International Accounting Chapter 4 & 5
Which of the following items should be included in the cost of property, plant, and equipment under IAS 16?
All costs directly attributable to getting the asset to the proper location; import duties and taxes; estimated costs of removing the assets
What are the two models allowed for measuring PPE at dates subsequent to original acquisition?
Allowed under IAS 16: Cost model: Revaluation model: Under the revaluation model, PPE is reported on the balance sheet at the revaluated amount, measured as fair value at the date of remeasurement, less accumulated depreciation and any accumulated depreciation and any accumulated impairment costs.
What are the three categories of financial assets and which is the residual category?
Amortized cost Fair value through other comprehensive income (FVOCI) Fair value through profit and loss (FVPL) FVPL is the residual category
What is an onerous contract? How are onerous contracts accounted for?
An onerous contract exists when the unavoidable costs of meeting the obligation of the contract exceed the economic benefits expected to be received from it. An onerous contract must be recognized as a provision with an offsetting decrease in net income.
Which items of PPE may be accounted for under the revaluation model, and how frequently must revaluation occur?
Any item of PPE may be accounted for under the revaluation model. However, all other items within that class of PPE must be revalued at the same time. Revaluation must occur frequently enough that the difference between the revalued assets' carrying amount and fair value is not material
Blanco Chemical Company spent €15,000,000 in development efforts to create a fertilizer for which it was able to obtain a patent; however, the expected distribution costs make it infeasible to market the chemical in the foreseeable future. According to IAS 38 (Intangible Assets), how should Blanco Chemical Company record the €15,000,000?
As a development expense on the income statement
Under both IFRS and U.S. GAAP, in an equity-settled share-based payment transaction, how are such payments to non-employees measured?
At the fair value of goods or services received, if a reliable determination is available—otherwise, the fair value of the equity instrument.
Which of the following types of share-based payment (SBP) transactions always result in the recognition of a liability?
Cash-settled SBP transactions with employees.
How does accounting for bearer plants differ from that for other biological assets?
Companies treat bearer plants as PPE. Thus, they choose between the cost and revaluation models for these assets. The treatment of bearer plants constitutes an important exception to the requirement that companies revalue biological assets.
How are convertible bonds measured initially on the balance sheet?
Convertible bonds are compound financial instruments subject to "split accounting". Upon initial recognition and measurement, convertible bonds are split into their debt and equity components using a with-and-without approach.
What is effective control?
Effective control is control over a subsidiary exercised through means other than controlling a majority of voting shares of the subsidiary's stock.
According to IAS 16 (PPE) what is the term used to indicate the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction?
Fair Value
Under IAS 16 (PPE) subsequent revaluation decreases are:
First recognized as a reduction in any related revaluation surplus
Which of the following best describes the accounting for goodwill subsequent to initial recognition?
Goodwill is tested for impairment on an annual basis
By what cut-off date should an entity adjust its financial statements for events occuring after the reporting period?
IAS 10 establishes the date that financial statements are authorized for issuance as the cut-off date for recognition of events after the reporting period. US GAAP uses the date that financial statements are available for issuance as the cut off date.
How do IFRS and U.S. GAAP differ in their approach to allowing reversals of inventory write downs?
IFRS requires the reversal of write-downs from cost to net realization value (NRV) when the selling price increases. U.S. GAAP prohibits the reversal of past write downs.
On January 1, Year 1, the Hoverman Corporation made amendments to its defined benefit pension plan, resulting in $150,000 of past service costs. The plan has 100 active employees with an average expected remaining working life of 10 years. There currently are no retirees under the plan. Determine the amount of past service costs to be amortized in Year 1 and subsequent years under (a) IFRS and (b) U.S. GAAP.
IFRS: All past service costs are expensed in the year in which amendments are made to the defined benefit pension plan. Thus, the total amount of $150,000 is recognized as expense to net income in Year 1. U.S. GAAP: Because the pension plan amendment only affects active employees, the past service cost is amortized on a straight-line basis over their average expected remaining working life of 10 years. The amount of expense to be recognized in net income in each of Years 1 through 10 is $15,000.
How are internally generated intangibles handled under IFRS? How does this differ from U.S. GAAP?
IFRS: Under IAS 36, expenditures giving rise to a potential intangible are classified as either research of development expenditures. Research expenditures are expensed as incurred. Development expenditures are recognized as an intangible asset when six criteria are ment US GAAP: Under US GAAP research and development costs are expensed as incurred. The only exception is for software development costs, which are recognized as an asset when certain criteria have been met
Under IAS 32, how should an equity instrument be classified?
If it contains a contractual obligation that meets the definition of a financial liability, it should be classified as a liability.
Which intangible assets are subject to annual impairment testing?
Indefinite-lived intangibles and goodwill are subject to impairment testing at least annually.
Under IAS 32, which of the following is not a financial asset?
Investment in equity instruments accounted for under the equity method
What is a "contingent asset?"
It is a probable asset, arising from past events, whose existence is yet to be confirmed definitively by a future event.
How should the cost of borrowing funds to acquire or construct property, plant, and equipment be accounted for under IASB rules, as revised in 2007?
It should be added to the other costs of acquiring fixed assets to determine the amount for the balance sheet
IAS 38 states that an intangible asset is deemed to have an indefinite life when there is no foreseeable end to the expected cash flows the asset is likely to generate. What is the impact of an indefinite life on amortization of the intangible asset's cost under IAS 38?
No amortization is taken as long as the life is considered indefinite
Under IFRS 2, with respect to choice-of-settlement share-based payments, if the supplier chooses the cash settlement, the entity is deemed to have issued a compound financial instrument consisting of debt and equity. When cash is received, how does the supplier apply it?
Only against the debt portion
Under what conditions should preferred shares be recognized as a liability on the balance sheet?
Preferred shares should be recognized as a liability on the balance sheet when they are redeemable by the shareholder and the issuer cannot avoid the payment of cash to the shareholders if they redeem their shares. Preferred shares that are contingently redeemable based on future events outside the control of the issuer also should be classified as a liability.
Halifax Corporation has a December 31 fiscal year-end. As of December 31, Year 1, the company has a debt covenant violation that results in a 10-year note payable to Nova Scotia Bank becoming due on March 1, Year 2. Halifax will be required to classify the 10-year note payable as a current liability unless it obtains a waiver from the bank:
Prior to December 31, Year 1, which gives the company until January 1, Year 3, to rectify the debt covenant violation.
Under IFRS 9, Financial Instruments, which of the following is NOT a category into which a financial asset must be classified?
Property, plant, and equipment
An asset is considered to be impaired when its carrying amount is greater than its?
Recoverable amount
An entity must adjust its financial statement for an event that occurs after the end of the reporting period if:
The event occurs before the financial statements have been approved for issuance and provides evidence of conditions that existed at the end of the reporting period.
When stock options are granted to employees, what is the basis for determining the amount of compensation cost that will be recognized as expense?
The fair value of the stock options at the grant date.
Which of the following is a criterion that must be met in order for an item to be recognized as an intangible asset?
The item is identifiable and lacks physical substance
Which of the following is a criterion that must be met to recognize revenue from the sale of goods?
The receipt of consideration to which the entity is entitled under the contract must be probable.
As defined by IAS 38, how are intangible assets unlike other assets?
They are non monetary and lack physical substance.
According to IAS 37, how should contingent assets be recognized?
They should be disclosed in the notes to the financial statements if the inflow of resources is probable.
How does the classification of interest and dividends in the statement of cash flows differ between IFRS and US GAAP?
US GAAP: requires interest paid and received and dividends received to be classified as operating; dividends paid must be classified as financing IFRS: IAS 7 allows interest paid and dividends paid to be classified either as operating or financing; interest received and dividends received may be classified as either operating or investing
Ultima Company offers its customers discounts to purchase goods and take title before they actually need the goods. The company offers to hold the goods for the customers until they request delivery. This relieves the customers from making room in their warehouses for merchandise not yet needed. The goods are on hand, ready for delivery to the buyer, and not available for an alternative use. Ultima Company pays the cost of storage and insurance prior to shipment. Customers are billed at the time of sale and are given the normal credit period (90 days) to pay. Required: Determine whether Ultima Company should recognize revenue from the sale of goods at the time title passes to the customer or whether it should defer revenue recognition until the goods are delivered to the customer.
Ultima Company is offering to sell goods to customers as a "bill and hold sale." Criteria outlined in IFRS 15 are: a. substantive reason for the arrangement b. separate identification of the product as belonging to the customer; c. ready for physical transfer d. entity cannot have the ability to use the product or direct it to another customer. All of the above conditions are met. The fact that Ultima pays storage and insurance costs would make storage services a separate deliverable of the contract under IFRS 15. In the real world, there would be additional facts and circumstances to consider that could make it easier to justify a specific policy.
When an entity chooses the revaluation model as its accounting policy for measuring PPE, which of the following statements is correct?
When an asset is revalued, the entire class of PPE to which that asset belongs must be revalued
Memphis Ltd. purchased a building in 2015 for €11,000,000 and as of December 31, 2018 had recorded accumulated depreciation on the building of €4,000,000. On December 31, 2018, the company conducted its first revaluation when the fair value was €27,000,000. Under IAS 16, the journal entry recorded on this date would include:
a credit to Revaluation Surplus—Building for €20,000,000.
Under IFRS, an entity that acquires an intangible asset may use the revaluation model for subsequent measurement only if
an active market exists for the intangible asset
According to IAS 16, a decrease in the carrying amount of a fixed asset that is identified on an asset's first revaluation should be recorded as:
an expense on the income statement
The primary difference between IAS 37, and U.S. GAAP concerning the treatment of contingent liabilities pertains to:
definition of terms.
If a company chooses the revaluation model permitted in IaS 16 for fixed asset measurement:
it must update the valuation so that the balance sheet represents fair value on the balance sheet date
Through 50 years of high quality service, Domo Diagnostics Laboratory has created goodwill with its clients that management estimates is worth at least $20,000,000. Under IAS 38, how should this be recognized?
it should not be recognized in Domo's accounting records at all
Under IAS 12, current and deferred taxes are measured on the basis of:
rates that have been enacted or substantively enacted by the balance sheet date.
Under U.S. GAAP, a deferred tax asset must be realized when:
realization is more likely than not.
Under IAS 40 (Investment Property), gains or losses from revaluation are:
recognized in current income
According to IAS 37, with respect to onerous contracts, a provision should be recognized for "unavoidable costs of the contract", which is:
the lower of cost of fulfillment or the penalty from non-fulfillment of the contract.
Bull Arm Company has the following items at December 31, Year 1: $200,000, 5 percent note payable, due March 15, Year 2. The company has reached an agreement with the bank to refinance the note for two years, but the refinancing has not yet been completed. $1,000,000, 4 percent bonds payable, due December 31, Year 5. The company has violated an agreement with the bondholders to maintain a minimum balance in retained earnings, which causes the bonds to come due on January 31, Year 2. $50,000 overdraft on a bank account. Overdrafts are a normal part of the company's cash management plan. Related to these items, what amount should Bull Arm Company report as current liabilities on its December 31, Year 1, balance sheet?
$200,000 + $1,000,000 = $1,200,000
Melbourne Inc. is involved in a tax dispute with the national tax authority. Melbourne's legal counsel indicates that there is a 70 percent likelihood that the company will lose this dispute and estimates that the amount the company will have to pay is between $500,000 and $700,000, with all amounts in that range being equally likely. What amount, if any, should Melbourne recognize as a provision related to this tax dispute?
$600,000
Under IAS 32, what is a financial asset
1. Cash 2. 10% investment in a subsidiary 3. Loans to other entities
What are the five steps that entities take to recognize revenue under IFRS 15?
1. Identify the contract with a customer 2. Identify the separate performance obligations in the contract 3. Determine the transaction price 4. Allocate the transaction price to the separate performance obligations 5. Recognize the revenue allocated to each performance obligation when the entity satisfies each performance obligation
How does the definition of asset impairment differ between IAS 36 and U.S. GAAP?
1. US GAAP does not consider selling price in determining impairment, but IAS 36 does 2. US GAAP considers cash flows in assessing value of continued use, but does not discount them, whereas IAS 36 requires discounting in assessing asset impairment 3. Asset impairment is more likely to occur under IAS 36 than under US GAAP
under IFRS 9, what is a category into which a financial asset must be classified
1. bonds held to maturity 2. loans and receivables 3. Available-for-sale financial assets
Siam Financial Corp. (SFC) actively trades bonds but chooses not to hedge any of its open positions. At the beginning of the year, SFC purchased 50 million baht of Thai government bonds paying 4 percent per annum. The year-end fair market value of the bonds was 51 million baht. How much did the bonds contribute to SFC's pretax income during the year?
2 million baht. (50mil *4%)
Sandoval Company operates in a country in which distributed profits are taxed at 25 percent and undistributed profits are taxed at 30 percent. In Year 1, Sandoval generated pretax profit of $100,000 and paid $20,000 in dividends from its Year 1 earnings. In Year 2, Sandoval generated pretax profit of $120,000 and paid dividends of $40,000 from its Year 1 earnings. What amounts should Sandoval recognize as current tax expense in Years 1 and 2, respectively?
A Year 1: ($80,000 × 30%) + ($20,000 × 25%) = $29,000 Year 2: ($120,000 × 30%) - ($40,000 × (30%-25%)) = $34,000
What is a contingent liability? What is the financial reporting treatment for contingent liabilities?
A contingent liability is: 1. A possible obligation 2. A present obligation that is not recognized as a provision because (a) an outflow of resources to settle the obligation is not probable or (b) the obligation cannot be reliably estimated. Contingent liabilities are disclosed unless the likelihood of an outflow of resources is remote
When a previously recognized impairment loss is subsequently reversed, what is the maximum amount at which the affected asset may be carried on the balance sheet?
A previously impaired asset may be written back up only to what it's carrying amount would have been if the impairment had never been recognized.
