IFRS—Consolidations/Combined Financial Statements/ Variable Interest Entities (VIEs)

The following information pertains to shipments of merchandise from Home Office to Branch during 2007: Home Office's cost of merchandise$160,000 Intracompany billing 200,000 Sales by Branch 250,000 Unsold merchandise at Branch on December 31, 2007 20,000 In the combined income statement of Home Office and Branch for the year ended December 31, 2007, what amount of the above transactions should be included in sales? $250,000 $230,000 $200,000 $180,000

250,000 The amount that should be included in sales is the amount of sales with unrelated parties. In this case, that is the $250,000 sales by Branch to unaffiliated entities.

Which of the following legal forms of business combination will result in the need to prepare consolidated financial statements? Merger-Acquisition-Consolidation Yes-Yes-Yes Yes-Yes-No No-No-Yes No-Yes-No

No-Yes-No Only an acquisition form of business combination will require the preparation of consolidated financial statements. In the merger and consolidation forms of business combination, only one firm will remain after the combination. Therefore, there will not be two (or more) sets of financial statements to consolidate.

Which statement is true with respect to noncontrolling interest? -US GAAP records noncontrolling interest at the proportionate share of the value of identifiable net assets of the acquiree. -IFRS only records noncontrolling interest at the proportionate share of the value of identifiable net assets of the acquiree. -Both US GAAP and IFRS record noncontrolling interest at the proportionate share of the value of identifiable net assets of the acquiree. -IFRS permits recording noncontrolling interests at either fair value or the proportionate share of the value of identifiable net assets of the acquiree.

-IFRS permits recording noncontrolling interests at either fair value or the proportionate share of the value of identifiable net assets of the acquiree.

Which statement is true with respect to push-down accounting? -IFRS permits the use of push-down accounting. -IFRS does not permit the use of push-down accounting. -SEC accounting does not permit the use of push-down accounting. -Both SEC accounting and IFRS permit the use of push-down accounting.

-IFRS permits the use of push-down accounting.

Combined statements may be used to present the results of operation of: Companies under common management Commonly controlled companies No-Yes Yes-No No-No Yes-Yes

Yes-Yes Combined financial statements are used (when consolidated statements are not appropriate) to show the aggregate results both for companies under common management and for companies under common control (and for unconsolidated subsidiaries).

Mr. Allen owns all of the common stock of Astro Company and 80% of the common stock of Bio Company. Astro owns the remaining 20% interest in Bio's common stock, for which it paid $8,000, and which it carries at cost, because there is no ready market for Bio's stock. The condensed balance sheets for Astro and Bio as of December 31, 2007, were: AstroBioAssets $300,000 120,000 Liabilities$100,000 $60,000 Common Stock 50,000 40,000 Retained Earnings 150,000 20,000 Total $300,000 120,000 What amount should be reported as total owner's equity in a combined balance sheet for Astro and Bio as of December 31, 2007? $260,000 $252,000 $212,000 $200,000

$252,000 The correct answer is Astro's equity of $200,000 plus Bio's equity of $60,000, less Astro's investment in Bio of $8,000, or $200,000 + $60,000 − $8,000 = $252,000. Astro's investment in Bio must be eliminated to prevent double counting of the $8,000 - once as an investment on Astro's books and again as net assets (to which the investment has a claim) on Bio's books.

Under IFRS the asset goodwill may be recognized When it is acquired by purchase. When it is internally generated or acquired by purchase. When it is clear that it exists and has value. When it has future economic benefits.

When it is acquired by purchase. Goodwill can only be recognized if it is acquired by purchase.

Combined statements may be used to present the results of operations of: Unconsolidated subsidiaries-Companies under common management Yes-Yes Yes-No No-Yes No-No

Yes-Yes Combined financial statements are used when consolidated statements are not appropriate to accomplish much the same purpose. It is done when there is a non-consolidated sub or a group of companies owned by a common shareholder.

Which of the following items should be treated in the same manner in both combined financial statements and consolidated statements? Different fiscal periods-Foreign operations No-No No-Yes Yes-Yes Yes-No

Yes-Yes When combined statements are prepared for a group of related companies, and there are issues in connection with such matters as noncontrolling interests, foreign operations, different fiscal periods, or income taxes, they should be treated in the same manner as in consolidated statements.

Which of the following items should be treated in the same manner in both combined financial statements and consolidated statements? Income taxes-Noncontrollinginterest No-No No-Yes Yes-Yes Yes-No

Yes-Yes Where combined statements are prepared for a group of related companies, intercompany transactions and profit and losses should be eliminated. Matters such as noncontrolling interests, income taxes, foreign operations, or different fiscal periods should be treated in the same manner for both combined financial statements and consolidated statements.

Morton Inc., Gilman Co., and Willis Corporation established a special-purpose entity (SPE) (variable interest entity) to perform leasing activities for the three corporations. If at the time of formation the SPE is determined to be a variable interest entity subject to consolidation, which of the corporations should consolidate the SPE? The corporation with the largest interest in the entity. The corporation that is the primary beneficiary. The corporation that has the most voting equity interest. Each corporation should consolidate one-third of the SPE.

The corporation that is the primary beneficiary. A variable interest entity should be consolidated by the primary beneficiary. A primary beneficiary has the power to direct the activities of the VIE that most significantly impact the VIE's economic performance, and has the obligation to absorb the majority of the entity's expected losses if they occur, or receive the majority of the residual returns if they occur, or both.

A holder of a variable interest that is not the primary beneficiary acquired additional variable interests in the variable interest entity (VIE). What action, if any, should follow? -The holder of the variable interest should reconsider whether it is now the primary beneficiary. -The holder of the variable interest should use the voting-interest model to determine whether the VIE should be consolidated. -The primary beneficiary should discontinue consolidation of the VIE because the election to consolidate is no longer allowed. -No action is necessary because the primary beneficiary of a VIE does not change subsequent to the initial assessment.

-The holder of the variable interest should reconsider whether it is now the primary beneficiary. Any time there is a change in ownership, the relationship with the owner and investee should be reassessed. If the holder was not the primary beneficiary but acquired additional interest, the holder should reassess to determine if it is now a primary beneficiary by obtaining the ability to exert power or has more risks/rewards associated with the VIE.

The determination of whether an interest holder must consolidate a variable interest entity is made By reassessing on an ongoing basis. When the interest holder initially gets involved with the variable interest entity. Every time the cash flows of the variable interest entity change. Interests in variable interest entities are never consolidated.

By reassessing on an ongoing basis. The determination of whether an entity is a variable interest entity and which enterprise should consolidate that entity is made at the time the enterprise initially gets involved with the variable interest entity and is reassessed on an ongoing basis.

It is generally presumed that an entity is a variable interest entity subject to consolidation if its equity is Less than 50% of total assets. Less than 25% of total assets. Less than 10% of total assets. Less than 10% of total liabilities.

Less than 10% of total assets. It is presumed that an entity with equity of less than 10% of total assets does not have sufficient funding to finance its activities unless there is definitive evidence to the contrary (e.g., a source of outside financing).

Nolan owns 100% of the capital stock of both Twill Corp. and Webb Corp. Twill purchases merchandise inventory from Webb at 140% of Webb's cost. During Year 4, merchandise that cost Webb $40,000 was sold to Twill. Twill sold all of this merchandise to unrelated customers for $81,200 during Year 4. In preparing combined financial statements for Year 4, Nolan's bookkeeper disregarded the common ownership of Twill and Webb. By what amount was unadjusted revenue overstated in the combined income statement for Year 4? $16,000 $40,000 $56,000 $81,200

$56,000 Since all the goods have been sold outside the combined entity, income recognition is correct. However, sales and cost of goods sold have been recorded at two different points (i.e., the sale from Webb to Twill and the sale from Twill to outsiders). To the combined entity, Webb's cost of merchandise (the original cost to the combined entity) is what is needed for cost of goods sold, and Twill's sales (the amount the merchandise was sold for outside the combined entity) is needed for sales. This means that the sale from Webb to Twill and the cost of goods recorded by Twill need to be eliminated. That amount is $56,000 (computed as $40,000 cost to Webb × transfer price to Twill of 140% of cost = $56,000).

Nolan owns 100% of the capital stock of both Twill Corp. and Webb Corp. Twill purchases merchandise inventory from Webb at 140% of Webb's cost. During 2007, merchandise that cost Webb $40,000 was sold to Twill. Twill sold all of this merchandise to unrelated customers for $81,200 during 2007. In preparing combined financial statements for 2007, Nolan's bookkeeper disregarded the common ownership of Twill and Webb. What amount should be eliminated from cost of goods sold in the combined income statement for 2007? $56,000 $40,000 $24,000 $16,000

$56,000 The amount at which Webb sold the inventory to Twill ($40,000 × 1.40 = $56,000) will be the amount of cost of goods sold to Twill and should be eliminated in combining the financial statements of Webb and Twill.

Under IFRS, a parent may exclude a subsidiary from consolidation if all of the following conditions exist, except: -It is wholly or partially owned and its other owners do not object to nonconsolidation. -It reports only one class of stock in its balance sheet. -Its parent prepares consolidated financial statements that comply with IFRS. -It does not have any debt or equity instruments publicly traded.

-It reports only one class of stock in its balance sheet. It is not one of the three conditions required to exclude a subsidiary from consolidation. The three required conditions are: (1) it is wholly or partially owned and its other owners do not object to nonconsolidation; (2) it does not have any debt or equity instruments publicly traded; and (3) its parent prepares consolidated financial statements that comply with IFRS.

Parco has the following three subsidiaries: Finco, Serco, and Euroco. Finco is a 100% owned finance subsidiary. Serco is an 80% owned service company. Euroco is a 100% owned foreign subsidiary that conducts operations in Western Europe. Which one of the following is the most likely number of entities, including Parco, to be included in Parco's consolidated financial statements? One. Two. Three. Four.

Four. The consolidated statements would include not only Parco, but also all three of its subsidiaries, for a total of four.

Which of the following statements about the differences between U.S. GAAP and IFRS in determining whether or not to consolidate an entity is/are correct? -IFRS guidelines for determining the eligibility of an entity to be consolidated are more principles-based than are U.S. GAAP guidelines. -In assessing an investor's level of ownership of an investee, both U.S. GAAP and IFRS consider outstanding securities that are exercisable or convertible into voting shares. -Under both U.S. GAAP and IFRS, there are circumstances under which a majority-owned subsidiary does not have to be consolidated. I only. I and II only. I and III only. I, II, and III.

I and III only. Statement I and Statement III are correct; Statement II is not correct. Under IFRS, the guidelines for determining whether or not to consolidate an entity are more principles-based than are U.S. GAAP (Statement I). Under IFRS, the basic guideline is that an entity must be consolidated when another entity has the ability to govern the financial and operating policies of the entity to obtain benefits from it. U.S. GAAP has a specific two-tiered assessment process that must be followed to determine whether or not an entity should be consolidated. Under both U.S. GAAP and IFRS, there are circumstances under which a majority-owned subsidiary does not have to be consolidated (Statement III). U.S. GAAP does not require consolidation of a majority-owned subsidiary when the investor cannot exercise control of the subsidiary. IFRS does not require consolidation of a majority-owned subsidiary under certain conditions when the parent will be consolidated with a higher-level parent.

In the preparation of combined financial statements, would the following issues be treated in the same way as when preparing consolidated financial statements or in a different way? Minority Interest-Foreign Operations-Different Fiscal Periods Different-Different-Different Different-Same-Same Same-Same-Different Same-Same-Same

Same-Same-Same According to ASC 810, if problems associated with minority interest, foreign operations, different fiscal periods, or income taxes occur in the preparation of combined financial statements, they should be treated in the same manner as in the preparation of consolidated financial statements. Therefore, all three items should be treated in the same manner as in consolidated statements.