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 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.
[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
|
|
1997
|
313,328
|
209,399
|
40,500
|
482,734
|
|
1998
|
1,048,220
|
332,113
|
79,013
|
1,313,359
|
|
1999
|
2,042,772
|
598,497
|
204,871
|
2,440,002
|
|
2000
|
2,351,151
|
772,564
|
|
3,123,715
|
|
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 (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.).
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.
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
(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:
[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
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”.
[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.
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:
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
____________
§
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 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.
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, 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.
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. 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.
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 hypothesis, which assumes that it has neither
the intention nor obligation to terminate its long-term contracts and that it
will be able to honour its commitments to its customers. Accordingly, it is
entirely warranted for Bombardier, in a situation where it is not in default
under the contract, to measure the liabilities associated with the long-term
contracts underway using only the amounts that have not been used to provide
services in connection with the underlying contracts. Recognition in
liabilities of advances on the net amount in accordance with GAAP is based on
the fact that the advances, which are liabilities at the time they are
received, are settled by the performance of the services provided for in the
contract.
If Bombardier could not have used the going concern assumption, it
would not be able to honour its commitments to its customers, that is, the
amounts received would become repayable. In that situation, it would have shown:
i. a financial liability corresponding to the
total of the amounts received from customers that would reflect the fact that
those amounts would then have to be repaid in cash; and
ii. an inventory asset of products underway that
would reflect the fact that those products are available for sale in the market
(and not to the customer in question), which would be measured as the amount of
the total costs incurred.
b. Bombardier presents its balance sheet in
accordance with the principle that substance prevails over legal form.
Accordingly, while from a strictly legal point of view the
advance received could be considered to have been legally settled only at the
time of delivery, the accounting treatment under GAAP, which considers
the advance to be settled by performance of the services provided for in the
contract, as costs are incurred, reflects the commercial substance of the
transaction, established in the context of a going concern.
4. The measurement of the assets and liabilities
associated with the long-term contracts underway used by Bombardier is also in
accordance with accounting doctrine. Accounting texts used in university
instruction take the position that the components of the balance sheet for
long-term contracts underway represent either:
a. an asset that is measured in the net total costs
incurred for work in progress (which represents an account and not a component
of the balance sheet), less total billings (which represent a contra account
and not a component of the balance sheet), or
b. a liability that is measured in the net
amount of total billings (which represents an account and not a component
of the balance sheet), less total costs incurred for work in progress
(which represents a contra account and not a component of the balance sheet).
5. Bombardier measures the assets and liabilities
associated with long-term contracts underway in accordance with the accounting
practices used by enterprises operating in the aerospace industry. Those
practices are mainly described in the financial statements of American
corporations, since a large majority of corporations in the aerospace industry
are American.
6. Those accounting practices:
a. are consistent with the conceptual
accounting framework in the CICA Handbook since they give precedence to
commercial substance over legal form,
b. draw heavily on the American frame of reference
relating to recognition, measurement and presentation of assets and liabilities
associated with long-term contracts,
c. are based on standards that are firmly
established and were formulated in the 1950s,
d. are described in great detail in two American
documents published by the AICPA: the Audit and Accounting Guide:
Construction Contractors (which is updated annually), which includes the Statement
of position 81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts (SOP 81-1), and
e. were not challenged in the analysis by the
Financial Accounting Standard [sic] Board (FASB) of the recognition of
sale contracts (see, for example, the excerpt from Accounting Research Manager shown
as an appendix).
Simplified example – Recognition of long-term contracts by
Bombardier
Assume that on January 31, 200X, Bombardier has the following
two contracts for the manufacture and delivery of an aircraft: one contract
with a credit balance (Contract X) and one contract with a debit balance
(Contract Y):
|
|
|
|
(in $)
|
|
|
|
|
Costs
incurred
|
Money rec’d
|
Net debit amount (credit)
|
Amount in assets in balance sheet
|
Amount in
liabilities in balance sheet
|
|
Contract X
|
80
|
100
|
(20)
|
0
|
(20)
|
|
Contract Y
|
80
|
50
|
30
|
30
|
0
|
|
Total
|
160
|
150
|
|
30
|
(20)
|
The Audit and Accounting Guide: Construction Contractors,
which includes standard SOP81-1 (American standard), in addition to
requiring the net calculation of the book value of the assets and liabilities
shown above, recommends disclosure of the figures that were used in the calculation
of the asset “inventory” shown in the balance sheet. The supplementary note
gives the extent of the costs incurred, $160, and the extent of the amounts
received from customers, $130 ($20 being recognized in liabilities). See the
supplementary NOTE that presents the measurement of the book value of the
“inventory” component in the balance sheet:
INVENTORY Costs incurred ($80 + $80: $160
Less: Amounts of
advances received
($150 - $20
shown in liabilities): $130
Inventory (shown
in assets): $ 30
Thus, in accordance with the American standard used by Bombardier,
the assets and liabilities associated with long-term contracts underway must be
measured according to precise rules that specify how to calculate their
respective book values. As a result:
§
Only the $20 out of the total of $150
received represents the book value of the advance
which must appear in liabilities in its balance sheet at 31/01/200X.
§
Only the $30 out of the $160 in costs incurred
represents the asset (“Inventory” item) which must appear in its balance sheet
at 31/01/200X
§
The $130 received, shown in the supplementary
note concerning inventory, is not a component of
the balance sheet and is not part of the liabilities or part of the
assets.
§
Net measurement is mandatory and was confirmed
in the analysis of the sale contracts by the American standard-setter, which
has provided a specific exception for long-term construction contracts.
§
Net measurement reflects the fact that
Bombardier has two contracts underway that involve rights and obligations in
relation to the manufacture and delivery of aircraft. These are not executory
contracts (or an exchange of promises). Thus, in accordance with GAAP:
o
For Contract Y, the advance (which is initially measured as the amount of money received from
the customer) is completely settled (it is nil) since Bombardier has
used those funds to perform the work provided for in the clauses of the
contract, incurring costs for the manufacture and delivery of an aircraft that
exceed the amount of the initial advance received from the customer.
o For Contract X, the advance is settled in part only (there is a
balance of $20 in non-financial liabilities in the balance sheet) because
Bombardier has used only a portion of those funds for the costs of
manufacturing the aircraft. [Emphasis by Mr. Chlala.]
Note that if at January 31, 200X, Bombardier had been in
default on those two contracts, it would have shown two components in the
balance sheet: (1) an asset representing inventory of products underway
(non-financial asset) measured at minimum value (the lower of the cost of $160
and the production value) and (2) a liability representing the amount
that would be claimed by its two customers that would include the money already
paid, $150 (financial liabilities) plus, where applicable, a penalty.
That presentation would result in a very different measurement of Bombardier’s
economic resources (assets) and obligations (liabilities) in its balance sheet
at January 31, 200X, and would reflect the commercial substance of the situation,
which is the obligation to repay in cash the money received from the customers
(an obligation that does not exist in the situation where there is no default
creating a legal right to that claim).
Accordingly:
§
The initial advance, recognized as a
liability, loses its character and nature as an advance and a liability as
costs are incurred. Thus, for Contract Y, there is
no advance left, since the measurement in accordance with GAAP of the obligation
in relation to the advances is nil at the date of the balance sheet.
§
Bombardier recognizes its long-term contracts in
accordance with GAAP by correctly reflecting its operations that call for not
only delivery of an aircraft but also manufacture of the aircraft for an
identified customer.
To illustrate the application of the example given above, the
following are the components of Bombardier’s balance sheet (assets, liabilities
and equity) taken from the audited financial statements at January 31, 2000,
prepared in accordance with GAAP (all figures in $millions):
ASSETS
Cash and cash equivalents
$ 334.6
Customer accounts:
Related corporations 365.9
Other 47.0
Inventories (note) 3,492.7
Capital assets 789.9
Investments 2,686.8
Other assets ___157.9
$
7,874.8
LIABILITIES
Accounts payable and accrued liabilities:
Related corporations $
289.2
Other 1,896.2
Advances and progress billings in excess
of related costs 1,482.4
Long-term debt 960.4
Deferred income taxes __502.7
5,130.9
Shareholders’ equity _2,743.9
$
7,874.8
The following is an excerpt from the supplementary note concerning
inventories:
Raw materials and products underway $
115.9
Long-term contracts and aerospace programs 5,446.5
Finished products 461.0
6,023.4
Advances and progress billings (2,530.7)
$
3,492.7
Observations concerning the balance sheet and the supplementary
note:
Neither the amounts received shown in the note concerning
inventories ($2,530.7) nor the costs incurred in the
gross amount ($6,023.4) are part of total liabilities and assets,
respectively.
Thus, at January 31, 2000:
§
The liabilities amount representing advances
is $1,482.4.
§
The cumulative amount received by Bombardier is
$4,013.1 ($1,482.4 representing liabilities and $2,530.7 representing an amount
deducted in calculating the book value of inventories).
§
Details of the measurement of the Inventories
component are shown in notes. Accordingly, the item Inventories, $3,492.7, is
calculated on the basis of costs incurred on “long-term contracts and aerospace
programs” amounting to $5,446.5, less the amount of the consideration received,
$2,530.7. This is not a grouping of components (i.e. assets or liabilities) in
the balance sheet. The $2,530.7 shown in the note concerning inventories is
not a liability and is not part of the total liabilities in the balance sheet.
[Emphasis by Mr. Chlala.]
To summarize, Bombardier recognizes its rights and obligations under
its long-term contracts by recognizing and measuring the liabilities or assets
in accordance with GAAP applicable to long-term contracts.
Under those
GAAP, the amount of advances corresponds to the liabilities shown in the
balance sheet and only to that amount. The aim of the disclosure of the amounts
received in the note concerning inventories is solely to present the background
of the related transactions, and they cannot in any case represent a liability
or alter the characterization of the money received from customers as advances. [Emphasis by Mr. Chlala.]
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?
Answer to question 3
There is no definition of the word “advance” in the
CICA Handbook in the context of recognition of long-term contracts in
accordance with GAAP. Accordingly, we must consult other reference sources to
determine the meaning of this word in that context.
1. There are definitions of the word “advance”
in the context of the presentation of long-term contracts on the balance
sheet prepared in accordance with GAAP. Those definitions include the
following:
a. Paragraph 41 of International Standard IAS 11
Construction Contracts which defines the word “advances” as “the
amounts received by the contractor before the work has been
executed” (emphasis added). That definition provides as follows:
i. advances and work executed form a unit and are
a single component to be included in the balance sheet,
ii. if any work has not been executed, the cost is
nil and the amount of the advance is the gross amount received from the
customer, and
iii. if the corresponding “work” has been executed,
there is no longer an advance.
b. Appendix 5 of the Construction Industry Audit
Technique Guide (ATG) published by the Internal Revenue Service (US),
which defines two specific words in the context of long-term contracts as
follows:
i. “Advance Payments: Payments generally made to a
prime contractor prior to the performance of any work under a contract. These
payments help the contractor cover developmental and preliminary costs incurred
prior to commencement of work.”
ii. “Advance on Contracts: A current liability on
the books of contractors where billings or contracts exceed accumulated cost”.
Note that the foregoing two definitions reflect the economic
substance of long-term construction contracts, in accordance with which the
work performed and payments from customers form a single “accounting unit”, and
accordingly the advance is determined and measured on tha basis of the work
performed.
2. As well, under the theoretical framework and
accounting standards in effect (GAAP), Bombardier must measure the book
value of the advances that should appear in the balance sheet for a
long-term contract underway as the amounts received from the customer net of
the corresponding costs of the work.
3. Accordingly, if the costs exceed the amounts
received on a long-term contract, Bombardier has no liability. However, if
the amounts received exceed the cost of the corresponding work, only the excess
represents the advance that must appear in liabilities, since for accounting
purposes, performance of the work constitutes settlement of the advances.
Thus in accordance with GAAP, the initial advance ceases to be an advance
once the long-term contract is underway.
4. Ménard’s Dictionnaire de la comptabilité
[Dictionary of Accounting Terms], published by the CICA, provides the
following general definition of the word “advance” in the context of a general
contract of sale (in general): [Translation]
“A payment made on account of, but before completion of, a contract, or before
receipt of goods or services”.
a. The definition in Ménard’s Dictionary addresses
the application of GAAP not in the specific context of long-term contract
accounting, but in the more general context of the sale of goods. However,
GAAP, which apply to the measurement of the liability relating to advances
received under long-term contracts, are not consistent with that definition.
Thus in accordance with GAAP as they relate to long-term contracts, and
as explained earlier, an advance is settled as work is performed and costs
are incurred. Accordingly, only the amount by which the amounts received exceed
the costs incurred correspond to [Translation]
“a payment made before completion of a contract or before receipt of services”.
In strictly legal terms, the contract could not be considered to have
been completely performed before delivery of the goods, and this would
provide a measurement of the obligation (i.e. the amount in liabilities in the
balance sheet) relating to the advances received that is totally different from
the measurement provided by GAAP.
5. Bombardier would have presented a misleading
balance sheet that would not comply with GAAP if it had measured the
liability as net of the cumulative amount of the cash received from
customers or the asset as gross of the cumulative costs incurred (two
figures shown in the supplementary note concerning inventories).
6. Bombardier presents the long-term contracts in
the balance sheet in accordance with accounting methods that are comparable to
the other enterprises operating in the same industry in North America (see also
point 4 in the answer to question 2 at page 12 of this report).
7. According to Bombardier’s audited financial
statements for the 1990 to 2006 fiscal years, prepared in accordance with GAAP,
the amounts of the advances are shown in liabilities in the balance sheet,
prepared in accordance with GAAP, at the closing date of the fiscal year in
question. Accordingly,
a. for 1990 to 1996, no advance appears in
Bombardier’s balance sheet since the costs incurred on the products underway
exceed the amount of the advances; and
b. for 1997 to 2006, the book value of the advances
for each of the years is reflected by the figure for non-financial liabilities
entitled “Advances and progress billings in excess of related costs” (APBEC).
Bombardier indicates in the note concerning the main accounting conventions
relating to valuation of inventories and recognition of revenues (products)
that “advances and progress billings in excess of related costs are shown as
liabilities”.24 According to
Bombardier’s financial statements, a single component of non-financial
liabilities is shown in the balance sheet relating to advances and progress
billings received on these long-term contracts, i.e. the APBEC. The APBEC
component of the balance sheet is:
____________
24 Bombardier Inc. uses two word to refer
to billings on its long-term contracts: proportional billings and progress
billing [sic].
|
Fiscal years ended:
|
Book value of APBEC component in the
balance sheet:
|
|
January 31,
from 1990 to 199[5]
|
Nil
|
|
January 31, 1997
|
$
249,400,000
|
|
January 31, 1998
|
$ 332,100,000
|
|
January 31, 1999
|
$1,246,100,000
|
|
January 31, 2000
|
$1,482,400,000
|
|
January 31, 2001
|
$1,304,100,000
|
|
January 31, 2002
|
$1,067,800,000
|
|
January 31, 2003
|
$1,025,900,000
|
|
January 31, 2004
|
$
883,000,000
|
|
January 31, 2005
|
$1,084,000,000
|
|
January 31, 2006
|
$
832,000,000
|
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?
Answer to question 4:
As noted earlier, to determine the amount of liabilities or the
amount of assets arising out of Bombardier’s long-term contracts, we must
refer to the balance sheet alone and not the supplementary note, which
provides additional information concerning the measurement of the book value of
the inventories that appear in assets.
1. Bombardier’s supplementary note
a. relates to the details of the calculation of the
book value of the assetsshown in the balance sheet,
b. cannot, in accordance with GAAP, be
intended to present a liability that was not recognized in the balance
sheet.
2. However, the supplementary note is useful since
it enables users of the financial statements to assess the management’s
hypotheses and estimates that are used in the calculation of the amount of the
asset (inventories).
3. The practice in effect, of measuring assets and
liabilities on a long-term contract net of cumulative advances and cumulative
costs incurred, is consistent with GAAP.
Accordingly, the supplementary notes do not provide information
about liabilities that was omitted from the balance sheet. The book value of
the advances is shown in the balance sheet in the APBEC component and is added
to the other liabilities to arrive at the total liabilities in the balance
sheet. Cumulative advances and progress billings do not represent the book
value of the advances it has been given at the end of the year and cannot
appear as liabilities in Bombardier’s balance sheet. Cumulative advances and
progress billings and cumulative costs incurred on long-term contracts and
aerospace programs shown in the supplementary note concerning inventories
[Emphasis by Mr. Chlala.]:
§
provide a “historical” indication of amounts received from customers and costs incurred by
Bombardier, which are not a liability or asset, respectively, in themselves,
[Emphasis by Mr. Chlala.]
§
comprise a single “accounting unit”, that is,
the two cumulative totals cannot be separated and the net amount is the only
liability and the only measurement of the book value of the liability relating
to advances and progress billings received on long-term contracts and required
to appear in the balance sheet.
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?
Answer to question 5:
Bombardier Inc. (Bombardier) uses standard SOP 81-1 found in the
AICPA’s Audit and Accounting Guide: Construction Contractors. That
standard differs from the old version of IAS 11 Construction Contracts,
but it is similar to the version of IAS 11 currently in effect in relation
to recognition and measurement of liabilities and assets in the balance sheet
for long-term contracts.
The following is a brief overview of the history of standard IAS 11:
1. IAS 11 Construction Contracts of the International
Accounting Standards Committee (IASC), now the International Accounting
Standards Board (IASB), was published in December 1993 and came into
effect for fiscal years beginning on January 1, 1995. That standard
replaced IAS 11 Accounting for Construction Contracts published in
March 1979, which was in effect until 1994.
2. Former standard IAS 11 (in effect before
1995) offered corporations a choice of (1) measuring liabilities gross of
progress billings, and (2) measuring liabilities net of cumulative
progress billings and cumulative costs incurred on work in progress.
3. The IASC decided to eliminate the option of
presenting progress billings as a liability without taking costs incurred on a
contract into account. From my point of view, that decision was sound, since
the option of measuring the liability (or performance obligation) as the amount
of progress billings without taking costs incurred into account was
inconsistent with the conceptual accounting framework and contradicted
generally accepted accounting practices.
...
Accordingly, since 1995, GAAP in effect in the United States and
on the international scene contain the same recommendations concerning
measurement of assets and liabilities arising out of a long-term contract:
both require that cumulative progress billings and cumulative costs incurred on
work in progress be considered as an inseparable unit. There is therefore a
consensus that requires corporations to measure assets or liabilities
arising out of long-term contracts as net of the two cumulative totals, which
are not in themselves assets and liabilities.
...
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?
Answer to question 6:
1. Proceeds (revenues) constitute a component of
the income statement, while an advance received on a long-term contract is an
amount that is included in calculating a component of the balance sheet (an
asset or liability, as discussed earlier)[.]
2. The income statement and the balance sheet have
different objectives:
a. The balance sheet is a representation of
a corporation’s financial situation at a particular date in the form of
economic resources (assets), obligations (liabilities) and elements of equity (equity).
The balance sheet provides information about the corporation’s resources and
debt.
b. The income statement presents the income
from transactions for a particular period. The income statement provides
information about the corporation’s financial performance and profitability.
3. Given that the objectives of the balance
sheet and the income statement are different, the accounting rules for
recognizing and measuring the components presented in those two tables may also
differ. For example, the accounting rules generally require that a liability be
recognized in the balance sheet when the business contracts an obligation while
income is generally recognized when a transaction is completed.
4. SOP 81-1, which relates to recognition of
long-term contracts, provides for two acceptable methods for recognizing
income:
a. the “percentage of completion method” under
which income is recognized as work is performed, and
b. the “completed contract method” under which
income is recognized only when all work provided for in the contract is
completed.
5. ARB 45, on which SOP 81-1 is based,
provides that whatever method is used for recognizing income, the amount of
the advances that comprise the liability must be measured using a single
method, the net amount of advances received in excess of work performed on the
contract.
6. Accordingly, in the case where income is
recognized when work is completed (“completed contract method”), the method
followed by Bombardier for recognition of contracts relating to aerospace
programs, ARB 45 provides as follows:
When the completed-contract method is used, an excess of accumulated
costs over related billings should be shown in the balance sheet as a current
asset, and an excess of accumulated billings over related costs should be shown
among the liabilities, in most cases as a current liability. If costs exceed
billings on some contracts, and billings exceed costs on others, the contracts
should ordinarily be segregated so that the figures on the asset side include
only those contracts on which costs exceed billings, and those on the liability
side include only those on which billings exceed costs … [ARB 45.12]
[14]
It is also useful to
reproduce certain passages from Mr. Thornton’s report (Exhibit I‑1).
Of course, there is considerable overlap between the two opinions and I will
reproduce only the passages that differ from Mr. Chlala’s report that seem
to me to be most significant. However, since Mr. Thornton provided a summary
of his opinion, which appears at pages 4 to 8 of the report, I will
reproduce it here. Emphasis is mine, except where otherwise indicated:
Executive Summary of Opinion
07. GAAP for long-term
construction contracts has been a specialized area since 1955 and even before
that. However, financial statement concepts in the CICA Handbook state that a
major, general
objective of accounting for any phenomenon is to help investors predict the
ability of a company to earn income and generate cash flows in the future in
order to meet its obligations and to generate a return on its investment, by
providing information about the company’s economic resources and obligations
and by providing information about changes in those resources. This
objective is achieved when the company accounts for transactions and
events and presents them in a manner that conveys their economic substance
rather than necessarily their legal or other form.
08.
In my opinion, a company’s accounting would not
comply with GAAP if it presented nothing but the difference between (a)
inventories and (b) advances and progress billings. Paragraph 25 (page 13)
illustrates why by showing financial statement excerpts of two hypothetical
companies that both report $1 as inventories net of advances and progress
billings. To summarize, a hypothetical Company A has work-in-process inventory
of $1,000; it has advances and progress billings of $999; a hypothetical
Company B has work-in-process inventory of only $2; it has advances and
progress billings of only $1:
|
|
Company A
|
Company B
|
|
Inventory
|
1,000
|
2
|
|
Less Advances
and Progress Billings
|
999
|
1
|
|
Inventory Net
of Advances and Progress Billings
|
1
|
1
|
09.
I argue that Company A is more successful in
generating contract business and has less inventory-based borrowing capacity
than B; these inferences would not be possible unless the companies showed the
components of the net $1 amounts, either on the face of their balance sheets or
in notes to their financial statements. Disclosing only the net amount could
also obscure changes in success and borrowing capacity over time for the same
company. Thus, to comply with the general standards of GAAP, the companies
would need to disclose the component amounts (inventories; advances and
billings) either on the face of their balance sheets or in the notes to the
financial statements. If they did not
disclose the component amounts on the face of the statements, then disclosure
in the notes would be required under GAAP; such financial statements would
not
comply with GAAP if the notes were omitted. Moreover, the component
amounts disclosed in the note under GAAP would have the same import as
if they had been disclosed on the companies’ balance sheets directly.
10.
I next perform a more technical analysis of
GAAP relating to construction accounting. During the Period North American
companies often referred to US accounting literature to justify the accounting
policy of netting progress billings with work-in-progress inventories.
Their practice, in turn, constituted Canadian GAAP not
because the author of the US publication was an authoritative accounting
standard setter but because, prior to 2003, a company could justify using an
accounting principle that was “generally accepted by virtue of its use by a
significant number of Canadian companies.” The US publication distinguished
advances from progress billings, saying the advances are [sic]
“generally are made to provide a revolving fund and are not usually applied
as partial payment until the contract is nearly or fully completed. However,
advances that are definitely regarded as payments on account of work in
progress should be shown as a deduction from the related asset, and the
amounts should be disclosed.” This statement suggests that it is permissible
to net the Amounts with inventories, provided the company discloses them
separately from progress billings; but management would need to exercise
judgment in “definitely regarding” the Amounts as being akin to progress
payments.
11.
After 2003, Canadian companies could no
longer justify using an accounting principle just because it was “generally
accepted by virtue of its use by a significant number of Canadian companies”
but there was little or no authoritative specific Canadian literature on how to
apply accounting principles relating to construction accounting. Henceforth, it
would be preferable to refer to International Accounting Standard No. 11
Construction Contracts as a basis for complying with Canadian GAAP, because
the International Accounting Standards Board was (and is) an authoritative
standards setter, albeit not a Canadian one. (This will change in 2011 when
Canada joins many other countries in adopting International Financial Reporting
Standards as GAAP). International Accounting Standard No. 11 was much stricter
in distinguishing advances from progress billings, requiring separate
disclosure of advances. It said progress billings but not advances should be
netted with inventories, though it did not specifically prohibit
advances from being netted with inventories.
12.
The question of whether Bombardier’s
financial statements complied with GAAP after 2003 then attains some
saliency. I would rely on the judgment of the auditors and the company
and conclude that they did, even though Bombardier’s accounting for the
contracts I reviewed did not comport strictly with the textbook accounting for
contracts called the “completed contract method” or the “percentage of
completion method” and Bombardier continued to aggregate advances and progress
billings rather than making separate disclosures of the advances. Possibly,
the auditors did not see any substance to the “no-invoicing” character of
advances, which is one feature that distinguishes advances from progress
billings. Also, progress billings are normally made when progress is made;
the advances would tend to flow to Bombardier regardless or the degree of
progress on a contract. Still, I respect the judgment of the auditors on
this point. I am uneasy, however, about Bombardier’s practice of
aggregating progress billings with advances and not making separate disclosure
of the advances.
13.
Next I consider the meaning of the term “reflected
in financial statements” by performing some original research on the basis of
contexts of the 382 occurrences of the term “reflect” as a root-word in the
CICA Handbook. I conclude that under GAAP the verb “reflect” generally means “represent,
recognize, depict, include, convey, or incorporate.” I also argue that any
amounts disclosed in financial statement notes that give details about the
components of amounts shown in the financial statements are also
reflected in financial statements, as elements of the statements to which
they are cross-referenced.
14.
Finally, I elaborate on the role of
financial statement notes. I show that the notes are integral to financial
statements. The notes themselves are not “elements” of the financial
statements; only items like assets, liabilities, revenues and
expenses are financial statement elements. Financial statement notes,
however, often provide additional information about elements, or set out the
components of elements that are shown on the face of the statements. The
Amounts are elements even though they do not appear on the face of the balance
sheet because in the notes they are disclosed as components of an
element, or components of a difference between two elements
(inventories net of advances and progress billings) and hence the Amounts
are reflected on the balance sheet.
15.
On page 33 (paragraph 55) I explain why I
think that the Amounts are analogous to draw-downs of lending facilities, i.e.,
the Amounts are substitutes for debt financing to support the manufacturing of
work-in-progress inventory.
16.
On page 55 I answer the four questions posed
by Justice:
1. According to GAAP, what is the nature and substance of the
payments made by Bombardier’s customers pursuant to the contracts?
The Amounts are in substance debt financing to support the
manufacturing of airplanes included in work-in-progress inventory.
2. Were the Appellant’s balance sheets (and financial statements) in
accordance with GAAP with respect to those payments?
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.
3. Are the advances, as detailed in the notes to the financial
statements, “reflected” in the balance sheets of Bombardier?
Yes. The Amounts are reflected, incorporated, or depicted in
the balance sheet by dint of the balance-sheet references to financial
statement notes; the notes, in turn, give details relating to the Amounts.
4. Are the notes to the financial statements an integral part of the
balance sheets?
Yes.
Relevant Statutory Provisions
[15]
The relevant statutory
provisions read as follows:
Determining values and amounts
181(3) For the purposes of determining the carrying value of a
corporation’s assets or any other amount under this Part in respect of a
corporation’s capital, investment allowance,
taxable capital or taxable capital employed in Canada for a taxation year or in
respect of a partnership in which a corporation has an interest,
(a) the equity and
consolidation methods of accounting shall not be used; and
(b) subject to paragraph
181(3)(a) and except as otherwise provided in this Part, the amounts
reflected in the balance sheet
(i) presented to the shareholders
of the corporation (in the case of a corporation that is neither an
insurance corporation to which subparagraph 181(3)(b)(ii) applies nor a
bank) or the members of the partnership, as the case may be, or, where
such a balance sheet was not prepared in accordance with generally accepted
accounting principles or no such balance sheet was prepared, the amounts
that would be reflected if such a balance sheet had been prepared in
accordance with generally accepted accounting principles, or
...
Limitations respecting inclusions and deductions
(4) Unless a contrary intention is evident, no provision of this Part
shall be read or construed to require the inclusion or to permit the
deduction, in computing the amount of a corporation’s capital,
investment allowance, taxable capital or taxable capital employed in Canada for
a taxation year, of any amount to the extent that that amount has been
included or deducted, as the case may be, in computing the first-mentioned
amount under, in accordance with or by reason of any other provision
of this Part.
Taxable capital
181.2 (2) The taxable capital of a corporation
(other than a financial institution) for a taxation year is the amount,
if any, by which its capital for the year exceeds its investment
allowance for the year.
(3) The capital of a corporation ... for a
taxation year is the amount, if any, by which the total of
(a) the amount of its capital
stock (or, in the case of a corporation incorporated without share capital,
the amount of its members’ contributions), retained earnings, contributed
surplus and any other surpluses at the end of the year,
(b) the amount of its
reserves for the year, except to the extent that they were deducted in
computing its income for the year under Part I,
...
(c) the amount of all loans
and advances to the corporation at the end of the year,
...
exceeds the total of
...
Investment allowance
(4) The investment allowance of a corporation (other than a
financial institution) for a taxation year is the total of all amounts each
of which is the carrying value at the end of the year of an asset of the
corporation that is
(a) a share of another
corporation,
(b) a loan or advance to
another corporation (other than a financial institution),
...
[Emphasis added.]
Position of Bombardier
[16]
Counsel for Bombardier
first noted that the purpose of the tax on large corporations announced in
Finance Minister Wilson’s budget on April 27, 1989, was the reduction of
the federal deficit. At page 41 of the budget papers (Respondent’s
Authorities, tab 1), the tax base is defined as including loans and
advances:
Tax on Non-Financial Corporations: Detailed
Provisions
The tax base will be calculated using the accounts of a
corporation determined in accordance with generally-accepted accounting
principles and presented on an unconsolidated basis. Current year-end
balances will be used.
This base will include the corporation’s
shareholders’ equity, surpluses, and reserves, as well as loans and advances
to the corporation, and certain other debts.
Surpluses will include earned surpluses and capital, appraisal and
other surpluses. Current income taxes paid or payable to all jurisdictions and
dividends paid by the corporation before the end of the year will be excluded.
However, deferred income tax reserves and contingent, investment, inventory and
similar reserves (other than those reserves deducted under Part I of the
Income Tax Act) will be included in computing a corporation’s capital.
All loans and advances to a corporation,
as well as any other indebtedness that is represented by bonds, debentures,
mortgages or other securities of the corporation, will be included in computing
its capital. Other indebtedness of the corporation, including accounts
payable, that has been outstanding for more than 356 days prior to the end
of the corporation’s tax year will also be included in its capital.
[Emphasis
added.]
(a) Main position
[17]
Counsel for Bombardier
submits that the statutory provisions enacted by the Parliament of Canada are
consistent with the fiscal policy announced by Finance Minister Wilson. Counsel
advanced two arguments against the Minister’s assessment. First, as the principal
argument, he agreed that moneys paid to Bombardier by customers on account of
the purchase price of the aircraft and railway stock that Bombardier was to
deliver constitute advances for the purposes of the Act, but submitted that the
amount of those advances must be the amount determined in liabilities in Bombardier’s
balance sheet, that is, “advances and progress billings in excess of related
costs”. In the alternative, he submitted that the moneys received were included
in Bombardier’s income and were then deducted from it. With respect to the 2000
taxation year in particular, all of the advances from customers were included
in income under paragraph 12(1)(a) of the Act and it was deducted in
full under paragraph 20(1)(m) of the Act. These are moneys covered
by paragraph 181.2(3)(b) and they were therefore excluded, by
application of that paragraph, in computing the capital. Given that result,
that paragraph should take precedence over paragraph 181.2(3)(c) of
the Act.
[18]
In the submission of
counsel for Bombardier, a loan is a financial obligation that must be repaid,
while an advance is a non-financial obligation that must be used to
finance construction costs, that is, work in progress, and under GAAP
applicable to long-term construction contracts, the advances must be deducted
from the cost of inventories because Bombardier considered that the financial
resources represented by the advances had been used as payments for the work in
progress. Accordingly, the amount of those advances at the end of its fiscal
year was not the total of the moneys received from its customers, and was
rather the balance of those advances that had not been used to finance the cost
of its products.
[19]
In counsel’s
submission, the relevant provisions of the Act with respect to calculation of
the capital require that GAAP be applied not only concerning the nature of the
elements that had to be including in computing the capital, but also concerning
the amounts or values that appear in the balance sheet.
[20]
In support of the proposition
that the characterization for accounting purposes should take precedence,
counsel for Bombardier cited a number of decisions. In particular, he cited Ford
Credit Canada Ltd v. Canada, [2006] T.C.J. No. 331 (QL), DTC 3424
(Eng.), in which Chief Justice Bowman concluded that the accounting treatment
had to take precedence over the legal treatment with respect to Class “C”
preferred shares redeemable at the holder’s option. In the financial
statements, those shares had beenshown as a debt of the corporation rather than
as share capital. Chief Justice Bowman wrote, at paragraphs 26 and 32 of his
decision:
26 We are not, in Part I.3, dealing with the computation of income, a
function that courts have jealously guarded to themselves. We are dealing with
a tax on capital and the base upon which the tax is to be computed. It is
not surprising if Parliament were to direct us to look to the manner in which
accountants measure that base. As Archambault J., said in Oerlikon
Aérospatiale Inc. v. The Queen, [1998] 4 C.T.C. 2821 at 2838:
... I believe that accounting
principles must be used to determine not only the value, but also the nature of
the elements set out in subsection 181.2(3) of the Act. The value
appearing in a balance sheet has meaning only when it is linked to a specific
heading.
...
32 The effect of these decisions
and indeed of the plain meaning of subsection 181(3) is that the accounting
characterization of terms in the balance sheet is to be accepted in
determining the components of a corporation's capital for the purposes of Part
I.3. In specifically giving a function to accounting principles that is
somewhat unique in income tax matters, Parliament intended that deference be
given to the accounting characterization in the balance sheet of items that
make up a corporation's capital.
[21]
That decision was
affirmed by the Federal Court of Appeal in Ford Credit Canada Ltd v.
Canada, [2007] F.C.J. No. 826 (QL), 2007 DTC 5431 (Eng.). At paragraph 27,
Justice Ryer wrote: “the balance sheet …
must be accepted for the purposes of the
determination of the LCT liability of the corporation.” In this case, since it has been admitted
by the parties and their respective experts that Bombardier’s financial
statements had been prepared in accordance
with GAAP, the amount of the advances that should be added in calculating
Bombardier’s capital is the amount that appears in liabilities for the item
“advances an interim billings in excess of related costs”. In counsel’s
submission, Bombardier’s senior management considered the moneys paid by
Bombardier’s customers to be payments on account relating to work in progress
and accordingly it was appropriate to apply the rule that appears in the AICPA
Audit and Accounting Guide: Construction Contractors (Guide), at
paragraph 6.19: “… Advances that are definitely regarded as payments on
account of work in progress should be shown as a deduction from the related
asset, and the amounts should be disclosed”. (Emphasis added.) (See
Exhibit A‑7, tab 3, page 157.)
[22]
The approach followed
by Bombardier is similar to that followed by the taxpayer in Terasen Gas (Vancouver Island) Inc. v. The Queen in Right of the Province of
British Columbia, 2006
BCSC 1696. In that case, the taxpayer had received $100 million from the
federal government to build a gas pipeline in 1991. That amount had been
deducted from the cost of the pipeline. The Crown submitted as follows (at
paragraph 22): “The Crown argues that they [the
payments] were still ‘accounted for’ in the balance sheet because they were
used to net down the assets.” The answer given by Justice Smith of the
British Columbia Supreme Court was as follows (at paragraph 23):
23 In
my respectful view, that submission is beside the point. The payments at issue
may indeed be "accounted for" in the sense that they had to be
considered in arriving at the total value of the petitioner's capital. But the
resulting accounting determination was that their value as capital was nil and
no amount was included for them as part of the total capital shown in
the financial statements. The evidence is that this is the result GAAP
mandates in these circumstances.
[Emphasis
added.]
[23]
In the opinion of
counsel for Bombardier, the respondent and her expert are wrong to argue that
the amount that appears in the “advances” account must be used, which was used
in the supplementary notes for the calculation of the value of inventories,
since that amount shown there is not meant as a representation of the amount of
the debt or the liability, but to serve for the calculation of the value of an
asset. He noted the following accounting principles, which are set out in the
CICA Handbook, in chapter 1000, that deal with the conceptual bases
of financial statements, at paragraph .42:
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
added.]
[24]
Similarly, he quoted
chapter 1400, “General Standards of Financial Statement Presentation”, at
paragraph .07, which states:
An entity provides information in a manner that clearly conveys the
nature and extent, and significant terms and conditions, of the related
transactions. … An entity discloses amounts such that users of financial
statements do not have to recalculate amounts actually disclosed to determine
amounts that are required to be disclosed.
[Emphasis
added.]
[25]
Paragraph 1400.11
of that Manual states:
Notes to financial statements, and supporting schedules to which the financial statements are cross-referenced, are often
essential to clarify or further explain the items in the financial statements.
They have the same significance as if the information or explanations were set
out in the body of the statements themselves. They are not, however, to
be used as a substitute for proper accounting treatment.
[Emphasis
added.]
Accordingly, the amount that must appear as the value
of advances is the amount that appears in the body of the balance sheet under
liabilities, and not the amounts used for the calculation of the net value of
inventories in the supplementary notes.
[26]
The facts in these appeals
bear a strong resemblance to the facts in Oerlikon Aérospatiale Inc. (supra,
footnote 1), where I confirmed the assessment by which the Minister, in
computing Oerlikon’s capital, had added the amounts of the advances as they
appeared in the supplementary notes for the purpose of the calculation of
inventories. Counsel for Bombardier rightly pointed out that the issue in Oerlikon
was whether the Act applied to advances on account, or whether, as counsel for
Oerlikon argued, its application had to be limited to advances in the nature of
loans. In that case, I ruled that paragraph 181.2(3)(c) applied
equally to both types. However, the issue there was not the amount of the
advances. Oerlikon’s expert witness had offered this opinion in his report:
[Translation]
Mr. Blanchette confirms at page 4 of
his report that the OA balance sheet follows this presentation:
According to this information, all moneys
received by OA from WO and from Martin Marietta Corporation were used in the
work in progress and the other expenses relating to the contracts. However, those
amounts were still considered to be advances in accordance with the
accounting principles stated previously and presented as such in the
financial statements.
[Emphasis
added.]
[27]
In argument, counsel for
Bombardier also addressed a decision of the Court of Québec, Bombardier
v. Sous-ministre du Revenu du Québec, 2010 QCCQ 3036; the Court
had to decide an issue similar to the issue in these appeals. For the 1992 to
2001 taxation years, the capital had to be computed for the purposes of the
capital tax paid as provided in section 1131 of the Taxation Act.
The judge of the Court of Québec ruled that, for the purposes of that Act, the
amount of the advances was the amount found in the supplementary notes. He made
the following remarks, at paragraph 73:
[Translation]
73 On this point,
the Court accepts the opinion of the expert Diane Paul and concludes that even
if the amounts were used by Bombardier to offset costs incurred in order to
perform the contract, they are still advances that are potentially
repayable under the terms of the contract.
[Emphasis
added.]
[28]
Bombardier appealed before
the Quebec Court of Appeal. It argued that the trial judge had adopted a legal
approach to the definition of the word “advance” instead of an accounting
approach. This may be seen in the following analysis by the judge at
paragraphs 37, 48, 65, 69 and 70 of his decision:
[Translation]
37 As long as delivery
has not been made, the amounts received by Bombardier, in accordance
with the provisions of the contract, are still advances and are part of
the corporation’s paid-up capital, inter alia, because they are
repayable. From the standpoint of the sale contracts signed by Bombardier, Ms. Paul
rejects the idea of “progress billing”. She acknowledges that it is
important to consider the economic or commercial substance of the
contract, but adds, on the other hand, that the legal substance is
equally important.
...
48 Having regard to the
definition of the phrase “financial statements” in section 1130 of the Taxation
Act, it is obvious that GAAP are important. Mr. Chlala defined
them as follows in his testimony:
... a set of general
principles and conventions of general application and of rules and procedures
that determine what the accepted accounting principles are ...
...
65 Although Bombardier uses
those amounts to offset the costs incurred, it must be noted that under the
contract those amounts are not definitively Bombardier’s until the contract is
completely performed, that is, at delivery.
...
69 If, as section 16.3(c)
provides, the amounts in issue may be retained and applied “against” costs and
expenses in the event of termination, in accordance with clauses 9.8, 16.1
and 16.2 of the contract, that means that before then, even if Bombardier has
used those amounts, they were not its own.
70 In the event that
there has been no termination of the contract before delivery, it must
be concluded that those amounts were still advances until delivery, the
point that also marks the termination of the contract, this time by
performance. Only then may Bombardier retain those amounts and apply them
definitely to the sale price.
[Emphasis
added.]
[29]
Counsel submitted that,
contrary to what the judge of the Court of Québec wrote at paragraph 48,
the financial statements are not merely important, they are conclusive. In
counsel’s submission, Mr. Thornton has adopted an interpretation
similar to the one adopted by the Court of Québec when he concludes that the
advances are still advances as long as there has been no delivery of the
aircraft or products.
(b) Alternative position
[30]
Counsel for Bombardier
acknowledged that his argument, that paragraph 181.2(3)(b) had to
take precedence over paragraph (c), was not his best argument.
However, he reiterated his position, in view of Pretty v. Solly,
cited in Canfor Ltd. v. British Columbia (Minister of Finance), 1975
Carswell BC 253, [1976] C.T.C. 429, [1976] 3 W.W.R. 519:
38 These
[certain rules of interpretation] have been considered and stated in a number
of authorities. In Pretty v. Solly (1859) 26 Beav 606 ( 53 ER
1032) it is thus stated at page 610:
The general rules which are
applicable to particular and general enactments in statutes are very clear, the
only difficulty is in their application. The rule is, that wherever
there is a particular enactment and a general enactment in the same statute,
and the latter, taken in its most comprehensive sense, would overrule
the former, the particular enactment must be operative, and the general
enactment must be taken to affect only the other parts of the statute to which
it may properly apply.
[Emphasis
added.]
Position of the respondent
[31]
The respondent filed
written submissions, and I will quote certain excerpts (with footnotes
omitted):
[Translation]
10. The respondent submits that, from a
substantive accounting point of view, the moneys received by Bombardier is that
they are advances and that those amounts are reflected in its balance sheet.
...
Definition of advances
12. To determine the economic substance of the
payments received by an entity, we must refer to the intent of the parties to
the contract. Here, the standard contract in issue (Jersey, tab 69 of the
Compendium) is very clear and it can be concluded from it that the moneys
received by Bombardier could only be advances on the contract. The provisions
of the contract are very important, as we shall see later.
13. According to Louis Ménard’s accounting and
management dictionary, an advance payment is [TRANSLATION] “moneys paid before
the goods or products sold have been delivered or the services performed”.
14. In Terminology for Accountants, “advance” is
defined as follows:
1. A payment that is to be accounted for by
the recipient at some later date, e.g. payment for expenses to be incurred.
2. A payment made on account of, but before completion of a
contract, or before receipt of goods or services.
15. Second, international standard IAS-11,
to which Mr. Chlala refers, also makes a distinction between advances and
progress billing, in paragraph 41. It defines the two concepts as follows:
41. Retentions are amounts of progress billings that are not paid
until the satisfaction of conditions specified in the contract for the payment
of such amounts or until defects have been rectified. Progress billings are
amounts billed for work performed on a contract whether or not they have
been paid by the customer. Advances are amounts received by the contractor
before the related work is performed.
16. The advances received by Bombardier were
received before the corresponding work had been performed.
17. Those definitions are regularly quoted by
the courts.
18. First, the Ontario Court of Appeal was
asked to define the word “advance” in an analysis of the provincial capital
tax. The definition it used was as follows:
“payment [made] before … the completion of an obligation for which
it is to be paid”: Dictionary of Business and Finance (1957), p. 9.
19. As well, in Journaux Trans-Canada (1996)
Inc., the Quebec Court of Appeal applied the following definition of
“advances”:
[Translation]
An advance under paragraphs 1136(1)(b) and (d) is
a payment made with a view to the future performance of a mutual
obligation.
20. The word “advances”, for the purposes of
Part I.3, was also defined in Oerlikon.
21. As in this case, Oerlikon used the
completion method and recognized income at the time of delivery of the units.
In that case, Oerlikon had notshown the total amount of the advances from its
customers as a debt included in its liabilities, and instead deducted the value
of its work in progress included in its assets. The advances received by the
appellant were identified in note 4 to the balance sheet and described as
“Advances from Customers”.
22. Although that case related to the
application of the international standards that offered entities a choice as to
the method of presentation, Oerlikon presented the advances received using a
method identical to the one proposed by the Accounting and Audit Guide –
Construction Contract or SOP 81-1.
23. For one of the years in issue, Oerlikon had
shown the excess of advances over liabilities in its balance sheet. However,
for another of the taxation years in issue, advances were deducted from work in
progress. On that point, the Court of Appeal stated:
In neither case was this amount included as income because,
according to generally accepted accounting principles, an advance is not
recognized as income until the goods or services to which it relates are
delivered or rendered or the percentage of completion method justifies its
inclusion.
24. The Court of Appeal quoted the following
definition of advances, which it had used in TransCanada Pipelines Ltd.,
in concluding that the payments:
… fell within dictionary definitions of “advance” as a “payment
[made] beforehand or in anticipation” and a “payment made before … the
completion of an obligation for which it is to be paid” Dictionary of
Business and Finance, (1957), p.9.
25. It then concluded:
The appellant was unable to show how the advances at issue in this
case were distinguishable from the advances the Ontario Court of Appeal
considered in TCPL. Both cases dealt with payments made in advance for
the eventual performance of the resulting reciprocal obligation.
26. And finally, the Court of Appeal stated
that an advance is available to the appellant and is part of its financial
resources:
The effect of an advance, be it in the sense of a payment on account
or a loan, is to make the amount of money it represents available to the person
or corporation which receives it. In the instant case, the advances were an
integral part of the financial resources available to the appellant at the end
of its 1989 fiscal year according to the financial statements it filed, and
nothing either in the legislation or the tax policy which led to its enactment
indicates that Parliament intended to exclude advances from the tax under Part
I.3.
27. What then is seen all of the decisions
referred to above is the performance of the mutual obligation. In the
case of Bombardier, that obligation, under the contract, is the delivery of the
aircraft. It is impossible for Bombardier’s customer to take possession of the
good before it is completed and ready for delivery. Bombardier’s obligation is
therefore to deliver a good that meets the specifications in the contract.
28. Oerlikon Aérospatiale Inc. was
applied and followed in Ford Credit (FCA, para. 25) and Manufacturers
Life Insurance Co. (FCA).
...
31. The definition offered by Mr. Thornton
in his testimony is to the same effect [as] the definition in accounting
dictionaries and in the new standard IAS‑11. In his opinion, it is an
amount received before the work is performed. In Bombardier’s case,
Mr. Thornton is of the opinion that performance of the work amounts to
delivery, as provided in the contract (Report of Mr. Thornton,
para. 55). In fact, Bombardier recognizes no income before that stage.
32. The appellant’s position is that the
advances lose their nature as the work is performed. To make that
assertion, Bombardier’s expert could not cite a single source, other than
his personal view. As Mr. Thornton’s testimony showed, IAS-11
addresses advances and billing separately, and never shows advances net of
costs incurred, whether in assets or liabilities.
33. Neither the document from the IRS nor the
Accounting and Audit Guide – Construction Contract, nor SOP 81-1, allows for
showing advances net of costs. The two documents address only progress
billings.
34. The following are some definitions of
“progress billings”:
An interim billing based upon partial completion of a contract[.]
[Translation] Billing method based on the progress of the work to be performed.
Amounts billed, in accordance with the provisions of a contract, on
the basis of progress to date under the contract.
35. The amounts received by Bombardier do
not meet those definitions of progress billings, since no work was done
under the contract.
36. The only paragraph in any of the
documents that allows for showing advances net of costs incurred is section
6.19 of the Handbook, which allows the net to be shown in a situation
that does not relate to the appellants’ situation.
37. Bombardier submits that when the advances
reduce the work in progress they can no longer be advances. First, other
than as a convention for presentation, there is no support in the
literature, and no theoretical concept, that supports the position that
advances must reduce costs. In addition, that argument is surprising since at
every opportunity, Bombardier refers to these amounts by using the word
“advances”.
38. Indeed, even if the advances and costs are
tracked by aircraft, the contract does not provide that the funds must be used for
the payment of the construction costs. The advances are funds made available to
Bombardier that are part of its available financial resources at the end of the
year.
39. SNC Technologies is an important case
since it is a recent one (August 2008), like the decision rendered by the
Court of Québec in Bombardier Inc. (tab 2 of the respondent’s book
of authorities). In SNC Technologies, the Court ruled that the amounts
received as “Progress payments regarded as interim payments” were nonetheless
advances within the meaning of paragraph 181.2(3)(c) of the Act.
40. Notwithstanding the fact that the
advances reduce inventories or are in liabilities, they are “advances” in
accounting terms. It is merely a question of presentation (para. 77 of
Mr. Thornton’s report).
The amounts received by Bombardier are
advances
41. The amounts received by Bombardier are
advances:
Unlike progress billings, which are charged to
the client once the work is performed, the amounts received by Bombardier are
charged before the work has been performed (or before the mutual obligation has
been performed). This corresponds to the definitions of advances provided by
accounting dictionaries, the courts and international standard IAS‑11.
The mutual performance under the contract is the
delivery of the aircraft. Indeed, Bombardier acknowledges that, since it
recognizes no income when that stage is completed. In fact, chapter 3400,
more specifically at paragraphs 3400.06 to 3400.15, clearly makes the
connection between recognition of income and performance of the work.
The accounts in which the amounts received are
accumulated are called “advances” and not “progress billings”.
The appellant admitted that the amounts received
were recognized in the “advances” accounts only and not in the contra accounts,
and that they accumulated there until the time of delivery. The amounts
received from EDC and L.R. Jet were also recognized in accounts identified
as “advances”.
Indeed, the documents submitted during
examination of Pierre Lafontaine, Vice-President, Taxation, at Bombardier,
describe the amounts received from its customers as “accountable customer
advances”.
Until 1995, Bombardier’s financial statements
referred simply to “advances” and made no mention of “progress billings” or
“proportional billings”. Mr. Paré told us in his testimony that the
substance of those accounts did not change after 1995, only the terminology
used did.
Accordingly, until 1995, Bombardier was of the
opinion that the amounts were advances.
As in Autobus Thomas (FCA), “[t]here is no reason to disregard their intent or not to give their
transactions the meaning and effect they intended to give them and did give
them in practice by recording them as such in their books of account”. Indeedt, in this case, both the auditors and Bombardier’s senior
management agreed to the term “advances” to characterize the accounting
substance of the transaction.
That shows that Nadi Chlala is the only one who
argues that the amounts in issue are not advances, since a significant number
of accountants have consistently identified these amounts as advances. If the
advance had ceased to have that nature, those experts would have ceased to
identify it as such.
42. The standard contract of Bombardier’s
Aerospace division (tab 69 of the compendium of documents) supports that
conclusion.
The contract provides that Bombardier’s
obligation under the contract is to deliver an aircraft to its customer.
Section 4 of the contract provides for the sale
price.
Section 5 provides for the method of payment of
the sale price. Paragraph 5.1 indicates that a down payment must be made
on each aircraft. At the time the down payment is made, no work has been done
on the aircraft.
Paragraph 5.2 of the contract provides for
a payment schedule. In the Jersey contract, the payment schedule provides:
It is contemplated that Buyer shall make the following payments for
each Aircraft:
(a) 5% of the estimated Purchase Price upon
execution of the Purchase Agreement;
(b) 7.5% of the estimated Purchase Price twelve
(12) months prior to its Scheduled Delivery Date;
(c) 7.5% of the estimated Purchase Price six (6)
months prior to its Scheduled Delivery Date;
(d) the balance of the Aircraft Purchase
Price on or before the Delivery Date of such Aircraft.
Payments referred to in paragraphs b. and c. above are to be made on
the first day of the applicable month.
According to Mr. Paré’s testimony, the
percentages in some contracts may be different. Indeed, in its notice of
objection, Bombardier refers to a standard contract in which 10% of the sale
price was payable on signing, 30% of the sale price was payable 12 months
before delivery, and another 30% of the sale price was payable six months
before delivery.
No witness has shown that the payment schedule
was connected with the progress of the work.
The contract does not stipulate that Bombardier
must use the advances expressly to pay the construction costs of the aircraft.
Indeed, Bombardier remains the sole owner of the
aircraft until the customer has paid the full sale price, that is, until
delivery (section 5.4 of the contract):
Bombardier shall remain the exclusive owner of the Aircraft, free
and clear of all rights, liens, charges or encumbrances created by or through
Customer or Buyer, until such time as all payments provided for under the
related Purchase Agreement and any amounts then due and payable by Customer
under this Agreement have been made.
Title and risk associated with the aircraft are
transferred only at the time of delivery:
10.1 Following acceptance of each Aircraft by Customer and
payment in full of the Aircraft Purchase Price by Buyer, Bombardier shall under
the related Purchase Agreement transfer title and interest in the Aircraft to
Buyer to be evidenced by instrument or by delivery (as the parties may agree).
10.2 If, after transfer of title to Buyer on the Delivery Date,
the Aircraft at Customer’s request remains in or is returned by Customer to the
care, custody or control of Bombardier, Customer for itself and on behalf of
its insurer(s) hereby waives and renounces to [sic], and releases Bombardier
and any of Bombardier’s affiliates from any claim, whether direct, indirect or
by way of subrogation, for damages to or loss of the Aircraft arising out of,
or related to, or by reason of such care, custody or control.
Section 13.1 of the contract provides for
situations where a forgivable delay may occur in delivery of the aircraft by
Bombardier. In the event that delays result in more than a 12-month delay in
delivery, the parties may terminate the contract under 13.2. Bombardier
must then refund the advances that it has received to its customer
(section 13.3).
Section 15 provides that, in the event of
damage caused to the aircraft or loss of the aircraft by Bombardier, the
customer may terminate the contract for that aircraft or, in certain circumstances,
require replacement of the aircraft.
Section 16 provides for the consequences of
cancellation of the aircraft. If Bombardier terminates the contract because of
default by its customer, the advances are dealt with as follows:
16.3(c) All amounts paid by Customer with respect to the applicable
undelivered Aircraft shall be retained by Bombardier and shall be applied
against the costs, expenses, losses and damages incurred by Bombardier as a
result of Customer’s default and/or termination of this Agreement including
without limitation … [Emphasis by the respondent.]
Accordingly, the contract does not provide
that before default by the customer, Bombardier may apply the moneys received
against costs. Only when the contract is terminated because of default by
the customer may Bombardier do that.
The advances continue to be owing to the
customer and do not belong to Bombardier under the contract until delivery. No
consideration is received by the customer at the time of the payment before
delivery.
43. Mr. Thornton’s testimony on this issue
is particularly valuable since according to his interpretation of the contract,
the customer had never provided for making progress payments, other than to
purchase the aircraft at the time of delivery. Any “interim” payment could
only be financing.
44. Initially, on the question of compliance
with GAAP, Mr. Thornton concludes that the financial statements were
prepared in accordance with those principles, but solely because of the
presentation of the advances in the body of the financial statements or in
notes (para. 76 of Mr. Thornton’s report).
45. Accordingly, these are clearly financial
resources that are available to Bombardier at the end of the year to undertake
the manufacture of aircraft.
...
49. Bombardier considers that the amounts it
receives are advances, as it shows in:
- Its books of account (I-2, tabs 3 and 4)
- Tables prepared by Jean Paré (Exhibits A-9
and A-10) and Pierre Lafontaine (Exhibit A‑11)
- Financial statements (A-1, tabs 1
to 12)
B. ADVANCES RECEIVED BY BOMBARDIER
“REFLECTED IN BALANCE SHEET”
50. The documents consulted by Nadi Chlala are
important and illustrate that the amounts in issue must be in the balance
sheet. See I‑7, tab 3 at paragraphs 6.18 and 6.20 and
SOP 81‑1 at paragraphs 27 and 30.
51. The advances in liabilities are
reflected in the balance sheet. They are reflected there because they are
reflected in the balance sheet because they appear in a supplementary note
to the balance sheet. They are also reflected there because they constitute
a component in calculating inventories and they reduce inventories in the
balance sheet.
The notes are an integral part of the
financial statements and the information in them is as important as if it
appeared in the body of the balance sheet itself
...
58. In addition, the courts have acknowledged
on numerous occasions not only that what appears in the notes is part of the
balance sheet but also that for the purposes of applying the tax on large
corporations reference may and/or must be made to them:
(1) Oerlikon Aérospatiale Inc. (TCC and FCA), supra.
(tabs 3 and 4 of the respondent’s book of authorities).
(2) The Royal Trust Company (supra), para[.] 19 (tab 8
of the respondent’s book of authorities). Manufacturers Life Insurance Co. (supra),
para. 9 (tab 7 of the respondent’s book of authorities) and Ford
Credit Canada (FCA) (supra), para. 25 which refers to Oerlikon
Aérospatiale.
(3) SNC Technologies Inc. v. The Queen, 2008 DTC 4538 (TCC),
paras. 31, 39, 46 and 47 (tab 9 of the respondent’s book of
authorities).
(4) PCL Construction Management (supra), tab 10,
at paragraphs 24 and 25, see also the definition of the word
“advances” adopted at para. 17 (tab 10 of the respondent’s book of
authorities).
Advances are reflected in the balance sheet because they are
included in the calculation of inventories in the balance sheet
59. Advances are reflected in the balance sheet
because the advances reduce the “inventories” asset in the appellant’s balance
sheet.
60. The appellant submits that the amounts are
not reflected in the balance sheet because they are not “recognized”, they are
simply disclosed.
61. In Part I.3, Parliament indicates that
to determine the book value of an amount under Part I.3 of the Act, the amounts
that are reflected in the balance sheet presented to the shareholders of
the corporation. It is important to note that Parliament does not require
that the “amount” be an item in the balance sheet or an element, let
alone that it be an element of liabilities. Parliament did not use the word
“recognized”, it used the word “reflectedˮ, in
French, “figurer”, in the balance sheet. The meaning of “reflected” and
“figurer” is very broad.
62. As well, regarding accounting,
Mr. Thornton did a detailed study of the use of the English word
“reflected” in accounting. He concluded that “reflected” has a meaning
equivalent to “included, represented, recognized, or depicted in the
statements” (para. 80 of Mr. Thornton’s report). Accordingly, the word
“reflected” has a broad meaning.
...
65. Advances received are disclosed in the
notes to the financial statements. They reduce inventories by a corresponding
amount and accordingly are reflected.
66. This disclosure is required so that the
appellant’s financial statements are in accordance with GAAP (Report of
Mr. Thornton, para. 76).
67. This information is necessary for readers
of the financial statements. As well, disclosure is required by
paragraph 6.18 of the Audit and Accounting Guide – Construction
Contract, whether by notes or “by a short extension in the balance sheet”.
See also section 6.20.
68. And finally, the most important decision is
the decision rendered by the Court of Québec in Bombardier, since Judge
Paquet adopted the respondent’s position on all of the issues, which were
essentially the same as in this case.
Analysis
[32]
It is easier to deal
with the appellant’s alternative argument first, since, as its counsel
acknowledged, that is not its best argument. As counsel himself acknowledged,
the Federal Court of Appeal addressed this issue in Oerlikon (supra,
footnote 1). The Court wrote, at paragraphs 20 and 21 of its
decision:
20 In addition to the above,
counsel for the appellant argues that the reserves in the amount of
$244,492,173 are specifically excluded from the computation of his client’s
capital pursuant to paragraph 181.2(3)(b) and that this amount cannot be
included anywhere else, for example as "advances" under paragraph
181.2(3)(c). In support of this argument, he cites the rule of
construction to the effect that a particular enactment in a statute overrules a
more general enactment on the same.
21 I do not believe this rule
supports the appellant’s argument. First, subsection 181.2(3) deals with a
series of items which must all be included in the computation of a
corporation’s capital, each of which is a particular enactment. Accordingly,
while it is true that in the instant case paragraphs 181.2(3)(b) and
181.2(3)(c) apply to the same amount, they do so in different respects
and give rise to results which can be reconciled in the statutory scheme.
[33]
In addition to this
ground there is the argument made by counsel for the respondent submitting that
subsection 181(4) of the Act is intended to avoid double inclusion of an
element. I therefore reject Bombardier’s alternative argument as being without
merit.
[34]
On the other hand, I am
persuaded by the first argument made by counsel for Bombardier, as set out
earlier, and I accept it in full. The starting point, obviously, is the language
of the statutory provision itself. Under paragraph 181(3)(b) of the
Act, the amounts of the advances that had to be added to the capital are the
amounts reflected in the balance sheet presented to the shareholders or the
amounts that would be reflected in the balance sheet if such a balance sheet
had been prepared in accordance with GAAP. Moreover, the courts have confirmed
that section 181 is consistent with the policy announced by Finance
Minister Wilson when he indicated in his budget papers that the tax base of
large corporations would be calculated using the accounts of the corporation
determined in accordance with GAAP at the end of the fiscal year. The advances
that are reflected in the balance sheet are the advances found in the liability
entitled “advances and progress billings in excess of related costs” in the
body of the balance sheet.
[35]
It was agreed by the
parties that the balance sheet (like the other financial statements) had been
prepared in accordance with GAAP. Moreover, part of the advances received by
Bombardier as down payment on the contracts had been used to reduce the asset
entitled “inventories”. According to the testimony of Mr. Chlala, the
expert witness, the amounts that appear as liabilities under the item “advances
and progress billings in excess of related costs” represent the value of the
“advances” within the meaning of paragraph 181.2(3)(c) of the Act.
The amounts in the advances account that appear in the supplementary notes are
there only to all the asset “inventories” and the liability “advances and
progress billings in excess of related costs” to be calculated”.
[36]
Not only did the
respondent acknowledge that Bombardier’s financial statements had been prepared
in accordance with GAAP, but its expert, Mr. Thornton, also acknowledged
this in his report and his testimony. As Justice Ryer of the Federal Court of
Appeal stated in Ford Credit Canada Ltd, supra, “the balance sheet
… must be accepted for LCT
purposes.” (paragraph 27). I accept the following opinion stated
by Mr. Chlala in answer to 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?”):
[Translation]
3. Accordingly, if the costs exceed the amounts received on
a long-term contract, Bombardier has no liability. However, if the amounts
received exceed the cost of the corresponding work, only the excess represents
the advance that must appear in liabilities, since for accounting purposes,
performance of the work constitutes settlement of the advances. Thus in
accordance with GAAP, the initial advance ceases to be an advance once the
long-term contract is underway.
[37]
It is possible that
there is really no discrepancy between the opinions of Mr. Chlala and
Mr. Thornton since that question was not put directly to
Mr. Thornton. I note that the questions most similar to it that were put
to him are question 1: “According to GAAP, what is the nature and
substance of the payments made by Bombardier’s customers pursuant to the
contracts?”, and question 3: “Are the advances, as detailed in the notes
to the financial statements, “reflected” in the balance sheets of Bombardier?”
Accordingly, it seems that Mr. Thornton was never asked the right
question, that is, the one put to Mr. Chlala.
[38]
Obviously, the opinion
given by Mr. Chlala seems to me to be entirely consistent with accounting
principles, and in particular the instructions in the CICA Handbook, which
provides that recognition of an item in the balance sheet must be “within one
or more individual statements and does not mean … in the notes”. See
paragraph .42 of chapter 1000, reproduced supra. I also adopt
the reasoning of the British Columbia Supreme Court in Terasen Gas Vancouver
Island Inc., in particular at paragraph 23, reproduced supra.
[39]
Bombardier’s financial
statements were prepared by the firm Ernst & Young. For example, in its
report for 2002, that firm wrote, in the second paragraph, that its audit was
done in accordance with audit standards generally accepted in Canada. (See
Exhibit A‑1, tab 13, page 286.) In the opinion of Ernst
& Young, “these non-consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at
January 31, 2002, … except that they are prepared on a non-consolidated
basis …”. The first paragraph also states that the responsibility for the
financial statements in question lies with the management of the corporation.
It appears from the above-mentioned report and the statements that accompany it
that Bombardier considered the advances to be payments “on account of work in
progress” and, in accordance with GAAP, the accounting firm prepared a balance
sheet in which it recognized as advances only those in excess of the cost of
inventories.
[40]
It is important to note
that this approach is valid, as I understand it, only for long-term
manufacturing or construction contracts. In general, advances will not be
deducted in the computation of inventories and will normally appear as a
liability in the balance sheet.
[41]
Moreover, I do not
share the opinion of counsel for the respondent, who believe it is not
necessary that the [Translation]
“amount … reflected … in the balance sheet” be an “item” or “element” of the
balance sheet, “let alone that it be a liability”, as they said at
paragraph 61 of their written argument. First, it is clear that Finance
Minister Wilson’s budget papers (an excerpt of which is reproduced supra
at paragraph 16 of these reasons) indicate that the intention was to define
“capital” for the purpose of the tax on large corporations as including
“liabilities”. In the budget papers, it is stated that the tax base includes
“other indebtedness”. In the French version of subsection 181.2(3) of the
Act, “capital” is defined as “l’excédent éventuel du total des éléments
suivants …”. (Emphasis added.) The use of the word “éléments” is not
an accident. In general, the word “montant” or “somme” is used in
the Act in drafting similar provisions. (See, inter alia, the definition
of “fraction non amortie du coût en capital” in subs. 13(21) of the
Act). If Parliament could have used the phrase “élément de passif”, it
would have done so. But it could not do that, because in listing the elements
that follow, there are elements that are not liabilities, in particular capital
stock, which is part of the “equity” component. When Parliament could use that
type of phrase, it did so, as is the case in the definition of “déduction
pour placements” [investment allowance] in subsection 181.2(4) of the
Act, where it uses the phrase “élément d’actif” [asset]. That definition
is relevant for the purposes of the computation of the “capital imposable”
[taxable capital] in subsection 181.2(2) of the Act. That phrase is also
found in subsection 181(3) for the determination of values and amounts.
[42]
I have concluded that
the value of the advances is the value that constitutes the value of a
“liability”, which must necessary appear in the balance sheet; hence, it
follows that the part of the advances that reduces the value of the inventories
cannot constitute the value of the advances that is reflected in the balance
sheet. It is entirely inappropriate, in accordance with GAAP, to show a
liability in the notes, and it is even less appropriate to do so in the note
providing details of the calculation of an asset, such as inventories.
[43]
In my opinion, counsel
for the respondent were also wrong to say, at paragraph 36 of their
written argument:
[Translation]
36. The only paragraph in any of the documents that allows for
showing advances net of costs incurred is section 6.19 of the Handbook, which
allows the net to be shown in a situation that does not relate to the
appellants’ situation.
[Emphasis
added.]
[44]
If counsel for the
respondent were correct in that submission, and they devoted much of their
argument to defending it, that would mean that Bombardier and its external
auditors were wrong to reduce the inventories by the amount of the advances and
to show as an asset only the amount by which it exceeded the cost of the
inventories. Only if the condition in section 6.19 of the Handbook is met
can inventories be reduced by the amount of the advances. If that was not the
case, the financial statements would not be in accordance with GAAP since only
advances that can be considered to be a “payment on account of work in
progress” may be treated in that manner. The respondent and her expert
acknowledged and admitted that Bombardier’s financial statements were prepared
in accordance with GAAP. I believe the same approach must be adopted as was
followed by Mr. Thornton, who stated on several occasions, not only in his
report but also in his testimony, and in particular in paragraph 12 of the
summary of his opinion: “Also, progress billings are normally made when
progress is made; the advances would tend to flow to Bombardier regardless of
the degree of progress on a contract. Still, I respect the judgment of the
auditors on this point.” [Emphasis added.]
[45]
I would again add that
if the Minister was correct to argue that the amounts of the advances are the
amounts that appear in the supplementary notes, the financial statements would
be misleading and would not be in accordance with GAAP. As Mr. Chlala
said, if a liability appeared in the supplementary notes instead, the financial
statements would be misleading. In my opinion, the respondent’s argument, set
out in paragraph 41 of her written argument, which attempts to distinguish
between advances and progress billings, is also without merit, since
Bombardier’s senior management considered the advances to be “payments on
account of work in progress”. Having admitted that Bombardier’s financial
statements were prepared in accordance with GAAP, the respondent is ill advised
to argue that the amounts that appear in the body of the balance sheet under
liabilities are incorrect.
[46]
Even if
standard SOP81-1 is not in itself considered to be a standard approved by
the official body in the United States, nonetheless, by adopting it, Bombardier
was considered to have applied GAAP. I would also add that even if, in
Mr. Thornton’s opinion, Bombardier was not required to reduce its
inventories by the amount of its advances, because of the use of the term
“should” rather than “shall”, the accounting treatment adopted by Bombardier
and its external chartered accountants was entirely in accordance with GAAP.
[47]
In the context of
long-term construction or manufacturing contracts, the ordinary concept of
advances, under which advances are defined as moneys received before delivery
during performance of the contract, or, to use the words found in “Terminology
for Accountants” and reproduced in paragraph 14 of the respondent’s
written argument, “a payment made on account of, but before completion of a
contract, or before receipt of goods or services”, has no application.
[48]
In conclusion, I am
satisfied, in view of the evidence presented by Bombardier, that the value of
the advances, for the purposes of Part 1.3 of the Act, corresponds to the
amounts shown in the body of the balance sheet and not to the amounts shown in
the supplementary notes.
[49]
For all these reasons,
the appeals by Bombardier are allowed and the assessments are referred back to
the Minister for reconsideration and reassessment, on the basis that the only
advances included in the appellant’s capital under paragraph 181.2(3)(c)
of the Act are as follows:
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.
Moreover, in making the reassessments for
the 1990, 1991, 1992, 1993, 1994, 1995, 1996, 1997 and 2000 taxation years, the
Minister will make the adjustments indicated in accordance with 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”
Translation
certified true
On this 27th day of
May 2011
François Brunet,
Reviser
Email this Content