable, the parties also state that the appellant presents those contracts as follows in its financial statements:
1990-1995 FISCAL YEARS[11]
(a) Before delivery, the amounts received from customers for all contracts are applied against the costs incurred;
(b) The amount by which the costs incurred exceed the amounts received from customers for all contracts is shown in assets on the balance sheet under the item “inventory”. The amounts received from customers are shown in the note in the financial statements concerning inventory on the “advances received” line;
(c) At delivery: (i) the total proceeds of the sale are recognized as income on the profit statement; and (ii) total costs of manufacturing are shown under the item “cost of sales and operating expenses” in the profit statement;
1996-2001 FISCAL YEARS
(d) Before delivery, the amounts received from customers for a particular contract are applied against the costs incurred for the contract;
(e) For a particular contract, if the costs incurred are greater than the amounts received from the customers, the excess is shown in assets on the balance sheet under the item “inventory”. The amounts received from customers are shown in the note in the financial statements concerning inventory on the “advances” or “advances and progress billings” line;
(f) If the amounts received from the customers for a particular contract are greater than the costs incurred for the contract, the excess is shown in liabilities on the balance sheet under the item “advances” or “advances and progress billings in excess of related costs”; and
(g) At delivery: (i) the total proceeds of the sale are recognized as income on the profit statement; and (ii) the total manufacturing costs are entered under the item “costs of sales and operating expenses” in the profit statement.
...
Transportation Division (public transportation equipment) and aircraft parts and components
10. Income from long-term contracts is recognized as work progresses, on the basis of costs incurred.
11. The sales contracts for public transportation equipment and aircraft parts and components provide that amounts must be paid by the purchaser on predetermined dates or at the occurrence of predetermined events generally referred to as “milestones”.
12. Subject to the additional details and information to be provided by the ordinary and expert witnesses called to testify, where applicable, the parties also state that the appellant presents those contracts as follows in its financial statements:
1990-1995 FISCAL YEARS
(a) Before delivery, the amounts received from the customers for all contracts are applied against the costs incurred and the associated profit, where the funds are received;
(b) The amount by which the costs incurred and the associated profit exceed the amounts received from the customers for all contracts is shown in assets on the balance sheet under the item “inventory”. The amounts received from customers are shown in the note in the financial statements concerning inventory on the “advances received” line;
(c) Income is recognized in the profit statement as work progresses on the basis of the costs incurred. The related costs are entered under the item “cost of sales and manufacturing expenses” in the profit statement, generally as costs are incurred;
1996-2001 FISCAL YEARS
(d) Before delivery, the amounts received from customers for a particular contract are applied against the costs incurred for and profits associated with the contract, when the money is received;
(e) For a particular contract, if the costs incurred and the associated profits are greater than the amounts received from the customers, the excess is shown in assets on the balance sheet under the item “inventory”. The amounts received from customers are shown in the note in the financial statements concerning inventory on the “advances” or “advances and progress billings” line;
(f) For a particular contract, if the amounts received from the customers are greater than the costs incurred and the associated profits, the excess is shown in liabilities on the balance sheet under the item “advances” or “advances and progress billings in excess of related costs”; and
(g) Income is recognized in the profit statement as work progresses on the basis of the costs incurred. The related costs are entered under the item “costs of sales and operating costs” and the associated profit is shown in the profit statement, generally as costs are incurred.
[Emphasis added.]
[9] The trial lasted three and a half days, two days of which were devoted to the testimony of two eminent accounting experts. The expert who testified at the request of Bombardier is Nadi Chlala, fca, fcma, an academic consultant; the expert who testified for the respondent is Daniel B. Thornton, Phd, fca, a professor of accounting at Queen’s University. Both have impressive backgrounds in terms of both education and professional experience. As was, of course, to be expected, the two experts had different opinions regarding the amount of the advances that had to be included in the calculation of Bombardier’s taxable capital. Both submitted written expert opinions. Mr. Chlala’s was 23 pages long, and Mr. Thornton’s was 57. The differences between the opinions stated by the two experts can perhaps be explained in part by the nature of the questions put to them. The questions put to Mr. Chlala were as follows:[12]
[TRANSLATION]
Question 1:
Please identify and describe:
(a) The conceptual bases of the financial statements;
(b) The components of the financial statements;
(c) The role of the supplementary notes;
(d) The principles relating to the recognition, measurement and disclosure of the information comprising the components of the balance sheet.
Question 2:
How are the assets and liabilities associated with long-term contracts (shown in accordance with GAAP) recognized, measured and shown in the financial statements of Bombardier Inc.?
Question 3:
What is the book value of the advances paid to Bombardier Inc. at the end of the year that appear in its balance sheet, shown in accordance with GAAP, for each of the 1990 to 2006 taxation years?
Question 4:
For any of the 1990 to 2006 taxation years, does the amount shown in the supplementary notes to the financial statements of Bombardier Inc. represent the book value of the advances paid to it at the end of the year that must appear in liabilities on the balance sheet of Bombardier Inc., shown in accordance with the GAAP?
Question 5:
How is International Standard IAS 11 from before 1995 different from U.S. standard SOP 81-1 which Bombardier Inc. used for presenting its balance sheets on the closing dates in the 1990 to 2006 fiscal years?
Question 6:
Is there a connection between the method of recognizing income associated with long-term contracts and the characterization of the amounts received from customers as advances?
[Emphasis added.]
[10] The questions put to Mr. Thornton, which he answered in his report (Exhibit I‑1), were as follows:
Opinion Sought by Justice
05. Justice has asked me for an opinion as to the nature of the Amounts[13] for accounting purposes, In particular, Justice has asked me to respond to the following four Questions:
1. According to GAAP, what is the nature and substance of the payments made by Bombardier’s customers pursuant to the contracts?
2. Were the Appellant’s balance sheets (and financial statements) in accordance with GAAP with respect to those payments?
3. Are the advances, as detailed in the notes to the financial statements, "reflected" in the balance sheets of Bombardier?
4. Are the notes to the financial statements an integral part of the balance sheets?
[Emphasis added.]
[11] I will come back to this, but to summarize, the position stated by each of the expert witnesses on the central issue, the amount or the value of the advances shown in Bombardier’s balance sheet, is different. According to Mr. Chlala, the value of the advances is the value shown in liabilities in the body of the balance sheet; according to Mr. Thornton, it is the value found in the “advances” account, the amount of which is shown in the supplementary notes.
[12] It is important to note that for the purposes of this proceeding, the parties have agreed that Bombardier’s financial statements were prepared in accordance with GAAP. Not only is that a fact agreed to in the agreed statement of facts (Exhibit A‑6, para. 5), but in their testimony and their respective reports, the two experts agreed to that. Mr. Thornton wrote the following in his report, at page 55, for example, when he answered the question “Was the accounting for advances in accordance with GAAP?”: “Yes, at least until 2003 when the definition of GAAP changed in Canada. Even after 2003, I have no reason to assert that the financial statements did not comply with GAAP”.[14]
[13] When Parliament enacted Part I.3 of the Act, concerning the capital tax on large corporations, it chose to use financial statements, in particular corporations’ balance sheets, to determine the values and items that must be included in calculating a corporation’s capital.[15] For that reason, it is important to have a clear understanding both of the accounting approach adopted and of GAAP, to decide the issue raised by this litigation: the amount of the advances that must be included in calculating the capital. Mr. Chlala’s report is very instructive on these issues, and I will quote extensively from it:
[Translation]
Answer to question 1:[16]
Financial statements comprise the main method of communicating financial information. They contain financial information relating to transactions and facts both past and present. The main purpose of financial statements is to enable users to assess, compare and predict the profitability, solvency and liquidity of a business.
Generally accepted accounting principles (GAAP) are “general principles and conventions of general application, as well as rules and procedures that determine what accepted accounting practices are at a particular point in time”. GAAP are constantly evolving. [Emphasis by Mr. Chlala.]
Canadian GAAP are prescribed by Accounting Standards Board (AcSB), which publishes its recommendations in the Handbook of the Canadian Institute of Chartered Accountants (CICA Handbook). The AcSB makes its recommendations using a frame of reference (conceptual accounting framework). The AcSB’s recommendations deal with rules and procedures (standards) for recognizing, measuring (assessing) and presenting information (disclosure or information to be provided).
To prepare its financial statements in accordance with GAAP, the business must refer to the CICA Handbook. Because the Handbook does not provide answers to all accounting questions, the accounting standards provide for the possibility of consulting other references sources, including those published by the Financial Accounting Standards Board (FASB) and the American Institute of Certified Public Accountants (AICPA), and by the International Accounting Standards Board (IASB).
The financial statements contain the following four tables (which comprise the “body of the financial statements”):2
____________
2 The terms “financial statement tables” and “body of the financial statements” are synonymous.
§ A balance sheet, which is a representation, as of a particular date, of the financial situation of a business in the form of assets (economic resources), liabilities (obligations) and equity (including share capital, surplus capital contributions and undistributed profits).
...
Financial statements are supported by explanatory and supplementary information shown in the supplementary notes, to make the financial statements more intelligible.
(a) Conceptual bases of financial statements
The conceptual bases of financial statements consist of a framework on which accounting standards are based. The framework relates to (1) accounting principles, (2) the objective of financial statements, (3) nature of the information in financial statements, and (4) the components of financial statements.
1. The basic principles for the recognition, measurement and presentation of information in financial statements include:
a. Going concern, which assumes that the business ordinarily carries on business, that is, that it has no intention or obligation to cease carrying on business or substantially reduce the scope of its business. This convention holds that the business is considered to be able to carry out the transactions in question and honour its commitments[17] in the foreseeable future. Otherwise, the financial statements must be prepared on a different basis. For instance, unless there is evidence to the contrary, a corporation recognizes a long-term contract currently being performed for the manufacture and delivery of a good to a customer in its books on the hypothesis that it will meet its commitments and is not in default at the end of the contract.
...
c. Complete information, which requires that the financial statements provide all necessary information about events or accounting practices that have a significant impact on changes in the future profits and situation of the business.
d. Precedence of substance over form is stated because the substance of the transactions and other events is not always consistent with what the apparent legal structure indicates. In order for the information to provide a reliable representation of the transactions and other events it is meant to represent, it is necessary that they be recognized and measured in a manner consistent with their substance and with the real economic or commercial situation and not only with their legal form.[18] This means, for example, that the business measures the book value of its assets and liabilities on the balance sheet on the basis of the commercial substance of the underlying transaction or event. For accounting purposes, there is no other commercial substance to be “discovered” in supplementary information.
2. The objective of financial statements is to facilitate economic decision-making by investors and creditors. To achieve that objective, it is necessary that the financial statement tables be complete. For example, the balance sheet must present all of a corporation’s economic resources, obligations and equity.
3. In addition, in order for the information presented in financial statements to be useful, it must have certain qualitative characteristics. For example, the information presented in the balance sheet must be (1) understandable, (2) relevant (influence decisions by users), (3) reliable and (4) comparable. The CICA Handbook specifies that “reliable” statements are:
a. Faithful: this means that the recognition, measurement and presentation (disclosure) of facts and events in financial statements is consistent with their commercial substance, which may call for “examining a set of related transactions and facts taken as a whole.”
b. Verifiable: ...
c. Neutral: …
d. Prepared in accordance with concepts of prudence: this means that “in situations of uncertainty, prudent estimates are done in order to avoid any over-valuation of assets, proceeds and profits, or, conversely, any under-valuation of assets,[19] charges and losses.”
e. In accordance with the commercial or economic substance and reality of the transactions and other events and not merely with their legal form (see also the accounting principle supra).
4. The components (elements, headings or items) to be included in financial statement tables are defined in the next section. An amount that does not meet the definition of a component may not beshown as such in the tables (body of financial statements) and vice versa. For example, an account in credit may not be included in the balance sheet as a liability if it does not meet the definition of a liability. As well, an account in credit that meets the definition of a liability may not be omitted from the balance sheet.[20] In both cases, the total liabilities in the balance sheet would be incorrect and would not represent the total amount of the obligations of the business on a specified date. Mere presentation of a liability in a note that is omitted from the balance sheet would not comply with GAAP and would create confusion.
(b) Components of financial statements
Components (or headings) are the main categories of elements (or items) that are included in the four financial statement tables. The only components of the balance sheet are: assets, liabilities and equity. [Emphasis by Mr. Chlala.]
1. The CICA Handbook defines the three components of the balance sheet as follows:
a. Assets are “economic resources controlled by an entity as a result of past transactions or events and from which future economic benefits may be obtained”.
b. 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.”
c. Equity is “the ownership interest in the assets of a profit-oriented enterprise after deducting its liabilities. While equity of a profit-oriented enterprise in total is a residual, it includes specific categories of items, for example, types of share capital, contributed surplus and retained earnings.”
...
3. Transactions or events that do not meet the definition of a component are excluded from the balance sheet or profit statement.[21] However, they must be described in the supplementary notes to the financial statements where that information allows for better understanding of the financial statements. The amounts shown in the supplementary notes do not constitute assets and liabilities that have been omitted from the balance sheet prepared in accordance with GAAP.
4. To present a component in the financial statement tables, the business must:
a. Identify the transactions or events that meet the definition of a component.
b. Establish the nature and economic substance of the transaction or events to be recognized and comply with the standards prescribed by the AcSB for those transactions in terms of recognition, measurement and disclosure of information. For example, the applicable accounting standards for recognizing a loan from a financial institution and for recognizing an advance from a customer on a long-term contract are not the same, given that the substance of the two transactions is different:
i. A loan from a financial institution is a financial liability that must be settled (repaid) by payments in cash (that is, the debtor has a financial obligation).
ii. An advance from a customer on a long-term contract is a non-financial liability that is settled (repaid) by performance of the services provided for in the contract, not by payment of a cash amount (that is, the debtor has an obligation of “performance” or of “results” and not an obligation to repay in cash).
Accordingly, the financial statement tables must include all of the components as defined in the CICA Handbook. For example, the balance sheet must include all assets, all liabilities and all equity as defined in the CICA Handbook. The balance sheet must include, on its face, all of the financial resources of the business. [Emphasis by Mr. Chlala.]
(c) Role of the supplementary notes
The presentation (disclosure) of additional information by supplementary notes allows for better understanding of the content of the tables. For example, a note relating to an amount shown as a component in the balance sheet could enable the reader of the financial statements to understand the context of the transactions of the business, assess the risk of operating the business and be informed about the scope of the accounting estimates and the uncertainties associated with the measurement of that component. That is why it is considered that the supplementary notes are an integral part of the financial statements.
Notes to financial statements (supplementary notes) include:
§ narrative descriptions or explanations concerning the amounts shown in the tables,
§ schedules that provide details about the calculation of the book value of the components shown in the tables, and
§ supplementary information including amounts that do not represent components and that are accordingly excluded from the tables, such as commitments and contingencies.
1. The recommendations in the CICA Handbook (and other sources of GAAP, where applicable) require disclosure of supplementary information in notes. For example, the CICA Handbook requires the presentation of certain schedules in supplementary notes that show the detailed calculation of a component shown in the tables. A business that did not provide this additional information will be in violation of GAAP.[22]
2. Supplementary schedules may deal with measurement of a specific component (i.e. an asset, a liability or equity) by showing the details of:
a. The similar elements grouped together.
i. For example, a schedule may identify separately the amounts used in calculating the component “other liabilities” shown in the balance sheet. In that situation, each of the amounts to be paid or incurred represents a liability in itself. In that case, the purpose of the schedule is not to present liabilities not recognized in the balance sheet, since the balances of the various amounts to be paid are combined to determine a single amount under the heading “other liabilities” in the balance sheet, which is added to the other liability items to determine the total liabilities in the balance sheet.
b. Debits and credits that comprise separate accounts in the books that were taken into account in calculating the book value of an asset, a liability or an equity element. Those debits and credits are not themselves assets, liabilities or equity elements; they are simply taken into account in determining the measurement of the book value of an asset, a liability or an equity element. In this case, the measurement of the book value of elements shown in the balance sheet may be set out in a schedule, showing the details of the balances in debit and credit accounts. For example, the balance of a capital account on the acquisition cost, and accumulated depreciation, must be disclosed, but only the net amount represents an asset shown in the balance sheet.
3. As set out in paragraph 1000.25 of the CICA Handbook, supplementary notes, “which are useful for the purpose of clarification or further explanation of the items in financial statements, while an integral part of financial statements, are not considered to be an element”. Paragraph 1000.41 states, concerning recognition, that “recognition is the process of including an item in the financial statements”. Paragraph 1000.42 adds that “recognition means inclusion of an item within one or more individual statements and does not mean disclosure in the notes to the financial statements”. The CICA Handbook therefore stipulates unequivocally that the supplementary notes may not contain an asset, liability or equity element that is not recognized in the balance sheet. [Emphasis by Mr. Chlala.]
To summarize:
§ A business may not exclude components from the tables and simply disclose them in notes. For example, a business must present all elements in the balance sheet that meet the definition of asset or liability. In other words, the balance sheet must be complete. The total assets and total liabilities appearing in the balance sheet may not be under-valued because that would give an incomplete picture and would skew the ratios used by investors and creditors to assess the financial health of a business.
§ The schedules that explain the measurement of components in accordance with GAAP in no way replace the components. For example, if a liability shown in the balance sheet refers specifically to a note that shows the detailed calculation of the liability, the information in that note does not provide another measurement of the book value of the liability. If there is a liability, it must be shown in the balance sheet and not merely disclosed in notes. The measurement of the book value of that liability element must be what is included in the total of the “liability” component in the balance sheet (total liabilities in the balance sheet). The balance sheet must provide information about the total economic resources and obligations of the business and may not be “corrected” by a note. [Emphasis by Mr. Chlala.]
§ Paragraph 1000.42 of the CICA Handbook specifies that supplementary notes “either provide further details about items recognized in the financial statements, or provide information about items that do not meet the criteria for recognition and thus are not recognized in the financial statements”. [Emphasis by Mr. Chlala.]
§ Notes may not be used to camouflage components omitted from the balance sheet or re-value a component in the balance sheet. Schedules and supplementary reconciliations shown in notes do not replace the components shown in the balance sheet and do not give another measurement of those components. In other words, as paragraph 1400.11 of the CICA Handbook provides, the notes “clarify or further explain the items in the financial statements. They are not, however, to be used as a substitute for proper accounting treatment” and must not have the effect of rectifying accounting treatment that is not in accordance with GAAP. [Emphasis by Mr. Chlala.]
(d) Principles relating to recognition, measurement and disclosure of information about components of the balance sheet
Presentation of the three components of the balance sheet (assets, liabilities and equity) is the result of application of GAAP relating to the recognition and measurement of transactions and events.
1. A business follows the following procedures when it prepares its balance sheet, in the order shown: …
2. Correct measurement of the components in the balance sheet is not sufficient for the assessment of the performance of a business. The financial statements must also contain supplementary information, in particular schedules that present the detailed calculation of significant components. This is a requirement of the accounting rules, the purpose of which is to meet the criterion of complete information[.] However, presentation of these supplementary schedules should not serve as a pretext for underestimating an asset or a liability in the balance sheet.
For example, the purpose of separate presentation of the debit account “capital assets at cost” and the corresponding credit account “accumulated depreciation” is not to correct the measurement of the “capital assets” component.17 Whether that disclosure is made in a specific note or by presentation of the account and its counterpart side by side in the balance sheet, it does not alter either the amount of the capital assets or the total amount of assets (the economic resources) recognized in the balance sheet. In other words, regardless of where the disclosure is made, the business must show an asset in its balance sheet measured as the net amount of the cost of capital assets less accumulated depreciation.
____________
17 In English, the counterpart account is referred to as the “contra account”[.]
To summarize,
§ Paragraph 1000.41 of the CICA Handbook provides that recognition “is the process of including an item in the financial statements of an entity. Recognition consists of the addition of the amount involved into statement totals together with a narrative description of the item (e.g., “inventory” …).” [Emphasis by Mr. Chlala.]
§ Paragraph 1000.42 further provides that recognition “means inclusion of an item within one or more individual statements and does not mean disclosure in the notes to the financial statements. Notes either provide further details about items recognized in the financial statements, or provide information about items that do not meet the criteria for recognition and thus are not recognized in the financial statements.” [Emphasis by Mr. Chlala.]
§ Paragraph 1000.53 of the CICA Handbook stipulates that measurement is “the process of determining the amount at which an item is recognized in the financial statements”. [Emphasis by Mr. Chlala.]
Accordingly, the balance sheet must be complete and include all components as defined by the CICA Handbook. The business may not recognize an asset or liability by supplementary notes. Presentation in supplementary notes provides details about the recognition and measurement of the book value of the components, for example an asset such as inventories. [Emphasis by Mr. Chlala.]
Question 2:
How are the assets and liabilities associated with long-term contracts (shown in accordance with GAAP) recognized, measured and shown in the financial statements of Bombardier Inc.?
Answer to question 2:
Bombardier Inc. (Bombardier) measures the assets or liabilities associated with long-term contracts underway in accordance with Canadian GAAP, referring to the specific accounting standards in the American frame of reference, because the CICA Handbook does not contain any specific recommendation in this regard.
1. To comply with Canadian GAAP, Bombardier has to measure the components of the balance sheet associated with long-term contracts underway on the basis of the American standard SOP81-1 and in accordance with the American recommendations in the Audit and Accounting Guide: Construction Contractors of the AICPA, as follows:
a. assets, which represent amounts ultimately payable by customers for work done, are measured in the amount of the “amounts by which costs exceed billings”,19 and
____________
19 Billings is a general term that includes amounts received from the customer and amounts to be received from the customer on a long-term contract. The word “advance” is sometimes used to mean amounts received before work begins (see answer to question 3).
b. liabilities, which represent unearned amounts that will require that costs be incurred in future, are measured in the amount of the “amounts by which billings exceed costs”. [Emphasis by Mr. Chlala.]
2. SOP81-1 was developed to take into account the specific operating context of long-term contracts such as contracts performed by enterprises operating in the aeronautics industry. The special accounting rules thus developed take into account the unique nature of the long-term contracts which may be spread over several fiscal years and which may call for the significant expenses to be incurred in order to perform the work provided for in the contracts.
3. Bombardier measures the book value of the assets and liabilities associated with each long-term contract underway in accordance with the rules in SOP 81-1 and discloses supplementary information in notes showing the detailed calculation of those values, taking into account the conceptual accounting framework in the CICA Handbook. For example:
a. Bombardier presents its balance sheet in accordance with the going concern h