Chapter 5

Incorporating the effects of changing prices into a company's accounting records ...

'waxes and wanes' with the level of inflation in a country; occurs almost never in Germany and Japan; was done experimentally in the US; routinely takes place in South American countries

Financial accounting standards are rules for preparing financial statements

...

How many board members are currently in IASB?

16

ABC Inc bought a private jet for use of its officials. The cost is 15 mil and can be depreciated either using a composite useful life or useful lives of its major components. It is expected to be used over a period of 7 years. The engine of the jet has a useful life of 5 years. The private jet's tires are replaced every 2 years. The private jet will be depreciated using the straight-line method over

5 years useful life of the engine, 2 years useful life of the tires, and 7 years useful life applied to the balance cost of the jet.

which organization in Japan is playing the same role as US FASB:

Accounting Standards board of Japan

How should gain on sale of an office building owned by the entity be presented in a cash flow statement?

As an adjustment to the net income in the operating activities section of the cash flow statement prepared under the indirect method

Accounting technology is imported and exported and countries have similar accounting for this reason. Reason why the United States influenced accounting in Canada:

Canadian companies routinely sell shares of stock or borrow money in the US; geographic proximity

In our world of increasing national interdependence, countries often have political and economic ties with each other. Such ties do not exist between

Germany and Pakistan

The applicable IFRS/IAS for a property being constructed or developed for future use as investment property is:

IAS 16, Property Plant and equipment, until construction is complete and then it is accounted for under IAS 40, Investment property

What is NOT true about revenue recognition for multiple deliverable contracts under IFRS?

IAS No. 18 provides extensive guidance for determining how contracts are to be separated into components for purposes of revenue recognition.

which unit is equivalent of the FASB under IFRS foundation?

IASB

Which of the following organizations is directly involved with developing international auditing standards?

IFAC

which committee provides advice to the IASB on agenda decisions and priorities in the IASB's work

IFRS Advisory council

IASB board members are appointed by trustees of

IFRS Foundation

What is the authoritative status of the Framework?

If there is a standard or interpretation that specifically applies to a transaction, it overrides the framework. in the absence of a standard or an interpretation that specifically applies to a transaction, management should consider the applicability of the framework in developing and applying an accounting policy that result in information that is relevant and reliable.

A group is organized into a number of business divisions across the world. The group has two main classes of business: insurance and banking. THe management board receives information from each business division on a quarterly basis and wishes to report segmental information on the basis of these divisions. What should be the basis of the group's reporting of the primary segmental information?

It would depend on the different (or differing) risks and rewards but is likely to be the different classes of business.

Country that tends to show a relatively high preference for conservative accounting standards:

Japan

Noncurrent assets must be reported before current assets in a balance sheet reported by a company using

Neither US GAAP nor IFRS

Countries that tend to show a relatively LOW preference for conservative accounting standards:

Norway, UK, USA, India

An entity has split its business segments on the basis of the law governing its different types of business. Two business segments that the entity has identified are insurance and banking. Within the banking group, several different services are provided: retail banking, merchant banking, and small business advisory service. The insurance entities sell travel insurance, health insurance, and property insurance. The entity operates throughout the world in several countries and continents. What basis should the entity report its segmental information?

On the basis of the services it offers within those divisions.

Is not a characteristic of the Continental model of accounting:

Oriented toward decision making-needs of shareholders

Characteristics of the continental model of accounting:

Prescriptive and procedural; Conservative accounting practices; Accounting principles are national laws; Usually designed to satisfy government imposed requirements.

What are the qualitative characteristics of financial statements?

Relevance and faithful representation. Financial information is useful when it is relevant and represents faithfully what it purports to represent. The usefulness of financial information is enhanced if it is comparable, verifiable, timely and understandable. [F QC4]

ABC Inc owns a fleet of over 100 cars and 20 ships. It operates in a capital-intensive industry and thus has significant other property, plant and equipment that it carries in its books. It decided to revalue its property, plant and equipment. THe company's accountant suggested the alternatives that follow. Which would be in line with the provisions of IAS 16?

Revalue an entire class of PPE

The equivalent to the FASB's Financial Accounting Standards Advisory Council (FASAC) for the IASB is

Standards Advisory Council

How should the income from discontinued operations be presented in the income statement?

The entity should disclose a single amount on the face of the income statement with analysis in the notes or a section of the income statement separate from continuing operations.

Which of the following criteria do not have to be met in order for an operation to be classified as discontinued?

The operation must be sold within three months of the year-end

Convenience statements (definition/description):

These contain translated language and, often, converted currency. They still lack information CPAs need about accounting practices, the translation method and how the currency was converted. Do not assume they are in or comparable with U.S. GAAP. Even large companies may choose to use convenience statements. Suzuki Motor Corp., for example, prepares statements that show both Japanese yen and U.S. dollars. Amounts are converted to U.S. dollars at the year-end exchange rate.

Borrowing costs can be capitalized as part of the asset when

They are a qualifying asset; the entity has opted for the allowed alternative treatment under IAS 23, and it is probable that they will result in future economic benefits to the entity, but the costs can be measured reliably

An entity purchases a building and the seller accepts payment partly in equity shares and partly in the debentures of the entity. This transaction should be treated in the cash flow statement as follows:

This does not belong in the cash flow statement and should be disclosed only in the footnotes to the financial statements.

European country that does not use the Euro as its domestic currency:

UK

Which of the following countries' financial reporting systems is not heavily influenced by the tax laws?

UK

The GAAP of these two countries at the national level are similar:

US and UK

When can a 'provision' be recognized in accordance with IAS 37 (provisions, contingent liabilities and contingent assets)?

When there is a constructive obligation as a result of a past (obligating) event, the outflow of resources is probable, and a reliable estimate can be made of the amount of the obligation.

Is not a financial accounting measurement issue:

accounting for increases in the cost of living

In an environment where business capital needs are provided by only a few very large banks

accounting practices tend to be conservatively value assets and overvalue liabilities

Many people believe that differences in accounting are not neutral in their effects. IOW, differences in accounting may ...

affect business decisions; produce an 'un-even playing field' internationally; impact the global competitiveness of companies

Purchased goodwill is accounted for differently in different countries. Which accounting practice IS acceptable?

all are acceptable: expense full amount immediately; charge full amount to owner's equity; set up as an asset and amortize during future periods

Purchased goodwill is accounted for differently in different countries. Which accounting practice is NOT acceptable?

allocate full amount to property and equipment accounts

'secondary' financial statements

are usually translated into English; many express the monetary amounts in a second currency; usually conform to the accounting principles of the US or the International Accounting Standards Committee; are prepared by a number of Japanese MNCs

What are components of financial statements according to IAS 1?

balance sheet, statement of changes in equity, notes to the financial statements, statement of comprehensive income, statement of cash flows (5 total)

In industrialized societies, professional accountants provide extensive economic and information services. The volume of professional accounting services in a country is best measured

by total fees of accounting firms/GDP.

Is involved in developing national financial reporting methods and rules, otherwise known as financial accounting standard setting:

companies' laws; litigation and court processes; professional practicing accountants; stock exchange regulators

which IS an approach taken by multinationals to accomodate foreign readers of their financial reports?

convenience translations, limited statements, secondary financial statements, convenience statements

what is meant by the translation of foreign currency financial statements?

converting financial statements of a foreign currency into a domestic currency

the difference between 'convenience translations' and 'convenience statements' is

different monetary expressions are employed

Under both US GAAP and IFRS, which one of the following items is reported separately in the income statement, net of tax?

discontinued operations

The best reason for sending domestic financial statements to readers in other countries:

domestic accounting standards are highly regarded and generally understood in other parts of the world

Financial accounting information links business enterprises with providers of business capital through

financial reports issued periodically by business enterprises

When a company restates financial information on a limited basis, the reader will find this information in the ...

footnotes

Financial accounting exists because it

furnishes info for those who provide capital for business enterprises

Impacts a country's financial accounting orientation:

how developed the stock exchanges are; who the information users are; how close the relationship is between businesses and the invest/creditor group

Does not impact a country's financial accounting orientation:

how many banks there are

In most countries, a particular group of accountants is legally sanctioned to conduct financial statement audits. These statements are correct:

in the UK it is the chartered accountants; in the Netherlands, it is the register accountants; in Germany it is the Wirtschaftprufer

the 'use right of land' before the construction or development commences in China is classified under:

intangibles section

Which of the following costs MAY BE eligible for capitalization as borrowing costs under IAS 23?

interest on bonds issued to finance the construction of qualifying assets; amortization of discounts or premiums relating to borrowing that qualify for capitalization; exchange differences arising from foreign currency borrowings to the extent they are regarded as an adjustment to interest costs pertaining to qualifying assets

The IFRS interpretation committee has committed itself to

interpret the application of IFRS and provide timely guidance on financial reporting issues not specifically addressed in iFRSs, in the context of hte IASB framewor,k, and undertake other tasks at request of IASB; have regard to the IASB"s objective of working actively with national standard-setters to bring about convergence of national standard-setters and IFRS to high quality solutions; publish after clearance by the IASB draft interpretations; report to the IASB and obtain approval

Accounting for private pension plans ...

is based on assumptions rather than cash transactions

The internationalization of accounting ...

is directly driven by our political and economic environments

convenience translation

is either when an entity displays its financial statements or other financial information in a currency that is different from either its functional currency or its presentation currency simply by translating all amounts at end-of-period exchange rates. A result of making this is that the resulting financial information does not comply with all Generally Accepted Accounting Principles. It is also referred to as this when a (language) translation is rendered for the convenience of reading a text in a different than the original language; however, the original text remains the only legally-binding text.

Accounting for inflation and other price changes

is required in some countries

Accounting professionals may benefit from worldwide accounting diversity because

it makes cross-border auditing more costly and therefore raises auditing fees

Is not a problem caused by accounting diversity:

lack of qualified international auditors

ABC Inc incurred costs of $5 million on a two-year fixed price contract for $4 million. What profit or loss should it recognize in the first year of the contract?

loss of $1 million ( expensed immediately)

Inventory should be stated at

lower of cost and net realizable value

A competitor has sued an entity for unauthorized use of its patented technology. THe amount that the entity may be required to pay to the competitor if the competitor succeeds in the lawsuit is determinable with reliability, and according to the legal counsel it is less than probable (but more than remote) that an outflow of the resources would be needed to meet the obligation. THe entity that was sued should at year-end

make a disclosure of the possible obligation in footnotes to the financial statements

Who is least affected by the accounting diversity that exists throughout the world?

managers of domestic corporations

Groups that like international accounting diversity (don't dislike it)

managers of domestic corporations; financial analysts; CPAs, the IASB

The group that probably dislikes international accounting diversity the most is ...

managers of multinational corporations

False statement about MNCs:

many MNCs use US GAAP when they prepare convenience statements

True statements about MNCs:

many MNCs use US GAAP when they prepare their secondary financial statements; many MNCs use IFRSs when they prepare their secondary financial statements; most MNCs preparing secondary financial statements are from countries where accounting is legalistic in its orientation; many MNCs use US GAAP when they prepare limited restatements

Which is not a qualitative characteristic of financial statements according to the framework?

materiality

Variables shaping accounting development include many different factors. Correct statement:

most MNCs are headquartered in wealthy countries; most complex accounting problems happen in large companies; most regular users of financial reports can be considered sophisticated persons; most accounting developments go hand in hand with economic development

Is not involved in developing national financial reporting methods and rules, otherwise known as financial accounting standard setting:

newspaper reports

information about shares and shareholders

normally includes the company's share ownership structure

Transnational financial reporting (TFR) ...

occurs when a company sends its annual report to users in a country other than the one where the company is headquartered

In the context of TFR, it has been said, 'comparability still may not exist even if financial statements are prepared on the basis of comparable accounting standards.' This statement implies that ...

one should know about the business environment of the country

Problems caused by accounting diversity:

preparation of consolidated financial statements; access to foreign capital markets; comparability of financial statements

which of the following approaches to TFR is generally the least expensive for a multinational corporation?

preparing convenience translations

When potential investors find it difficult to understand a foreign company's financial statements, they may ...

refuse to provide funds to the company

TFR is encouraged by

selling bonds to investors in other countries; listing stocks on stock exchanges outside the home country; borrowing money from foreign banks; investing in the stocks of MNCs

In code law countries such as Germany, France, and Japan, tax law and accounting standards tend to be

similar

What is TRUE about revenue recognition for multiple deliverable contracts under IFRS?

some arrangements are likely to be different from GAAP; unlike US GAAP, IFRS does not require vendor-specific objective evidence for software contracts in order to separate contracts into multiple deliverables; IFRS focuses on fair values to allocate total revenue to components

The non-legalistic orientation to accounting

tends to produce adaptive and innovative accounting practices

Which of the following countries' companies prepare comprehensive current cost financial statements or disclose current cost information supplementally because of the influence of business economics on the accounting system?

the Netherlands

In this pair of countries, there is a strong private sector influence on financial accounting standard setting:

the UK and the USA

US financial accounting and auditing standards influence similar standards in other countries because

the US enjoys a leading position in the world of accounting

An important international difference in liabilities measurement is the issue of accounting for ...

the effects of inflation

In convenience translations ...

the financial statements are translated into the foreign reader's language

Which of the following criteria DO have to be met in order for an operation to be classified as discontinued?

the operation should represent a separate line of business or geographic area; the operation is part of a single plan to dispose of a separate major line of business or geographical area; the operation is a subsidiary acquired exclusively with a view to resale.

In order for a noncurrent asset to be classified as held for sale, the sale must be highly probable. Highly probable means that

the probability is higher than more likely than not

under which circumstances do companies choose the 'do nothing' approach to transnational financial reporting (TFR)?

they use private placements for selling their securities; the accounting principles of their home country are 'world class'; little capital is raised outside the borders of their home country

In the world of international business, companies sometimes use 'primary' and 'secondary' financial statements concurrently.

this can happen because of stock exchange requirements

Why a company would want its stock cross-listed on the stock exchanges of several countries:

to gain access to more financial resources than are available in its home country

convenience statement

translates the statement into the foreign user's language and retains the home country's accounting principles, but expresses the monetary amounts in the reader's home currency. these are usually translated at the year-end exchange rate. [not 100% sure this is the right definition]

According to Gray's framework for accounting system development, the counterpart to (opposite of) the value of 'secrecy' is ...

transparency

What are several qualitative characteristcs of financla statements according to the framwork?

understandability, comparability, relevance

Transfers from investment property to property, plant, and equipment are appropriate

when there is a change of use

High levels of disclosure in published financial statements are generally found

where businesses raise their capital from a large and diverse investor/creditor group

which is not an approach taken by multinationals to accomodate foreign readers of their financial reports?

world class conversions