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Notes about Simulation...

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With permission of the CICA, a consortium made up of members from each of the four provincial CA professional programs updated the following simulation and evaluation guide to reflect the CICA Handbook standards, the Tax laws and the UFE Candidates Competency Map in effect as of March 31, 2011. Any changes to the original material are the sole responsibility of the consortium and have not been reviewed or endorsed by the CICA. The assumption was made that private companies will apply Accounting Standards for Private Enterprises (ASPE) and public companies International Financial Reporting Standards (IFRS)*. The assumption was also made that the accounting framework had been in place for several years. Dates in the simulation have not been changed. * Note: For the 2011 UFE, a candidate might be required to determine whether ASPE or IFRS is appropriate under the circumstances.

© 2011 Institute of Chartered Accountants of Ontario

Paper II - SIMULATION 3 (70 minutes) You, CA, have just been hired by Doctor Robert Blake (Doctor Bob) as a part-time accountant for his new clinic located in the province of Quebec. From your interview, you have learned that Doctor Bob moved to your city from another city within Quebec. Prior to that, he was studying medicine overseas. He arrived in Canada on February 28, 2006, and met all the requirements to practice medicine in the province. He has many questions about setting up his own medical practice, but is aware that according to provincial tax legislation he cannot incorporate his practice in Quebec. It is now February 1, 2007, and it’s your first day working for Doctor Bob. He calls you into his office to explain what he needs your help with. Doctor Bob: “Welcome aboard, CA! I’m so glad to have your help. As you know, I just recently rented this office space and opened my own clinic. I currently have a small growing practice, and up to now I have been doing all my record keeping manually. But I have signed a contract with a software vendor that automates medical practices (Exhibit I). I have committed to purchasing their medical practice management system but would like you to take a look at it and recommend the features and modules that I should select. Could you also highlight any concerns related to the system that I should be aware of?” CA: “I can take a look at that.” Doctor Bob: “Also, much of my practice is providing medical services to Aboriginal people. Partial funding for these services is provided through a Health Canada program called the First Nations Health Care Program (FNHCP). This program funds health-care services that are not covered by Provincial health-care programs. I bill my services directly to FNHCP. Now, Health Canada, which is a federalgovernment department, sent me a letter (Exhibit II). I’ve read the letter but I don’t fully understand it. Am I being audited and if so, should I be concerned? I am counting on your expertise to explain to me the purpose behind their procedures and how the information that I have been asked to provide assists them in conducting those procedures. And, if they’re concerned, why are they only looking at some of my invoices? “Lastly, I would like your assistance in filing my 2006 taxes. Here are my records (Exhibit III). I am not familiar with the Canadian tax rules and for this reason I have not filed a return yet. As I mention in my records, I don’t think I will have to pay any tax because my practice lost money in 2006, and taxes were deducted from my payroll cheques at the clinic where I first worked on my arrival in Canada. Since I lost money on my practice, I would like you to do my taxes as soon as possible because I should be able to recover some of the tax that was withheld. I could sure use the cash, since I have spent so much money getting my practice established.” You collect the records, sit down at your desk and get to work.

© 2011 Institute of Chartered Accountants of Ontario

Paper II - SIMULATION 3 (continued)  EXHIBIT I MEDICAL PRACTICE MANAGEMENT SYSTEM Description of Mydoctor software Mydoctor is an electronic medical record system written and supported by a local software developer. Key features of Mydoctor are: • • • • •

Application service provider system – does not require storage on the doctor’s hardware; the system remotely accesses Mydoctor’s server through a broadband high-speed wireless internet connection; Compatible with some major accounting and financial systems software; Modular – with a variety of different modules available; Scalable data storage on Mydoctor’s secure server environment; and Free super-user training for one user that includes 20 hours of online instruction.

As discussed above, the system is modular. This allows the clients to tailor the system to their specific needs by choosing only those modules that are necessary for their business. The purchase of Mydoctor costs $20,000 for the initial licensing and installation, and includes the features described above. Also included in the cost are two modules or features to be selected by the client from the list below. Additional modules and features can be purchased for $5,000 each. An annual maintenance contract is also available for a fee of $2,000 and provides for access to software updates, unlimited e-mail queries, two hours of telephone support per month and internet. The following modules and features are available: • • • • •

Patient charting system and data storage (Charting Module); Doctor-patient scheduling (Scheduling Module); Financial interface to general ledger (General Ledger Module); Interface to government and insurance carriers’ payment systems through universal service codes (Payment Module); Interface to internet-based database to provide patients with their test results, recommend dosages of over-the-counter medications, track blood sugar levels of diabetics, etc. (Patient Interface Module);

In addition to these modules, paperless recordkeeping is available. The doctor would be responsible for scanning all of the documents. For an extra $1,000 a year, Mydoctor will host the data. In addition, a onetime cost of $850 would apply for the purchase of the scanner.

© 2011 Institute of Chartered Accountants of Ontario

Paper II - SIMULATION 3 (continued)  EXHIBIT II LETTER FROM HEALTH CANADA We will be visiting your practice on February 12, 2007 to execute the following procedures: Procedure: Confirm revenues • • •

•

Obtain list of invoices sent to FNHCP with patient name, procedure codes, and dollar value of services performed. Select a sample of invoices for confirmation from this list once on-site. Prepare and send written confirmations to the patients included in the sample requesting they confirm the date and time of their appointment, the procedures performed, and request a copy of their Certificate of Indian Status. Follow up by telephone with patients who do not reply.

Procedure: Confirm bank • •

Obtain the doctor’s monthly bank statements for confirmation. Select payments from the list generated by Health Canada and trace the cheques or the electronic funds transfers (EFTs) to the doctor’s bank account.

Procedure: Compare billings to client files • •

Select another sample of invoices once on-site and compare the procedure codes to the patient medical files. Ensure that the invoice date and the date in the medical file match.

Procedure: Other •

Obtain a copy of a letter of good standing from the College of Physicians for Doctor Robert Blake.

Your co-operation is appreciated, Health Canada

© 2011 Institute of Chartered Accountants of Ontario

Paper II - SIMULATION 3 (continued)  EXHIBIT III 2006 TAX RECORDS RECEIVED FROM DOCTOR BOB I did a preliminary calculation of my taxable income and concluded that there is no tax payable. I have heard about GST refunds for businesses and am eager to get back my $1,756 of GST in addition to the taxes that were withheld from my wages earlier in 2006. My T4 slip shows $40,000 of wages received from the medical clinic where I worked from March to August 2006, with $11,750 of income tax deducted at source. I opened my practice on September 1, 2006 and operated it for four months in 2006. I currently have 150 regular patients plus drop-ins. I believe that I will be able to grow my practice to about 250 patients and $200,000 in annual revenue by 2008. I do not have any current plans to partner with any other doctors, but I would like my wife to take some nursing classes so that she can help out with some patient care in the clinic. Costs incurred in moving to the current city (850 kms away) on August 19, 2006: Car rental, including gas, for transportation of the family Hotel costs at destination (30 nights) Meals at destination (30 days) Meals on the road (2 days) Moving company (including storage of $3,000) Utility hook-ups: Telephone Electricity Gas Cable TV

$

483 3,570 2,853 256 8,976 55 30 30 25

© 2011 Institute of Chartered Accountants of Ontario

Paper II - SIMULATION 3 (continued)  EXHIBIT III (continued) 2006 TAX RECORDS RECEIVED FROM DOCTOR BOB Calculation of Income from Medical Practice (September 1 to December 31, 2006)

Cash received (note 1) Cash paid Office furniture and medical instruments Medical supplies (gloves, bandages, etc.) Salaries (note 2) Computer (including software of $514) Utilities Office rent Gas, repairs and maintenance for car (note 3) Car lease payments Medical licensing, office insurance (both paid monthly) Office renovation costs (note 4) Miscellaneous Total cash paid Net loss

$ 36,853

7,664 742 29,800 2,183 919 9,200 794 2,480 1,158 8,668 2,287 65,895 $ 29,042

Notes: 1. I invoiced the provincial and federal governments for an additional $7,684, which had not been received by December 31, 2006. As at December 31, 2006, I owed utility companies $384. Office rent is due on the first of the month. 2. Salary expense includes payments to my children aged 7 and 10, and Ann, my spouse. Ann received $17,000 for helping out in the office during the day by answering the phone and booking appointments. Each of the children received $6,400 for sometimes helping with the filing on weekends. 3. I drive my car from my home to work every day, and charge $0.35 per kilometre for this travel to the medical practice. I do not have any other business-related travel. 4. I paid a contractor $8,668 to make the necessary renovations to the clinic. The work included constructing walls, a ceiling, flooring, and some plumbing and electrical work.

© 2011 Institute of Chartered Accountants of Ontario

EVALUATION GUIDE PAPER II SIMULATION 3- DOCTOR BOB PRIMARY INDICATORS OF COMPETENCE The reader is reminded that the solutions are developed for the UFE candidate and that therefore all the complexities of a real life situation may not be fully reflected in the following solution. The UFE Report is not an authoritative source of GAAP. To: Dr. Bob From: CA Subject: Assistance with your 2006 tax return, the Health Canada audit, and choice of software features Dr. Bob, You have asked me to prepare your taxes for you as soon as possible so that you can claim any refund due to you. The refund amount, based on my calculations detailed below, is about $6,500. In addition, you asked me to explain the letter you received from Health Canada, and in particular the purpose behind the procedures they intend to perform. The attached memo explains why Health Canada is performing the procedures and why certain information is relevant. I trust my explanations will help allay your concerns. You have signed a contract for a medical-practice management system. I have provided you with an analysis of the features and modules from which you can choose. During my review of the system I noted several concerns and, as requested, I am bringing them to your attention. Should you decide to proceed with the purchase, some of them will need to be addressed immediately. Respectfully yours, CA Primary Indicator #1 The candidate prepares Dr. Bob’s personal tax return. The candidate demonstrates competence in Taxation. The income calculation you provided was prepared on a cash basis. I have recalculated your income using accrual accounting, as this is required by the Canada Revenue Agency (CRA). I have calculated capital cost allowance (CCA) deductions for the business’s capital assets in lieu of deducting the entire capital cost.

© 2011 Institute of Chartered Accountants of Ontario

Recalculation of Income-First approach (starting with revenue) Revenue ($36,853 received plus $7,684 receivable)

$ 44,537

Medical supplies Salaries (note 1) Utilities ($919 plus $384 payable) Office rent Medical licensing, office insurance Miscellaneous CCA (note 2)

$

742 17,000 1,303 9,200 1,158 2,287 758

Net income

$

12,089

Recalculation of Income – Alternate approach (starting with net income) Net income

$ (29,042)

Accounts receivable Office furniture and medical instruments (note 2) Salaries (note 1) Computer (note 2) Utilities payable Gas, repairs and maintenance for car (note 3) Car lease payments (note 3) Office renovation costs (note 2) CCA (note 2)

$

7,684 7,664 12,800 2,183 (384) 794 2,480 8,668 (758)

Net income

$

12,089

Notes: 1. Salaries may not be fully deductible. They are paid to related parties and may not be at fair market value for the services received. The salary to your wife appears reasonable, but $1,600 per month per child to clean up on some weekends does not appear reasonable and would most likely be disallowed by the CRA.

© 2011 Institute of Chartered Accountants of Ontario

2. CCA Calculation CCA has been prorated because it is the first year and your practice has been open for 122 days only. Office furniture and medical instruments Class 8 (20%) $7,664 x 20% x ½ in first year = $766 x 122/365 = $256 Editorial Comment: If the medical instruments each cost less than $500, they would be in Class 12 (100%, no half-year rule). Computer Class 45 (45%) $1,669 x 45% x ½ in first year = $376 x 122/365 = $126 Editorial Comment: Computers purchased after January 27, 2009 and before February 1, 2011 are in class 52 (100%, no half-year rule), and the calculation would be as follows: $1,669 x 100% = $1,669 x 122/365 = $558 Computers purchased after March 18, 2007 and before January 28, 2009, or after January 31, 2011, are in class 50 (55%, and the half-year rule applies), so the calculation would be as follows: $1,669 x 55% x ½ in first year = $459 x 122/365 = $153 Software Class 12 (100%) $514 x 100% x ½ in first year = $257 x 122/365 = $86 Office leasehold improvements Class 13 (5 year straight line) $8,668 / 5 x ½ in first year = $867 x 122/365 = $290 3. Vehicle expenses Vehicle expenses of $794 and $2,480 are not deductible because travel to and from your home to work is not deductible. No other business travel was incurred by you. (Candidates were able to provide good support for their adjustments. Some candidates provided support in their narrative and again in the exhibit, unnecessarily repeating the same information.) (There was some evidence of technical weakness in many of the responses. A considerable number of candidates failed to recognize that the depreciable assets were not fully deductible in the year of acquisition. Many candidates were not aware of the appropriate rule for the car expenses and instead discussed standby charges and taxable benefits. Some candidates thought the tax numbers had to be on a cash basis. They did not realize that the accrual basis was allowed.) Moving expenses Car rental Hotel costs (1/2 X $3,570 – only 15 days deductible) Meal costs (allowed flat rate of $45 per person per day) $45 X 4 X 17 days (15 days at destination plus 2 days travel) Moving company Utility hook ups (cable TV not allowable)

$

483 1,785 3,060 8,976 115

© 2011 Institute of Chartered Accountants of Ontario

Total allowable

$ 14,419

Editorial Comment: The simplified method rate for meals for 2009 is $17 per meal ($51 / day). The revised table from above would be as follows: Car rental Hotel costs (1/2 X $3,570 – only 15 days deductible) Meal costs (allowed flat rate of $51 per person per day) $51 X 4 X 17 days (15 days at destination plus 2 days travel) Moving company Utility hook ups (cable TV not allowable)

$

483 1,785

Total allowable

$ 14,827

3,468 8,976 115

Given the limitation discussed below, this should not have an impact on the amount ultimately deducted in the current year, but will increase the amount available for carryforward into the following year. The moving expense deduction is restricted to $12,089, which is the total amount of income from the business at the new work location. For your information, the excess can be carried forward to future years. The GST paid is not recoverable. Medical services are exempt under the Excise Tax Act, meaning that input tax credits are not available. (Candidates attempted a reasonable calculation of the moving expenses. Again, there was some evidence of technical weakness. Some candidates thought the storage expenses were not deductible. Most candidates did not realize there is a cap on moving expenses, or they identified it but did not apply it in their calculations. A good number of candidates were not aware of the 15 day rule regarding the hotel and meal costs. Candidates could readily have looked up the moving expenses rules in their Income Tax Act, but most chose to guess instead. The moving expenses were an important element of the tax calculation. Candidates should have realized that and should have taken the time to look up the rules.) (In addition, a few candidates misinterpreted the case facts. They thought Dr. Bob was moving from overseas and did not think the moving expenses were deductible. Candidates must read the simulation carefully.)

© 2011 Institute of Chartered Accountants of Ontario

Taxable income Calculation of taxable income and taxes payable Net income from medical practice Employment income

$

Total income

12,089 40,000 52,089

Less allowable moving expenses

(12,089)

Taxable income

$

40,000

Tax on $36,378 @ 15.25% Tax on $3,622 ($40,000-$36,378) @ 22%

$

5,548 797

6,345 Calculation of non-refundable tax credits Bob – personal credit (prorated) Personal tax payable

1,134 $ 5,211

The spousal credit is not available because your spouse received too much income in 2006 for you to qualify for the credit. Editorial Comment: The calculation using 2010 tax rates would be as follows: Net income from medical practice Employment income

$

12,089 40,000

Total income

52,089

Less allowable moving expenses

(12,089)

Taxable income

$

40,000

Tax on $40,000 @ 15%

$

6,000

Calculation of non-refundable tax credits Bob – personal credit (prorated - $10,382 * 307/365 * 15%) Personal tax payable

1,310 $ 4,690

(Candidates’ responses were weakest in this part of the tax calculations. Most candidates did not use appropriate tax credits and rates even though the information is available in the tables at the back of the evaluation paper. Some candidates deducted the moving expenses from the business income instead of including it in the taxable income calculation. Some confusion was evident in the responses as to what business income is and what personal income is and where to fit them into the tax calculation. Some candidates incor...