ACCT 430 - Chapter 4 - International Financial Reporting Standards: Part 1

How often does IAS 16 require companies to review the estimates of useful life, residual value, and the method of depreciation?

Annually

How often must intangible assets with indefinite lives be reviewed for impairment?

At least annually

Under which set of standards would goodwill be required to be carried as an asset without amortization in post-acquisition balance sheets, IFRS or U.S. GAAP?

Both IFRS and U.S. GAAP

What would be the treatment for a decrease in carrying amount of a fixed asset on the first revaluation?

Charged to the income statement as an expense

What would be the treatment for an increase in carrying amount of a fixed asset on the first revaluation?

Credited directly to a revaluation surplus in the other comprehensive income component of equity

What types of differences can cause issues between U.S. GAAP and IFRS?

Disclosure differences and lack of requirements or guidance Definition differences and alternatives Recognition and measurement differencesIFRS and U.S. GAAP might have issues in all of the above differences

How often does IAS 40 require companies to revalue their investment properties?

Every reporting period

Which IAS provides the primary guidance in accounting for the acquisition and use of property, plant, and equipment under IFRS?

IAS 16

Which IAS provides guidance on determining the initial cost of inventories, the cost formulas to be used in allocating the cost of inventories to expense, and the subsequent measurement of inventories on the balance sheet?

IAS 2

Which IAS governs accounting for borrowing costs under IFRS?

IAS 23

Which IAS provides guidance on accounting for internally generated intangibles?

IAS 38

Which IAS provides the primary guidance on accounting for intangible assets?

IAS 38

Which IAS prescribes the accounting treatment for investment properties, which are defined as land and/or buildings held to earn rentals, capital appreciation, or both?

IAS 40

Which IFRS is the primary international standard governing consolidation and its scope?

IFRS 10

According to IAS 36, where would an impairment amount be recognized?

In income

What are considered investment properties under IAS 40?

Land and/or buildings held to earn rentals, capital appreciation, or both

______ between IFRS and U.S. GAAP in the amount recognized result from either a difference in the method required or a difference in the detailed guidance for applying a similar method.

Measurement Differences

According to IAS 2, what is defined as estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale?

Net Realizable Value

In an acquisition, the consideration transferred amount is $240,000 and the noncontrolling interest is $12,500. The fair value of the acquiree's identifiable net assets is $260,000. How much would be goodwill?

No goodwill, but there is a gain on bargain purchase.

Under which condition can the revaluation model be used for intangible assets with finite lives?

Only if the intangible asset has a price that is available on an active market

According to IAS 16, what would be included in the initial cost of property, plant, and equipment?

Purchase price

Is not allowed under the selection of assets to be revalued in IAS 16?

Selectivity of assets within a class

IAS 16 allows two treatments for reporting fixed assets on balance sheets subsequent to their acquisition. Under which model is an item of property, plant, and equipment carried on the balance sheet at cost less accumulated depreciation and any accumulated impairment losses?

The cost model

Under IAS 36, how is the recoverable amount determined?

The greater of net selling price and value in use

For companies with patterns of increasing R&D expenditure, the expenses avoided by capitalization in a given period exceed that period's amortization charges. In such cases, what would be the impact of R&D capitalization on the reported profits?

The reported profits would be inflated relative to a full-expensing system.

IAS 16 allows two treatments for reporting fixed assets on balance sheets subsequent to their acquisition. Under which model is an item of property, plant, and equipment carried at a revalued amount, measured as fair value at the date of revaluation less any subsequent accumulated depreciation and any accumulated impairment losses?

The revaluation model

Under IAS 36, when would an asset be considered impaired?

When its carrying amount exceeds its recoverable amount

Goodwill is measured as the difference between (a) and (b): a. The consideration transferred by the acquiring firm plus any amount recognized as noncontrolling interest. b. The fair value of net assets acquired. When (a) is less than (b), then the difference between (a) and (b) is recognized as ______.

a gain

In a business combination, if the total of the consideration transferred amount and the noncontrolling interest is less than the fair value of the acquiree's identifiable net assets, then the acquirer would recognize ______.

a gain from a bargain purchase

"Under IFRS 3, noncontrolling interest can be measured either at (1) ______ of acquired firm's net assets or (2) ______."

a proportionate share, fair value

"When a class of property, plant, and equipment is revalued, IAS 16 allows companies to eliminate the ______ ______ against the gross carrying amount of the asset, and restate the net amount of the revalued amount of the asset."

accumulated depreciation

"When testing for impairment of goodwill, the goodwill related to the acquisition of an acquiree will be tested by comparing the ______ carrying amount with its ______ amount."

acquiree's, recoverable

"Under IAS 38, regarding purchased intangibles, the cost of an intangible asset with a finite useful life is ______ on a systematic basis over the ______."

amortized, useful life

Goodwill is measured as the difference between (a) and (b): a. The consideration transferred by the acquiring firm plus any amount recognized as noncontrolling interest. b. The fair value of net assets acquired. When (a) is greater than (b), goodwill is recognized as ______.

an asset

How often must accountants test for goodwill impairment under IFRS?

annually

"The fair value of land and buildings is usually determined through ______ conducted by professionally qualified ______." Multiple choice question.

appraisals, valuers

Under IAS 38, how is the value of a purchased intangible asset initially measured?

at its cost

Select the best answer to complete the following statement: "Under the revaluation model of IAS 16, revaluation increases are ______ directly to the other comprehensive income component of equity as a revaluation ______."

credited surplus

The removal of an asset or liability from the balance sheet and the accounts refers to ______.

derecognition

"Development costs consist of (1) all costs directly attributable to ______ activities and (2) those costs that can be reasonably ______ to such activities."

development, allocated

"The carrying amount of an item of property, plant, and equipment is derecognized (1) upon ______ or (2) when no future ______ are expected from its use or disposal."

disposal, economic benefits

"Under both IFRS and U.S. GAAP, most borrowing costs are recorded as ______ in the periods in which they are incurred. However, both require companies to capitalize borrowing costs that are attributable to the ______, construction, or production of qualifying assets."

expenses, acquisition

"Events such as a decline in market value, an increase in market interest rates, or economic, legal, or technological changes that adversely affect the value of an asset is considered ______ events that might indicate an asset impairment."

external

Under IAS 16, the amount at which an asset could be exchanged between knowledgeable, willing parties in an arm's-length transaction is called ______.

fair value

"In the first step of the U.S. GAAP two-step process to test for goodwill impairment, companies appraise the ______ of the reporting unit and compare this estimate with the unit's ______."

fair value, book value

"Under IAS 38, the acquiring company should recognize identifiable intangible assets such as patents, brands, and customer lists acquired as assets even if they were not recognized as assets by the acquiree, so long as they are identifiable and controlled and their ______ can be measured ______."

fair value, reliably

"IAS 41, Agriculture, requires companies to measure biological assets at ______ period by period, with revaluation gains or losses included in ______."

fair value, the income statement

"Under IAS 38, intangibles acquired in a business combination must be classified as having a(n) ______ or a(n) ______ useful life."

finite, indefinite

A term commonly used outside the U.S. to describe the various rules and conventions that accountants use to construct consolidated financial statements from the separate accounts of the group's various members is ______.

group accounting

"IAS 38 provides the primary guidance on accounting for ______ assets. Many of its provisions for both purchased ______ and those acquired in business combinations are consistent with U.S GAAP."

intangible, intangibles

"Events such as physical damages, obsolescence, idleness of an asset, the restructuring of part of an asset, or the worse-than-expected economic performance of the asset are considered ______ events that might indicate an asset impairment."

internal

"IAS 41 also extends fair value measurement to agricultural produce at the point of harvest. Once harvested, the produce is considered a(n) ______."

inventory item

"For companies with patterns of increasing R&D spending, the expenses avoided by capitalization in a given period ______ that period's amortization charges."

is higher than

"If company A gains control over company B by acquiring a sufficient number of its voting shares, but company B continues its separate legal existence, then company A will be considered the ______ company, and company B will be considered a(n) ______ company."

parent, subsidiary

"The impairment loss should be reversed only if there are changes in the estimates used to determine the original impairment loss or there is a change in the basis for determining the ______ amount."

recoverable

"Under the revaluation model of IAS 16, revaluation decreases are first recognized as a ______ in any related revaluation ______, and once the ______ is exhausted, additional revaluation decreases are recognized as an expense."

reduction, surplus, surplus

The IASB has concern that there is a trade-off between relevance and ______.

reliability

"In the case of property, plant, and equipment carried at a revalued amount, the impairment loss is first taken against ______ and then to ______."

revaluation surplus, income

According to IAS 2, all of the following costs are expressly excluded from the costs of inventories:

storage costs unrelated to the production process costs of abnormal amounts of labor costs of abnormal amounts of wasted materials costs of conversion abnormal amounts of wasted materials, labor, or other production costs administrative overhead that does not contribute to bringing inventories to their present location and condition selling costs

In the U.S., because of tax reasons, M&A deals in which the acquirer pays by issuing stock instead of cash and the acquiree's shareholders maintain a continuing financial interest in the merged entity after the acquisition are often treated as ______.

tax-free reorganizations

According to IAS 2, the net realizable value is computed by subtracting the estimated costs of completion and the estimated costs necessary to make the sale from ______.

the estimated selling price in the ordinary course of business

According to IFRS 10, control exists when any of the following conditions is present, except when ______.

the investor has potential to lose power over the investee in the near future

Select the best answer to complete the following statement: "Costs that are excluded from the costs of inventories are abnormal amounts of ______ materials, labor, or other production costs and storage costs that are not related to the production process."

wasted

If subsequent to recognizing an impairment loss of $2,000, the recoverable amount of an asset is determined to exceed its new carrying amount by $1,000. How much impairment loss should be reversed?

$1,000

Jessica Company borrows $250,000 for 10 years at 4% to upgrade its operations with a new production line. Assume that the weighted-average expenditures during Year 1 are $30,000. How much is the capitalizable interest cost recorded at the end of Year 1?

$1,200

Acme Company acquires a new machine with an estimated useful life of 10 years for $150,000 on January 1, Year 1. By law, the machine must be inspected after two years with an inspection cost of $5,000. Acme Company decides to use straight-line method of depreciation. The residual value of the machine is $10,000. How much would be the depreciation expense for Year 1?

$16,000 ($145,000 - $10,000) ÷ 10 years + $5,000 ÷ 2 years = $16,000

Kenny Company wishes to carry a building on the December 31, Year 1 balance sheet at a revalued amount of $2,800,000. The historical cost of the building is $3,000,000 and the accumulated depreciation of the building is $300,000 on December 31, Year 1. How much would the net carrying amount of the building be on Kenny's balance sheet on December 31, Year 1?

$2,800,000

George Company acquires 90% of the outstanding shares of Chris Company by paying $90,000 in cash. The fair value of Chris's identifiable assets is $80,000, and the liabilities assumed by George in this business combination are $5,000. If George chooses to measure the noncontrolling interest using the proportionate share method, how much would be the goodwill amount to be recorded?

$22,500 NCI = ($80,000 - $5,000) × 10% = $7,500. Consideration transferred + NCI = $90,000 + $7,500 = $97,500. Goodwill = $97,500 - $75,000 = $22,500.

Kenny Company wishes to carry a building on the December 31, Year 6 balance sheet at a revalued amount of $1,400,000. The historical cost of the building is $3,000,000 and the accumulated depreciation amount is $1,800,000 on December 31, Year 6. If Kenny would restate both the buildings account and accumulated depreciation on buildings, then what would be the gross carrying amount of the building?

$3,500,000 $1,400,000 ÷ 0.4 = $3,500,000

Alpha Company spent $50,000 to develop a product in Year 1. 60% of that amount was incurred up to a point at which the technically feasibility of the product could be demonstrated and other criteria were met. How much development expense should Alpha Company record in Year 1?

$30,000

Jensen Company is estimating the impairment of goodwill related to its acquisition of Marco Company. Assume that Marco Company is considered a cash generating unit. The adjusted carrying amount (net assets plus goodwill) is $25,000, and the recoverable amount is $20,000. How much would be the impairment loss of goodwill, if any?

$5,000

At December 31, Johny Company has a machine with the following characteristics: Carrying amount is $5,000. Selling price is $4,500. Costs of disposal is $200. Present value of expected future cash flows is $3,000. What is the impairment loss of the machine?

$700 $5,000 - ($4,500 - $200) = $700

At December 31, Year 1, Timmy Company has a machine with the following characteristics: Carrying amount is $12,000. Selling price is $8,000. Costs of disposal is $500. Present value of expected future cash flows is $9,000. What much would be the recoverable amount?

$9,000 The greater of net selling price $7,500 and value in use $9,000.

According to IAS 2, the cost of inventories includes: 1. Costs of purchase. 2. Costs of conversion. 3. Other costs such as the costs incurred to bring the inventories to their present location and condition.

1, 2, and 3

Johnson Company borrows $1,000,000 at an annual interest rate of 10% to finance the construction of a new facility. The market average interest rate in the past month was 7% and in the past year was 5%. What rate of interest should Johnson use to capitalize the borrowing costs to finance the construction?

10%

How many alternative treatments are described in IAS 16 for the treatment of accumulated depreciation when a class of property, plant, and equipment is revalued?

2

How many steps are there in the goodwill impairment test under U.S. GAAP?

2

When was IFRS 3 issued?

2004

Sali Environment Company purchases a new machine with an estimated useful life of 5 years and paid the total cost of $100,000 on January 1, Year 1. The machine must be inspected every two years with an inspection cost of $10,000. Sali Environment Company has decided to use straight-line depreciation method. The machine has no residual value. How much would be the total component depreciation expense reported in Year 1 with the fiscal year ended on December 31?

23,000 Annual depreciation expense = $10,000 ÷ 2 + $90,000 ÷ 5 = $23,000.

Salsa Company purchased a new equipment at the cost of $25,000 on January 1, Year 1. The equipment was expected to have a useful life of 5 years with no residual value. At the end of Year 1, an impairment loss based on value of use of that equipment was determined to be $500. What would be included in the journal entry to record the impairment loss at the end of Year 1?

A credit entry to equipment of $500

Innovation Corporation incurred a $10,000 cost to develop a product in Year 1. Of that amount, $8,000 was incurred up to a point at which the technical feasibility of the product could be demonstrated and other recognition criteria were met. What would be included in the journal entry to record this development cost?

A debit entry to development expense of $8,000

Green Company recorded an equipment impairment loss of $350 at the end of Year 1. At the end of Year 2, the equipment is determined to have a recoverable amount of $2,000 and its carrying amount is $1,800. What would be included in the journal entry to record the reversal of impairment loss of Green Company at the end of Year 2?

A debit entry to equipment of $200