IFRS Topic 2

The Twin Company (TC) has two manufacturing plants. One manufactures glass bottles in Brazil and the other manufactures car batteries in Russia. Before TC's December 31 year-end, management made the decision to sell the plant in Russia. TC entered into a sales agreement for the plant in Russia on December 15. To ensure it will not have any significant continuing involvement in the Russian plant operations after the disposal transaction, TC decided to delay the sale for six months so it can fill the backlog of orders, at which time it will cease all plant operations. ► Based on the limited information given, does TC's plant in Russia qualify as a discontinued operation under US GAAP as of its year-end? Explain your answer and list any additional information you need, if any, to come to a final conclusion. ► Based on the limited information given, does TC's plant in Russia qualify as a discontinued operation under IFRS as of its year-end? Explain your answer and list any additional information you need, if any, to come to a final conclusion.

As of December 31, TC's plant in Russia is not available for immediate sale. Therefore, the plant does not qualify for treatment as a non-current asset held for sale under either IFRS or US GAAP. Thus, the plant cannot be treated as a discontinued operation.

What would be included in a complete set of IFRS financial statements? a. A balance sheet, statement of comprehensive income, a statement of changes in equity and statement of cash flows. b. A balance sheet, statement of comprehensive income, a statement of changes in equity, statement of cash flows and notes comprising a summary of significant accounting policies and other explanatory notes. c. A balance sheet, statement of comprehensive income, a statement of changes in equity, statement of cash flows, financial review by management and notes comprising a summary of significant accounting policies and other explanatory notes. d. A balance sheet, statement of comprehensive income, a statement of changes in equity, statement of cash flows, financial review by management, value-added statements and notes comprising a summary of significant accounting policies and other explanatory notes.

B. The components of a complete set of financial statements using IFRS include: • balance sheet • statement of comprehensive income • statement of changes in equity • statement of cash flows • accompanying notes to the financial statements. These statements would allow a financial statement user to make economic decisions regarding the company's financial position, financial performance, and cash flows.

Company AA met all the requirements for accounting for a discontinued operation under both US GAAP and IFRS in its 2014 comparative financial statements. ► Prepare a detailed list of the required presentation of discontinued operations on the company's comparative statement of financial position under US GAAP. ► Prepare a detailed list of the required presentation of discontinued operations on the company's comparative statement of financial position under IFRS.

Both US GAAP and IFRS require that the assets and liabilities of Company AA's discontinued operations be shown separately on the 2014 statement of financial position. US GAAP requires that prior periods be restated. IFRS does not require restatement of the 2013 statement of financial position.

Using US GAAP, companies classify interest and dividends paid or received as: a. Operating cash flows. b. Interest and dividends paid as financing cash flows and interest and dividends received as investing cash flows. c. Interest received and paid and dividends received classified as operating cash flows and dividends paid as financing cash flows. d. a. or b.

C. IAS 7 permits an entity, (a) to classify interest and dividends paid or received as operating cash flows or (b) to classify interest and dividends paid as financing cash flows and interest and dividends received as investing cash flows. US GAAP requires that interest received and paid and dividends received be classified as operating cash flows and dividends paid are classified as financing cash flows.

The Copper Mining Company (CMC) is a fully integrated copper company. CMC has three separate operating segments. The mining segment mines the copper and had revenues of $1.0 billion and a net negative cash flow of $0.2 billion. The industrial segment smelts the copper into ingots and had revenues of $1.2 billion and a net cash flow of $0.2 billion. The distribution segment sells the copper ingots to third parties and had revenues of $1.5 billion and a net cash flow of $0.3 billion. Management of CMC has received an unsolicited offer from a competitor for its distribution segment, which it believes reflects the fair value of these operations. The competitor wants to complete the purchase in the next 18 months. CMC's Board of Directors has authorized management's plan to sell its distribution segment to this competitor and retain the remaining two segments. ► Does CMC's distribution segment qualify as a discontinued operation under IFRS? Explain your answer. ► Does CMC's distribution segment qualify as a discontinued operation under US GAAP? Explain your answer.

IFRS: Since it is not probable the sale will occur within one year, the requirement to classify the industrial segment as a non-current asset held for sale has not been met. Therefore, the plan to sell the distribution segment would not qualify for accounting as a discontinued operation. US GAAP: The answer is the same as IFRS.

Explain how a company should account for a change in estimate due to new developments or new information under US GAAP compared to IFRS.

Under both US GAAP and IFRS, a change in accounting estimate due to new developments or new information should be accounted for prospectively (in the period of the change and future periods).

Explain how a company should account for a change in accounting policy, if practical, under US GAAP, compared to IFRS.

Under both US GAAP and IFRS, if practical, a change in accounting policy should be accounted for retrospectively.

Both US GAAP and IFRS frameworks require financial statements (except the statement of cash flows) to be prepared on an accrual basis except for rare circumstances. a. True b. False

a. Both US GAAP and IFRS frameworks require financial statements (except the statement of cash flows) to be prepared on an accrual basis except for rare circumstances.

Using IFRS, overdrafts may be classified as a component of cash and cash equivalents if considered to be an integral part of an enterprise's cash management. Explain how this differs from US GAAP. a. True b. False

a. IAS 7 makes an explicit distinction between bank borrowings and bank overdrafts. Overdrafts may be classified as a component of cash and cash equivalents if considered to be an integral part of an enterprises cash management. ASC 210-20 does not address bank overdrafts. If the net amount is a credit, they are generally reported as a liability in the balance sheet and presented as a financing activity in the statement of cash flows, creating a presentation difference when compared to IFRS.

In 2014, Company AA met all the requirements for accounting for a discontinued operation under IFRS in its 2014 comparative financial statements. Select the most appropriate response below regarding the impact of the discontinued operations on Company AA's cash flow information. a. Restatement of the 2014 and 2013 cash flow information for the discontinued operations is required. b. Restatement of only the 2014 cash flow information for the discontinued operations is required. c. Restatement of the 2012 and 2013 cash flow statements for the discontinued operations is required. d. Restatement of only the 2014 cash flow statement for the discontinued operations is required. e. None of the above.

a. IFRS 5.33 requires disclosure of "the net cash flows attributable to the operating, investing and financing activities of discontinued operations. These disclosures may be presented in either the notes or on the face of the financial statements." Restatement of comparative information for prior periods is also required.

IAS 1 requires a choice between two expense classifications based on which is reliable and more relevant. What are these expense classifications? a. By the nature of the expense and by the function of the expense. b. By the function of the expense and by the cost of the expense. c. By the nature of the expense and the duration of the expense. d. By the cost of the expense and the duration of the expense.

a. IFRS allows either natural or functional classification of expenses, but if the functional presentation is used, specific disclosures in the notes are required about the nature of expenses. US GAAP has no general requirement, but the SEC requires that expenses be based on the functional classification.

Using IFRS, deferred tax assets and liabilities may be classified as: a. Only non-current. b. Only current. c. Current or non-current based on the nature of the related asset or liability.

a. IFRS prohibits deferred tax assets or liabilities to be classified as current. US GAAP requires classification as current or non-current, based on the nature of the related asset or liability. IFRS is expected to converge with US GAAP on this issue. UPDATE: as of FY2017, GAAP no longer allows for a current DTA/DTL. GAAP and IFRS are now converged.

IFRS requires comparative information to be disclosed with respect to the previous period for all amounts presented in the financial statements. Whether true or false, briefly explain how this compares to US GAAP and SEC requirements. a. True b. False

a. IFRS requires comparative information must be disclosed with respect to the previous period for all amounts reported in the financial statements, whereas US GAAP allows a single year presentation in certain circumstances and SEC rules require two years for the balance sheet and three years for all other statements.

A company reports using IFRS. The company violates its debt covenants before fiscal year-end. The lender decides to waive the debt covenant violation that would have resulted in the debt being due within 12 months rather than 18 months. When must the lender waive the violation for the company to keep the debt as non-current on the fiscal year-end balance sheet? Briefly explain how this compares to US GAAP. a. By the end of the fiscal year. b. After fiscal year end but prior to the issuance of the financial statements. c. Both a. and b. are correct.

a. IFRS requires that a lender must waive or modify a debt covenant violation, which would otherwise require the related debt to be reclassified from non-current to current, by the balance sheet date sheet, whereas US GAAP allows non-current classification if the lender waives or modifies the violation after the balance sheet date, but prior to the issuance of the financial statements.

How might users of IAS 1 apply the information provided in the presentation of IFRS financial statements? a. To make economic decisions regarding the company's financial position, financial performance, and cash flows. b. To make economic decisions regarding the company's financial performance, cash flows, and hiring guidelines. c. To make economic decisions regarding the company's cash flows, hiring guidelines, and environmental position. d. To make economic decisions regarding the company's financial performance, environmental position, and community service.

a. The components of a complete set of financial statements using IFRS include: balance sheet, statement of comprehensive income, statement of changes in equity, statement of cash flows, and accompanying notes to the financial statements. These statements would allow a financial statement user to make economic decisions regarding the company's financial position, financial performance, and cash flows.

IAS 1 prescribes the order or format in which items are to be presented in the balance sheet. a. True b. False

b. Although no particular format is required under IAS 1, IFRS typically presents accounts in an order following UK legacy protocol, whereas US GAAP presents current assets and liabilities before non-current assets and liabilities.

In 2014, Company AA met all the requirements for accounting for a discontinued operation under IFRS in its 2014 comparative financial statements. Select the most appropriate response below regarding the impact of the discontinued operations on Company AA's income statement. a. The 2013 income statement presentation does not need to be restated. b. The 2014 and 2013 revenue and related expenses must be disclosed. c. The total income tax impact from the discontinued operations must be disclosed for 2014 and 2013. d. The income tax impact on the remeasurement gain or loss related to the discontinued operations must be disclosed in the 2013 income statement. e. None of the above.

b. Both IFRS and US GAAP require this disclosure. For answer a., IFRS requires restatement of 2013. For answer c., IFRS requires disclosure of the income tax impact on both the discontinuance and operating gain or loss. For answer d., the remeasurement gain or loss would be a 2014 event, not a 2013 event.

IFRS does not require the presentation of items in OCI that ultimately may be reclassified into net income to be presented separately from those that will not be reclassified into net income. a. True b. False

b. IFRS requires the presentation of items in OCI that ultimately may be reclassified into net income to be presented separately from those that will not be reclassified into net income. The tax effect must be shown separately, either by individual item or in aggregate. Generally, US GAAP considers all items recorded in OCI as subject to reclassification into net income.

IFRS identifies items of income and expense that are required by other standards or interpretations to be recognized directly into equity as: a. Transition reserves. b. Other reserves. c. Accumulated other comprehensive income.

b. IFRS uses the terminology "other reserves" and US GAAP uses "accumulated other comprehensive income" to identify items of income and expense that are required by other standards or interpretations to be recognized directly in equity.

Parts upgraded its computer systems in 2012. As part of this process, it determined that the beginning inventory was materially misstated by $8.0 million. While unable to conclusively conclude whether this error arose in 2011, management strongly believes most of the error related to a system change in 2008. Which of the following statements is most appropriate under IFRS? a. Parts can combine the correction of the error and the change in accounting policy noted in question 1. above and record these changes through its 2012 financial statements. b. Parts can reflect the correction of the error in the 2011 ending inventory because system limitations make it impractical to determine in which earlier period the error arose. c. Parts can reflect the correction of the error in the 2012 beginning inventory because system limitations make it impractical to determine in which earlier period the error arose. d. Parts must further research the error and determine the amount of the error in each period covered by the financial statements. e. Based on management's judgment, the error should be spread over the period from 2008 through 2011.

b. Parts Company should push the error as far back as practical.

Company AA met all the requirements for accounting for a discontinued operation under both US GAAP and IFRS in its 2014 comparative financial statements. Select all appropriate responses from the following: a. Both US GAAP and IFRS require the net assets (assets less liabilities) of the discontinued operations to be disclosed on the 2014 statement of financial position. b. US GAAP requires the 2013 assets and liabilities of the discontinued operations to be restated for the discontinued operations in the 2014 comparative statement of financial position. c. IFRS requires the 2013 assets and liabilities of the discontinued operations to be restated for the discontinued operations in the 2014 comparative statement of financial position. d. IFRS does not provide any specific guidance on whether comparative information on the statement of financial position needs to be restated. e. None of the above.

b. US GAAP requires restatement in the comparative statement of financial position. For answer a., both US GAAP and IFRS require that the assets and liabilities of the discontinued operations be shown on the 2014 balance sheet. A net presentation is not acceptable. For answer c., IFRS does not require restatement of the prior year statement of financial position. For answer d., IFRS specifically states comparative information is not required.

In 2014, Company AA met all the requirements for accounting for a discontinued operation under US GAAP in its 2014 comparative financial statements. Select the most appropriate response below regarding the impact of the discontinued operations on Company AA's income statement. a. The 2013 income statement presentation does not need to be restated. b. The 2014 revenue must be disclosed but not the related expenses. c. The total income tax impact from the discontinued operations must be disclosed for 2014 and 2013. d. None of the above.

c. US GAAP requires the disclosure of the total income tax impact of discontinued operations. For answer a., US GAAP would require restatement of 2013. For answer b., US GAAP does require disclosure of expenses.

Using IFRS, companies classify interest and dividends paid or received as: a. Operating cash flows. b. Interest and dividends paid as financing cash flows and interest and dividends received as investing cash flows. c. Interest received and paid and dividends received classified as operating cash flows and dividends paid as financing cash flows. d. a. or b.

d. IAS 7 permits an entity, (a) to classify interest and dividends paid or received as operating cash flows or (b) to classify interest and dividends paid as financing cash flows and interest and dividends received as investing cash flows. US GAAP requires that interest received and paid and dividends received be classified as operating cash flows and dividends paid are classified as financing cash flows.

When is a presentation of assets and liabilities in the order of their liquidity allowed under IFRS? Briefly explain how this compares to US GAAP. a. When such presentation is done before the interim financial statements are issued. b. When such presentation allows the company to measure assets against liabilities. c. When such presentation provides working capital distinctions. d. When such presentation provides more relevant and reliable information.

d. IFRS requires a classified balance sheet, except when liquidity presentation provides more reliable and relevant information. US GAAP allows the use of a classified or unclassified balance sheet.

Parts Company (Parts) upgraded its computer systems in 2012. Beginning in 2012, Parts can determine the average cost of its inventory. As of its 2012 fiscal year-end, Parts elected to change from the FIFO method to the average cost method for its inventory. Assume, for purposes of this example, the change is preferable. Which of the following statements is most appropriate under US GAAP? a. Parts cannot change its accounting policy in 2012 because the necessary data to retrospectively reflect the change in accounting policy is not available for 2011 and earlier years. b. Parts cannot adopt the new accounting policy because the change would result in 2011 and 2012 financial information being presented on an inconsistent basis. c. While Parts could change its accounting policy, it is more prudent to wait another year so the impact on cost of sales is properly determined. d. Parts can make the change in accounting policy in 2012, as long as it adequately disclosed the reasons for the impracticality of retrospectively applying the change in accounting policy. e. Both a. and b.

d. The answer is the same under US GAAP and IFRS.

Parts Company (Parts) upgraded its computer systems in 2012. Beginning in 2012, Parts can determine the average cost of its inventory. As of its 2012 fiscal year-end, Parts elected to change from the FIFO method to the average cost method for its inventory. Assume, for purposes of this example, the change is preferable. Which of the following statements is most appropriate under IFRS? a. Parts cannot change its accounting policy in 2012 because the necessary data to retrospectively reflect the change in accounting policy is not available for 2011 and earlier years. b. Parts cannot adopt the new accounting policy because the change would result in 2011 and 2012 financial information being presented on an inconsistent basis. c. While Parts could change its accounting policy, it is more prudent to wait another year so the impact on cost of sales is properly determined. d. Parts can make the change in accounting policy in 2012, as long as it adequately disclosed the reasons for the impracticality of retrospectively applying the change in accounting policy. e. Both a. and b

d. The average costs can be determined as of the beginning and end of 2012. Therefore, Parts Company would be able to determine the 2012 cost of sales impact and the year-end inventory impact. As a result, it could adopt the change in accounting policy.

Parts upgraded its computer systems in 2012. As part of this process, it determined that the beginning inventory was materially misstated by $8.0 million. While unable to conclusively conclude whether this error arose in 2011, management strongly believes most of the error related to a system change in 2008. Which of the following statements is most appropriate under US GAAP? a. Parts can combine the correction of the error and the change in accounting policy noted in question 1. above and record these changes through its 2012 financial statements. b. Parts can reflect the correction of the error in the 2011 ending inventory because system limitations make it impractical to determine in which earlier period the error arose. c. Parts can reflect the correction of the error in the 2012 beginning inventory because system limitations make it impractical to determine in which earlier period the error arose. d. Parts must further research the error and determine the amount of the error in each period covered by the financial statements. e. Based on management's judgment, the error should be spread over the period from 2008 through 2011.

d. US GAAP does not have an impractical exception for a correction of an error; therefore, this is the most appropriate answer.