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A few more weeks to go before the D-Day. I am sure there are pangs of nervousness, anxiety, excitement (that you can then enjoy free time), basically all the mixed emotions that are brewing. Completely understandable – just calm down, breathe. It’s completely fine – this too shall pass.

You cannot forget the months of hard work, sincerity and dedication you have put in for these 3 most important days. Hence, out of experience, I would love to share the do’s and don’ts of the week of the exam.

CFE Day 1

Remember, this is your first day of the exam and it’s 4 hours. Being the first day, it would not seem tiring to type on your laptop, but mentally it is draining, because you are tense before the exam.

So, take it easy and ensure:

• You sleep early the day before
• You don’t cram by going through a lot of your notes
• You pack your bags and keep it ready with all the food, documents, and stationery you may require for the exam
• You reach the exam center early so that you know your seating and the exact location.  This way, even if there are delays, it won’t stress you as you have enough buffer time.

CFE Day 2

This is an important day because Days 2 and 3 go hand-in-hand and they are both very technical. You need to know FR, MA and your role. Plus, you must pass Days 2 and 3 together, so it’s important to stay focused and be energetic. The night before Day 2, you may already feel exhausted as 4 hours of Day 1 had just gotten over and Day 2 is 5 hours, which can be tiring if you don’t get enough rest.

So before Day 2, ensure:

• You do not discuss Day 1 paper with others or go on Reddit
• You relax and take your mind off Day 1 exam
• You do not go through your notes. If you are not comfortable with this idea, go through your quick notes, flash cards and concepts that you want to just skim through before the big day. The idea is to refresh concepts, not bog down and panic
• You watch your favorite show, eat your favorite food and get fueled for the next day
• You get rest, because resting is super important for your mind to feel fresh the next day. You spent 4 hours looking at the screen in Day 1 and you still need to use your knowledge the next day. 

CFE Day 3

This CFE day is as critical as the first two. You cannot pass only Day 3, you must pass Days 2 and 3 together. But remember, 2 out of the 3 battles are done. You must give yourself credit for getting through Days 1 and 2.

So to go about Day 3, ensure:

• You go through only the non-role concepts, because you already covered your role for Day 2 (if you want to skip something)
• You get more rest. You need to switch between the cases in a smooth transition,  which is only possible if you are well rested
• You don’t forget your tea, coffee, and water bottle to fuel you for Day 3. I know you won’t have the time, but it can get overwhelming as you must solve multiple cases, so one or two sips in-between cases really helps!
• You don’t take the weights of Days 1 and 2 with you – leave it behind and go on Day 3 as a new day.

Stay calm through this process, so many of us have done it, you can too! Relax and remember a few more days before you are a free bird! Give it your all, in the end it’s just an exam – so enjoy the process and learn the most you can!

Good luck and smash it! – Leela

Author: Leela Pai, ICAI and successful CFE writer from Sep 2021

The structure of Canadian taxes is meant to charge the same level of income tax regardless of if it is earned through a salary or dividend on the individual and corporation level. This is known as integration. However, this is not a perfect model and there can potentially be a benefit to receiving one form of remuneration compared to another.

When assessing salary vs dividend AOs, CPA candidates should write a balanced qualitative analysis and demonstrate understanding on various tax topics. Several examples are provided below that can be used in determining your recommended structure.

Salary

Pros:

• Will provide a deduction in the calculation of corporate tax, therefore reducing the taxable income.
• You will receive payments from the CPP program later in life when you retire. This is an effective and stable form of pension planning.
• Generates earned income, which will create RRSP room. This will allow you to put funds aside for your retirement and receive a tax deduction in the year of contribution that will reduce your personal tax liability. Funds invested will compound tax-free while in the RRSP plan.
• Generates earned income for child care deduction purposes. This allows you to deduct childcare costs if you have children and meet the specific criteria. Being paid a dividend will not allow the same cost deductions.
• Allows you to qualify to claim non-deductible work expenses such as uniforms, home computers, etc. This is known as the Canada Employment Credit (CEC) and is a non-refundable tax credit designed to help employees.
• Creates more predictive and steady income. From a personal standpoint this can make obtaining loans, mortgages, etc. easier as the bank can assess your ability to comply with payment criteria. From a company perspective this is beneficial for planning monthly outflows.
• Deducting salaries payments from corporate taxable income can be used in tax planning to decrease income below the $500k small business limit to achieve a lower tax rate.
• Less tax planning works as taxes taken off automatically with a payroll/accounting system.

Cons:

• Included in employment income in the year received and taxed personally using increasing tax brackets.
• Requires payments into the CPP program (employer and employee portions). This could result in reduced net cash flow available due to CPP costs associated off of each salary payment.
• Reduces the financial results of a company as the salary payment represents an on-going expense. This could impact the company’s ability to obtain financing.
• Penalties are incurred for late payments for submitting income tax, CPP, EI, etc. for salary amounts.
• Need to determine a reasonable salary; otherwise amounts cannot be deductible and tax filings may be increased or may need to be amended for prior years.

Dividends

Pros:

• Capital gains produce amounts for a capital dividend account (CDA) balance. This can be paid out as a tax-free dividend.
• Generally, create less tax at the personal level. This will depend on numerous factors, including: whether the dividend is eligible or other-than-eligible, personal tax bracket, tax rates and tax credits.
• Interest and capital gain income earned from investments will be considered property income. This will be subject to additional refundable tax (ART), creating an RDTOH balance. In that case, by paying a dividend, the company will receive a dividend refund for paying the general corporate tax rate.
• Opportunity for income splitting can be achieved with two or more shareholders (i.e. husband and wife). Be mindful of new TOSI rules and discuss the implications if it applies.
• Net profit is not reduced by dividends, and they are not considered a business expense. Therefore, showing more favorable results which could be preferable when viewed by potential lenders or investors.
• Dividends can be declared at any time, allowing the owner to optimize their tax situation.
• Provides greater flexibility as dividends can be paid out based on how the business is performing.
• Dividends reduce an individual’s CNIL (cumulative net investment loss). When claiming the lifetime capital gains exemption (LCFE), CNIL will diminish the amount available. Receiving dividends as payments will reduce the existing CNIL balance and will increase the LCE available in the future.

Cons:

• Dividends are not deductible like salary payments, thus increasing taxable income for the company. However, dividends will be paid out of after-tax profits and be eligible for a dividend tax credit which, assuming integration is working, will offset the higher corporate rate of tax paid. Therefore, they reduce cash flow and do not decrease corporate income taxes.
• Does not generate RRSP contribution room and pensionable earnings for CPP.
• Issued and paid based on share ownership. This can become challenging to allocate different amounts of income to various shareholders.

Bonus

Pros:

• Bonuses declared at year-end create the opportunity for a personal tax deferral since the amount does not need to be paid for 6 months.
• Can often be directly deposited in RRSP, reducing the amount of taxes paid compared to receiving the bonus directly.
• The owner can set a bonus amount once the company’s earnings have been determined, ensuring the company maintains positive income. This also provides flexibility in the amount of bonus to be paid out.
• A CCPC can declare a bonus to reduce corporate profits, thus resulting in a lower tax rate.

Cons:

• If a bonus is declared and not paid right away, cash flow issues later could create difficulty in actual payment of bonus.
• Paying a bonus (like salary) comes with a higher cost, as employer and employee portions of CPP must be factored in.
• Personal tax rate on bonus is significantly higher than salary for example.

Conclusion

In CPA cases, recommending between paying out a salary, dividend or bonus is not a decision of exclusively picking one over the other. You should should recommend a variation between these alternatives that’s most optimal. For example, you can recommend the user to choose salary large enough to qualify for the maximum CPP benefits and RRSP room, to ensure effective retirement planning. Any excess beyond this amount can then be paid out in the form of a dividend. Deciding which combination will result in the least net taxes will be dependent on several other factors.

Valuation AOs come up on CPA Canada module exams all the time, starting with Core 1 and all the way to the CFE. Here’s a summary of the common valuation methods with examples.

Introduction

Valuation is required in situations where there may be:

• Proposed sale of business (both sale of shares or direct sale of net assets)
• Company wishes to go public and must set an issue price
• Division of assets needs to be determined
• Company needs to evaluate impairment or reorganization for tax purposes etc.

There are various valuation approaches, they are categorized to: Income-based, asset-based, and market-based.

Income-based approaches:

• Capitalized cash flow (CCF)
• Discounted cash flow (DCF)
• Capitalized earnings
• Discounted earnings

Asset-based approaches:

• Liquidation
• Adjusted net asset
• Replacement cost

Market-based approaches:

• Assets with an active market
• Comparable transaction (ie, earnings multiple approach)

In this blog, I’ll discuss the DCF and CCF (income-based), adjusted net asset (asset-based) and earning multiple (market-based) approaches.

Discounted Cash Flow (DCF)

When an entity is a start up and they don’t have positive cash flows, it would not be appropriate to use potential cash flows for valuation. Thus, a discounted cash flow (DCF) technique is used. To calculate  the DCF valuation, write out the annual cash flows in Excel and discount them to the present dollars.

Example:
Let’s assume the business will earn $100,000 in the current year and each year it will grow by 5%. We’re given the rate of return (ie, the WACC) at 15% per year. We will apply this discount rate to all future cash flows.

The equation would be:

 

 

 

 

 

 

As you can see, even if the actual cash flows will keep growing, the discounted versions of those cash flows will shrink over time, because the discount rate is higher than the growth rate. Therefore, the value of the company will be the total of all discounted cash flows.

Capitalized Cash Flow (CCF)

If an entity has consistent cash flows that are reflective of the future operations, an approach such as the capitalized cash flow (CCF) approach, based on historical cash flow, is appropriate. In this approach, the cash flows expected to occur consistently in the future are determined and a capitalization rate is applied to the expected future annual cash flow to obtain a value for the entity.

There are 2 steps to the CCF valuation process:

• Compute expected cash flows for a single period
• Divide cash flow from a single period by a capitalization rate

What’s really important here is the long term sustainable growth rate, where the Gordon Growth model is used. Hence we have to find the enterprise value and then deduct the interest bearing debt to arrive at the value of equity.

Here’s an example:

 

 

 

 

 

 

Notes:

• FCFF – Free cash flows
• WACC: Weighted Average Cost of Capital
• Gordon’s Growth Model —> P = D1/ (R-G)
• P = Stock’s price based off its dividends
• D1 = Stock’s expected dividend over the next year
• R = Required rate of return
• G = Expected dividend growth rate

Remember to reduce the interest bearing debt amount from the enterprise value above to come to the equity value.

Gordon Growth model is not tested at Core 1 or CFE Day 3 levels, but it is tested at Finance elective and CFE Day 2 Finance role levels. In Core 1 and CFE Day 3, you will be given the capitalization rate and you would need to apply it to the cash flows.

Adjusted net assets

Where the entity does not maintain active operations, or it has active operations but does not have excess earnings, the adjusted net asset approach is appropriate. Under the adjusted net asset approach, all assets are valued at their FMVs net of disposition costs. Liabilities are deducted and the tax consequences of selling the assets and settling the liabilities are adjusted for.

So this is a simple valuation technique. Simply write the total assets (at FMV), then deduct the liabilities, and the result is the value of the business.

Points to remember:

• Inventory adjustments should be based on FIFO
• PPE values may differ
• Intangible assets are often written off to zero
• Consider whether the payables will be fully paid and receivables fully collected
• Don’t forget to consider unrecorded liabilities or potential settlements

Earnings multiple

This is an approach based on historical earnings of the company. Earnings are multiplied by a multiplier to determine the company’s value. The earnings multiplier calculates the return an investor will get against the invested amount.

Example:
The share price of a company is now trading at $100 and its per share earnings is $10. The earnings multiplier will be 10. ($100/$10) It implies for $1 dollar earned by the company, an investor will give $10. This means the investor is paying 10 times the company’s present value. If the company’s earning multiplier is higher than that of industry average, the share price of the company is high.

In CPA Canada cases, you’re often given the multiplier, so you don’t have to calculate it. Instead, you should normalize the earnings (add/remove unusual transactions and amounts, such as one-time bonus, high manager salary, lawsuit, government grants, etc.) and multiply the adjusted earnings by the multiplier. This will give you the value of the business.

Hope this article was helpful and added “value” 😉

Happy Studying!
Leela

Author: Leela Pai, ICAI and successful CFE writer from Sep 2021

As you go through CPA Canada PEP and CFE technical review, you may notice the terms “provision” and “contingent liability”, specifically in your IFRS review (ASPE does not use the term provision).

Many candidates find it challenging to understand the relationship between provision vs. contingent liability, and how to effectively address these issues in CPA cases. In this blog, I’ll provide you simplified explanations to ensure you are assessing the correct criteria.

Liabilities

Before we differentiate provisions and contingent liabilities, let’s review the definition of liability. Under IAS 37, liabilities are defined as present obligations to a company that arise from past events, where the settlement is expected to result in an outflow of the company’s resources (i.e. cash).

Let’s look at an example of liability. Let’s say Company ABC got a loan of $50,000 from the bank that’s due in January of 202X. This is a present obligation, because the company has agreed to pay it back. This arose from the past event when the company signed the agreement to accept the loan. When the company pays back, there will be an outflow of cash.

Provisions

A provision is a liability that is uncertain in timing or amount. In our earlier example, Company ABC had to pay back $50,000 loan in January 202X. This was a liability, not provision, because both the timing (Jan. 202X) and amount ($50,000) were certain. 

Now, let’s say Company ABC sells its products with warranty. The amount of warranty claims and when they will be claimed are uncertain, thus this is a provision.

Provision is recognized when it meets all 3 criteria below:

• Present obligation for outflow of cash as a result of a past event
• Probable that it’ll have to settle the provision
• Amount can be reliably measured 

Let’s look at the details of each:

• An obligation exists when the company has no alternative to settling the obligation other than being enforced by the law.
• Probable means “more likely than not”. This means more than 50% probable.
• Provision is measured at the best estimate. In the case where there is a large possibility of outcomes, it’s estimated using the expected value method. When there is a range of possible outcomes and each point is just as likely as the other, midpoint of the range is used.

Under IFRS, a provision is required to be reviewed at the end of every reporting period. If the provision criteria is no longer met, it should be reversed.

Some examples of provisions include: 

• Warranty obligation
• Policy to make refunds to customers
• Onerous contracts
• Construction obligations to clean up land. 

These examples create an unavoidable outflow of resources and often require historical knowledge to record the estimated amount (i.e. warranty claim %).

For example, Company ABC sells dishwashers, each included with a legal warranty period of 2 years. Throughout these 2 years, Company ABC is required to remove all defects that existed at the time of the sale. It’s given that this is not a separate performance obligation. Based on historical evidence, Company ABC estimates $30K costs of repairs in the first year, and $10K in the second year. 

Let’s check if the 3 provision criteria are met:

• Present obligation for outflow of cash as a result of a past event
  • MET: Sale has occurred in the past and the company is obliged to fulfill the warranty.
• Probable that it’ll have to settle the provision
  • MET: This is unavoidable because the warranty agreement is in place.
• Amount can be reliably measured. 
  • MET: The company has historical knowledge that it needs to settle $30K in first year, $10K in the second year (Note: An item can be both “measurable” and “uncertain.” Measurable means that we can estimate the amounts (such as in this example), but the timing and the exact amounts may be “uncertain”).

Because Company ABC has an unavoidable obligation of uncertain timing/amount, this is a provision. (Note that this is also a liability because remember provision is a type of liability.)

Contingent liability

Simply put, if outflow is not probable, the entry is a contingent liability.

Contingent liabilities are possible (not present) obligations that will be confirmed by future uncertain events. Provision is of uncertain timing/amount, but it will happen (unavoidable), while contingent liability may or may not happen (avoidable).

The recognition criteria for contingent liability are as follows:

• Possible obligation that arises from past events
• Existence will be confirmed by occurrence or non-occurrence of uncertain future events not wholly in the control of the entity

Then discuss:

• Probable
• Measurable

While provisions are recorded in F/S, contingent liability is not recorded but disclosed, outlining the nature of the events, financial impact estimates, etc. If the probability of outflow is remote, the contingency doesn’t need to be disclosed.

For example, let’s say there is a pending investigation against Company ABC for possible health concerns at one of its facilities. Company ABC’s legal team believes the probability of being found in violation is likely low as the complaint is said to have come for a disgruntled former employee. No estimate of the amount is provided.

Let’s check if the 3 provision criteria are met:

• Present obligation for outflow of cash as a result of a past event
  • NOT MET: It’s a possible obligation, not present
• Probable that it’ll have to settle the provision
  • NOT MET: The lawyers believe that there is a low chance
• Amount can be reliably measured 
  • NOT MET: The amount is unknown

Because outflow of resources is not probable and no estimate is given, this is not a provision.  So let’s check the contingent liability criteria:

• Possible obligation that arises from past events
  • MET: It is a possible obligation as a result of a past health concern
• Existence will be confirmed by occurrence or non-occurrence of uncertain future events not wholly in the control of the entity
  • MET:  The payout for the lawsuit may or may not happen.
• Probable
  • NOT MET: There is low chance, per lawyers
• Measurable
  • NOT MET: The amount is unknown.

Therefore, this is contingent liability that should be disclosed.

Test Your Knowledge: Practical Example

For example, Company ABC has been engaged in a lawsuit where a customer had fallen on company property in January. As of April, it is unclear whether the Company will be required to pay settlement or not. << At this point, it represents a contingent liability (avoidable, may or may not happen).

As of June, Company ABC has been found guilty of the lawsuit against them, but it has not yet been determined if they will have to pay $50,000 or $150,000 and when. This will be determined at the next court date in July. << At this point, it represents a provision (unavoidable, will happen). If the amount or timing were known at this point, it would be classified as a liability.

Decision Tree

Below is a decision tree to help you understand and analyze this standard in CPA cases:

ASPE Differences

For review of contingencies under ASPE, check out ASPE 3290. Under ASPE, the following differences exist:

• The term contingent liability is used opposed to the term provision. 
• Contingent liability is to be recognized when the probability of an outflow is likely instead of probable.
• Instead of taking the best estimate or range for measurement, use the minimum amount.
• No requirement to review contingent liabilities at the end of each reporting period.

Overall, the key difference to keep in mind when reviewing an AO, is to remember that provisions are unavoidable and will happen, but the timing and amounts are uncertain. Contingent liability may or may not happen. Be sure to integrate case facts when assessing these criteria to achieve depth!

If you need support along the way, get in touch with our professional CPA coaching team.

We all know that the CPA Canada Professional Education Program (CPA PEP) is a long, rigorous, and often taxing journey (pardon the pun). PEP often takes anywhere from 1.5 to 2 years to complete, with several grueling exams. When all six PEP modules are complete, you become qualified to write the Common Final Examination (CFE), thus completing the educational component of the CPA Canada designation.

Now, what if I told you, instead of 1.5 to 2 years, you can achieve all of PEP’s glory and fast-track to the CFE, in merely 8 months? AND earn a Masters in Accountancy (MAcc) degree from a reputed institution along the way? Sounds nice doesn’t it?

Well, there are pros and cons to both pathways, but it’s key that you know both of your options.

MAcc Pathway to CPA

The regular CPA PEP pathway is covered in one of our articles, so let’s focus on the MAcc pathway. The MAcc is a type of program offered by select post-secondary institutions (PSIs) in Canada and, more importantly, it’s accredited by CPA Canada. This means MAcc can give you part or all of the CPA PEP courses. Not only do these accredited programs provide an alternative means to achieve completion of PEP modules, but they also provide a graduate diploma or a Master’s degree upon completion.

These programs are commonly offered in-person/in-class, so if you’re a candidates who doesn’t fancy online coursework (which is the mantra of CPA PEP), MAcc is a good fit for you. Here’s a list of all the accredited programs in Canada by province, which I’ve also put in the screenshot below.

As you can see, not all accredited programs fast-track to the CFE. For example, Brock’s MPAcc program (not MAcc) provides exemption only from CPA PEP’s Core 1 and Core 2 . On the other hand, Brock’s MAcc program, along with Carleton University’s MAcc program, provide exemptions from all six CPA PEP modules, thus fast-track you to the CFE. So make sure whichever program you decide to pursue, you review what exemptions you gain from it. 

Brock’s MAcc Program to CFE

As I have taken Brock’s MAcc program, I will share my thoughts on this option. This program is a continuous, 8 month graduate program that runs from January to September. It consists of 10 courses, 5 each term. Courses include all 4 electives from CPA PEP (yes, you heard me, all four), while CPA PEP only makes you take two electives (either Assurance, Finance, Taxation or Performance Management). It also includes Brock’s own version of Capstone 1 and 2, which is more demanding than CPA PEP’s Capstones 1 and 2.

The level of preparation provided in MAcc program for the CFE is substantial; it essentially over-prepares you. Naturally this contributes to higher chance of success on the CFE. This program can be taken after completing Brock’s BAcc (Bachelors in Accounting undergraduate program), however, you DO NOT need to have an undergraduate program from Brock to qualify for Brock’s MAcc. For example, I completed my Bachelor’s in Accounting from Conestoga College, and was accepted into Brock’s MAcc program. Here you can find more details of Brock’s MAcc and list of courses.

Not all MAcc programs are continuous 8-month programs. Some, such as Carleton’s MAcc, has a similar structure and course breakdown, but it consists of 2 four month terms spread over two summers, with a co-op term in-between if needed. The structure and duration are aspects you should make notes of when conducting research on these alternatives pathways to CFE.

In Part 2 of my blog series, I provide pros/cons to both pathways and my recommendations on which pathway makes sense for each type of candidate, such as working candidate vs full-time student. Check it out here!

Author: Abhimanu Goyal, Successful CFE writer and MAcc

If you are an Internationally Trained Accountant (ITA) and the accounting body you are associated with has an MOU/MRA in place which gives you an exemption from Capstone 1 and 2, you may be wondering if it’s worth taking them.

Taking the Common Final Exam (CFE) directly helps you save time and money, but you may be missing out on crucial learning materials. Let’s understand what Capstone 1 and 2 offer and whether it’s worth it.

Format of CPA Capstone 1

Capstone 1 is designed to teach teamwork and enabling skills. Candidates are put into groups where they complete team-based assignments and a presentation. There are no new technicals covered, it’s meant to train teamwork and presentation skills. 

The key benefit of Capstone 1 in preparing for the CFE is that the case covered in Capstone 1 repeats on CFE Day 1. 

This means by taking Capstone 1, you’re more familiar with the Day 1 case, thus you have a higher chance of clearing the Day 1 exam. 

The fee for Capstone 1 is $1,300CAD + taxes (changes annually, see the latest fees in Ontario here).

Here is a detailed video on Capstone 1.

 

 

Format of CPA Capstone 2

Capstone 2 is the final module before the CFE.      

 

 

 

 

  Image source: CPA Canada  

The entire module is designed to prepare you for the CFE. You’ll receive:

• Workshop – writing and study tips for all three days of CFE
• One-hour weekly webinars
• Individualized feedback on responses from national markers
• Excel tracking street
• Short video walkthroughs
• Case specific debrief guidance 
• Technical knowledge support through the Learning eBooks 
• Support provided by lead facilitators on the discussion board
• 12 marked practice cases 
• 2 marked Module Workshop cases 
• 4 unmarked practice cases 

All cases provided in Capstone 2 are the prior CFE exam cases.  The one-hour weekly webinars provide general tips, such as time management and case writing best practices.

The key benefit of Capstone 2 is the 12 case marking provided by the National Marking Centre. You’ll receive detailed feedback on how you performed and what areas you can improve on. Some students often find the marking to be generic, however, with not much explanations.

Here is a sample feedback from Capstone 2 markers:

 

 

 

 

 

 

The fee for Capstone 2 is $1,300CAD + taxes (changes annually, see the latest fees in Ontario here).

Here is a detailed video on Capstone 2.

 

Pros vs Cons

Pros of taking up Capstone 1 & 2 / Cons of directly writing CFE

• Both Capstone 1 and 2 will train you on case writing. This will expose you to the Canadian CPA exam system way earlier through the group presentations, case study and marking
• You will be very well prepared for Day 1, as you will be involved in the Capstone 1 case from the very beginning
• You will receive supplementary study materials, such as walkthrough guides and debrief notes
•  Your Capstone 2 cases will be marked by the National Marking Centre. This will help you understand your strengths and weaknesses for all three days of CFE

Cons of taking up Capstone 1 & 2 / Pros of directly writing CFE

• In both Capstone 1 and 2, strict schedules need to be followed. This can be difficult with a full time job, self study time and other personal errands
• There is no instructor in Capstone 2, which means it’s a self-study module with no immediate support
• There are high costs and you end up spending a whole lot more, approximately $2,600CAD + taxes, just for Capstone 1 & 2, and $1,500 more for writing the CFE.

Keep in mind, you can choose to take only Capstone 2. This helps you get the feel of CFE, which is the real challenge. Since the majority of Capstone 1 is teamwork, it may not help you much in preparing for the CFE. Another option is purchase only the review materials of Capstone 2. These cost around ~$280CAD and you get just the cases and the marking guides. Your cases will not be marked by the CPA National Marking Centre. This helps you save costs and you can pay just the CFE fees.

Conclusion

In summary, there seem to be more pros in taking Capstone 1/2 , but this does not mean it’s the best option for you.  I took the last route, the review materials, and signed up for coaching classes. I cleared the CFE in the very first attempt. You don’t have to follow what I did, or for that matter what anyone else has done. Follow what you are comfortable with, taking into consideration your study time, personal situation, costs, and what you plan to invest in your CPA.

Hope this helps! 🙂

Author: Leela Pai, ICAI and successful CFE writer.

Summary:

• CVP analysis helps to determine the impact of cost and volume on profit 
• Used for many purposes: 
  • Analysis of impact of cost/volume on profit
  • Calculating breakeven point (BEP), in terms of sales revenue or in terms of sales units, for single product or multiproducts. 
• In CPA Canada cases, the requirement for which the CVP analysis is made is specified
• Once the requirement is specified then the calculation process is initiated. 
• For calculating CVP, the following information is used:

1. Sales price (SP)
2. Variable cost (VC)
3. Contribution margin (CM) (= SP – VC)
4. Fixed cost (FC)
5. Target Profit

CVP

CVP analysis is tested often in CPA Canada cases and exams. It’s part of Management Accounting (MA) competency, which is tested in-depth in Core 2, Performance Management (PM), Finance and the CFE.

CVP analysis helps to determine the impact of cost and volume on profit. It helps managers understand how the profit changes, based on changes in other variables, such as selling price, variable cost, and fixed costs.

CVP is an umbrella topic that includes several different calculations. The most commonly tested are:

• Contribution margin (CM) analysis
• Break-even point (BEP) analysis.

Contribution Margin (CM) analysis

CM analysis is used to determine the profitability of a product, before considering any fixed costs. The best way to understand CM is through the profit equation of MA:

Selling price (SP) – Variable Costs (VC) – Fixed Costs (FX) per unit  = Profit

The above formula is per unit. To calculate for total, the formula is:

(Selling price (SP) – Variable Costs (VC)) x Qty of Units – Fixed Costs (FX) = Profit

CM is the result of deducting VC from the SP. The formula for CM is:

Selling price (SP) – Variable Costs (VC) = Contribution Margin (CM).

In CPA cases, you’ll be provided with either total amounts or per unit amounts. Put these numbers in Excel, apply the above formula, and calculate the CM.

The most common AOs that will test you on CM are:

• New product launch
• Outsource decision (known as Make or Buy)
• Keep or add or drop (product, service, department, customer)
• Special order
• Cost-benefit analysis

Break-even point (BEP) analysis

BEP analysis can be done for a single product or multiple products. I’ll discuss both below:

BEP for single product

BEP determines the number of units, or the selling price, at which point the profit is 0. The formula for BEP is terms of units is:

BEP in units = (Fixed Cost + Target profit (if any)) / CM per unit

Formula for BEP is terms of selling price is:

BEP in selling dollars = (Fixed Cost + Target profit (if any) + Variable Costs x Qty) / Qty 

In CPA Canada eBook, the formula uses the term “contribution margin ratio” and the formula is Fixed costs / CM ratio, however I find the broken-out formula  I put above easier to understand.

BEP for multiple products

Similar to above, we’re trying to determine the number of units, or the selling price, at which point the profit is 0. Since there are now multiple products, the formula changes.

BEP in units = (Fixed Cost + Target profit (if any)) / Weighted Average CM (WACM) per unit

The WACM is calculated using the sales mix. The sales mix tells you the % of each product that is normally sold at the company. CPA cases usually give this number. If it’s not provided, calculate using the sales (revenue) figures for each product. 

BEP in selling dollars = (Fixed Cost + Target profit (if any) + Total Variable Costs x Qty) / Qty 

Exam focus

Here are some ways you are tested on CPA exams:

• (1) The FC and target profit (if any) will be given in CPA cases in most cases while you may be asked to calculate SP, CM, WACM etc.
• (2) The exam might complicate the FC and say “fixed cost will increase if the sales activity exceeds this limit.” In this case, you have to provide two calculations, first for the sales activity below the limit and second for above the limit.
• (3) The sales may be fixed. In this case, you will need to treat the sales like fixed costs. This testing scenario is covered in my Core 2 case pack.

 

On the CPA Canada PEP and CFE exam results days, there is no better sound than hearing my students say: “I passed!”. I am grateful for my students who have provided honest testimonials on their experience with Gevorg CPA review courses. 

Thanks to all my students for your continued support and congratulations on your promising future as CPAs!

Shraddha is an international accountant who started her CPA Canada journey during the pandemic. She found the CPA Canada modules and exams different from her past experiences, resulting in a few unsuccessful attempts. She reached out to me for coaching and after a few changes to her study style, case writing , and time management methods, she passed her exams. I’m now coaching her for the CFE exam, after which Shraddha can apply for the Canadian CPA designation.

If you are looking for help with your CPA Canada PEP and CFE exams, reach out to me for a quick phone consultation.

 

The process of getting the Canadian CPA can be an overwhelming journey. With multiple pathways to consider and exams to navigate, it’s often difficult to know where exactly to start. Below information on how to become a CPA in Canada will help you plan your designation in more manageable steps.

Steps to becoming a Canadian CPA

To get the Canadian CPA designation, you must complete the “Four E’s”:

1. Entrance requirements
2. Education requirement
3. Examination requirements
4. Experience requirements

Step 1: Entrance requirements

There are different pathways to entering the CPA program, depending on your educational background.

#1 – If you have a Canadian degree in an area other than accounting

If you have obtained a Canadian degree in a subject other than accounting, you will be required to begin your CPA journey through the CPA preparatory courses (formerly CPA PREP). PREP will help you gain the necessary accounting technical knowledge. After you’ve complete the required credit hours in PREP, you can then enter the CPA Professional Education Program (PEP), discussed in Step 2. For differences between CPA PREP and PEP, check out our detailed article.

#2 – If you have a Canadian degree in accounting

If you have obtained a Canadian undergraduate degree in accounting, you will meet the necessary subject area coverage to enter directly into the CPA Professional Education Program (CPA PEP). PEP is designed to further develop technical depth in specific accounting areas. 

#3 – If you have a Masters degree in accounting

If you have a Master of Management & Professional Accounting (MMPA) that is accredited by CPA Canada, it will allow you to enter directly into the last module  of PEP, Capstone 2, and onto the Common Final Exam (CFE). Most MMPA programs are offered in 1 or 2 year terms, usually attended full-time. For more information about the Masters program, check out our Masers in Accounting (MAcc) to CPA  article.

#4 – If you have international credentials

If you have international credentials, such as an international CA, you’ll be provided streamlined programs to help you obtain your education and examination requirements. Bridging pathways are offered to take you right to the last modules (Capstone 1 and 2) and unto the CFE. For more information on international accounting bodies, refer to International CPA Guide and our article on passing the CPA Canada CFE for international Indian accountants.

Step 2: Education requirements

The educational requirements begin at the CPA PEP program. PEP is designed around technical topics and focuses on depth of knowledge. There are 6 PEP modules and you’ll start with Core 1. 

 

 

 

 

Image source: CPA Canada

The purpose of these modules are to build the foundation for and refine your technical understanding, introduce you to case writing responses, and to further develop your studying habits. Details about the PEP program are available in our article here.

Step 3: Examination requirements

To complete the CPA certification program, you will be assessed on your knowledge and skills in key competency areas. These competencies are summarized in the CPA Canada Competency Map. 

• The 6 technical competencies you will be assessed are: financial reporting, management accounting, audit and assurance, finance, taxation, and strategy and governance. 
• The 5 enabling competencies areas are: professional and ethical behavior, problem-solving and decision-making, communication, self-management, and teamwork and leadership. 

In both the PREP and PEP pathways, you will participate in modules with weekly assignments in the structure of formatted objective questions and short cases. At the end of each module, you must successfully complete the module exam to be admitted to the next module.

After completing core and elective courses in PEP, you will enroll in Capstone 1, which includes presentations and an 8-week team-based assignment in the form of an integrated business case. This will help you prepare for Day 1 of the Common Final Exam (CFE). After Capstone 1, you will begin the Capstone 2 module, which is designed to refine your case writing responses to lead you directly into CFE. 

Image source: CPA Canada

The Common Final Examination (CFE) is a three-day exam that evaluates your depth and breadth of all competency development. To pass the CFE, you must pass all three days. Day 1 will be marked separately, and Days 2 and 3 will be assessed as a separate entity. Check out Gevorg’s CFE breakdown (YouTube) to learn more.

As examination and module dates are set to certain times of the year, candidates should review CPA academic calendars in advance to plan their program completion.

Step 4: Experience requirements

Aside from educational requirements, to complete the CPA program you will need to capture your professional experience in the online practical experience reporting tool (PERT). This should be done simultaneously as you go through the stages of PEP onwards.

 

 

 

 

 

 

CPA Canada requires a minimum of 30 months (or 24 months in Quebec) of paid employment experience, with the allowance of up to 12-months from prior work experience. The purpose is to demonstrate your professional knowledge, and also how you uphold the CPA Way in your values and ethics towards various situations. 

Your experience must be supervised, you must regularly record detailed reports, you must meet with your CPA mentor at least semi-annually, and your experience will be assessed by CPA Canada. For more information on specific requirements, check out Gevorg’s PERT video (YouTube) and CRC Resources for CPA practical experience requirements.

There are two paths for obtaining your work-related experience, they are: Pre-Approved Route (PPR) and the Experience Verification Route (EVR). 

The major difference between the two is that PPR is for programs within an employer that have already been reviewed and approved by CPA to meet the requirements. Because of this, the reporting process is more streamlined with technical competency areas prepopulated. You will still need to fill-in the required enabling competencies. Your employer will also arrange for you to be matched with a CPA mentor to monitor your progress. 

As part of the EVR stream, you will be required to self-assess your level of technical and enabling proficiencies, and to outline specifics on the employer and job duties. Candidates will need to seek out their own CPE mentor.

The purpose of your CPA mentor and supervisor is to ensure your experience is accurately reflected in your experience report and you are on the right path to embodying the qualities of a CPA. If you need help with PERT, Gevorg’s PERT coaching program provides sample reports and writing lessons.

Exam resources

The combination of post-secondary and PREP/PEP education, successfully passing the module exams/CFE, and meeting the professional work experience requirements will result in you completion your CPA certification and obtaining your CPA. While each individual may have their own journey, it is about finding the right CPA path for you!

If you need support along the way, get in touch with our professional CPA coaching team.