Chapter 4: International Financial Reporting Standards Part I

1. Abnormal amounts of wasted materials, labor, or other production costs 2. Storage costs, unless necessary 3. Administration Overhead 4. Selling Costs

Costs excluded from the Cost of Inventories

True or false: IAS 36 allows reversals of impairment losses on goodwill. True False

False - impairment losses on goodwill is prohibited

True or false: IAS 16 requires that all assets of the same class be revalued at the same time. True False

True

External Events

a decline in market value, increase in market interest rates, etc.

How many steps are there in the goodwill impairment test under U.S. GAAP? a. 2 b. 3 c. 4 d. 5

a. 2

How often does IAS 36 require companies to assess whether there are any indicators that an asset is impaired? a. Annually b. Semi-annually c. Quarterly d. Monthly

a. Annually

Under IAS 38, how is the value of a purchased intangible asset initially measured? a. At its cost b. The net present value of expected future cash flows c. The total value of expected future cash flows minus purchase price d. The total value of expected future cash flows

a. At its cost

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? a. Both IFRS and U.S. GAAP b. Neither IFRS nor U.S. GAAP c. IFRS d. U.S. GAAP

a. Both IFRS and U.S. GAAP

According to IAS 36, where would an impairment amount be recognized? a. In income b. In assets as a write-up c. In either assets or liability d. In liability

a. In income

Under IAS 36, how is the recoverable amount determined? a. The greater of net selling price and value in use b. The net selling price c. Either the net selling price or value in use d. The lower of net selling price and value in use

a. The greater of net selling price and value in use

Under IAS 36, how is the recoverable amount determined? a. The greater of net selling price and value in use b. The net selling price c. The lower of net selling price and value in use d. Either the net selling price or value in use

a. The greater of net selling price and value in use

When an entity chooses the revaluation model as its accounting policy for measuring property, plant, and equipment, which of the following statements is correct? a. When an asset is revalued, the entire class of property, plant, and equipment to which that asset belongs must be revalued b. When an asset is revalued, individual assets within a class of property, plant, and equipment to which that asset belongs may be selectively revalued c. Revaluations of property, plant, and equipment must be made at least every three years d. Increases in an asset's carrying value as a result of the first revaluation must be recognized in net income

a. When an asset is revalued, the entire class of property, plant, and equipment to which that asset belongs must be revalued

Select the best answer to complete the following statement: "Under IFRS 3, noncontrolling interest can be measured either at (1) ______ of acquired firm's net assets or (2) ______." a. a proportionate share, fair value b. total shares outstanding, market value c. a proportionate share, historical value d. historical value, fair value

a. a proportionate share, fair value

According to IAS 16, property, plant, and equipment should be initially measured at cost, which includes all of the following, except ______. a. depreciation b. an estimate of the costs of dismantling and removing the asset and restoring the site on which it is located c. purchase price d. all costs directly attributable to bringing the asset to the location and condition necessary for it to perform as intended

a. depreciation

Select the best answer to complete the following statement: "For companies with patterns of increasing R&D spending, the expenses avoided by capitalization in a given period ______ that period's amortization charges." a. is higher than b. doubles c. is equal to d. is lower than

a. is higher than

Select the best answer to complete the following statement: "IAS 16 requires estimates of useful life, ______ value, and the method of depreciation to be reviewed on an annual basis." a. residual b. fair c. market d. current

a. residual

Select the best answer to complete the following statement: "In the case of property, plant, and equipment carried at a revalued amount, the impairment loss is first taken against ______ and then to ______." a. revaluation surplus, income b. assets, revaluation surplus c. revaluation surplus, assets d. income, revaluation surplus

a. revaluation surplus, income

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 ______. a. the estimated selling price in the ordinary course of business b. the estimated selling price in a recession c. the estimated selling price in a booming market condition d. the historical cost or the original purchase price

a. the estimated selling price in the ordinary course of business

IAS 36 (Impairment of Assets)

an entity must assess annually whether there are any indicators that an asset is impaired

Net Realizable Value

an estimated selling price in the ordinary course of business less the estimated costs of completion and estimated costs necessary to make the sale

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? a. $3,000 b. $1,000 c. $0 d. $2,000

b. $1,000

A company incurred the following costs related to the production of inventory in the current year: Cost of materials $100,000 Cost of direct labor 60,000 Allocation of variable overhead costs 30,000 Allocation of fixed overhead costs 25,000 Storage costs 2,000 Selling Costs 8,000 The cost of materials included abnormal waste of $10,000. What is the cost of inventory in the current year? a. $190,000 b. $205,000 c. $215,000 d. $217,000

b. $205,000

An entity incurs the following costs in connection with the purchase of a trademark: Purchase price $80,000 Nonrefundable value added tax paid 4,000 Training staff 2,000 Research prior to purchase 15,000 Legal Fees 8,000 Salaries of negotiation staff 10,000 Assuming that the trademark meets the criteria for recognition as an intangible asset, at what amount should the trademark be initially measured? a. $84,000 b. $92,000 c. $104,000 d. $119,000

b. $92,000

How often must accountants test for goodwill impairment under IFRS? a. Monthly b. Annually c. Semi-annually d. Quarterly

b. Annually

How often does IAS 40 require companies to revalue their investment properties? a. When the inflation rate is higher than 3% b. Every reporting period c. When companies restate their financial reports d. When the market is under recession

b. Every reporting period

Under IFRS, an entity that acquires an intangible asset may use the revaluation model for subsequent measurement only if a. the useful life of the intangible asset can be reliably determined b. an active market exists for the intangible asset c. the cost of the intangible asset can be measured reliably d. the intangible asset has a finite life

b. an active market exists for the intangible asset

According to IAS 16, property, plant, and equipment should be initially measured at cost, which includes all of the following, except ______. a. all costs directly attributable to bringing the asset to the location and condition necessary for it to perform as intended b. depreciation c. purchase price d. an estimate of the costs of dismantling and removing the asset and restoring the site on which it is located

b. depreciation

Select the best answer to complete the following statement: "IAS 41, Agriculture, requires companies to measure biological assets at ______ period by period, with revaluation gains or losses included in ______." a. historical cost, the income statement b. fair value, the income statement c. fair value, other comprehensive income d. historical cost, assets

b. fair value, the income statement

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 ______. a. consolidated accounting b. group accounting c. convention accounting d. separate accounting

b. group accounting

Select the best answer to complete the following statement: "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." a. intangible, tangibles b. intangible, intangibles c. tangible, intangibles d. tangible, tangibles

b. intangible, intangibles

The IASB has concern that there is a trade-off between relevance and ______. a. fair value b. reliability c. market value d. investors' interest

b. reliability

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." a. production b. wasted c. direct d. manufacturing

b. wasted

All of the following are considered challenges of fair value appraisals, except ______. a. illiquidity of the market in which the assets trade b. whether the market in which the assets trade is a domestic or foreign market c. subjectivity in estimates of modeling inputs once a particular model is agreed upon d. competing valuation models that lead to different results

b. whether the market in which the assets trade is a domestic or foreign market

A company determined the following values for its inventory as the end of its fiscal year: Historical cost $50,000 Current replacement cost 35,000 Net Realizable Value 45,000 Net Realizable Value less profit margin 40,000 Fair value 48,000 What amount should the company report for inventory on its balance sheet? a. $35,000 b. $40,000 c. $45,000 d. $48,000

c. $45,000

Changsha Corporation purchased an asset during the fourth quarter of the current fiscal year. It is not the end of the fiscal year, and the assets fair value exceeds its historical cost. In certain circumstances, IFRS allows or requires Changsha to carry the asset at fair value in its year end balance sheet. In which of the following scenarios might Changsha carry the asset at fair value? I. the asset is a new home office that Changsha occupied immediately after the purchase II. the asset is a broadcasting license with an indefinite useful life III. the asset is an office park that is being rented to a tenant IV. the asset is 100 hectares of young trees that will eventually be turned into wood products V. the asset is a vineyard consisting of mature grapevines a. I, II, and IV b. III, IV, V c. I, III. IV, and V d. all scenarios are correct

c. I, III. IV, and V

Which IAS provides the primary guidance on accounting for intangible assets? a. IAS 16 b. IAS 41 c. IAS 38 d. IAS 36

c. IAS 38

What types of differences can cause issues between U.S. GAAP and IFRS? a. Disclosure differences and lack of requirements or guidance b. Definition differences and alternatives c. IFRS and U.S. GAAP might have issues in all of the above differences d. Recognition and measurement differences

c. IFRS and U.S. GAAP might have issues in all of the above differences

______ 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. a. Recognition differences b. Disclosure differences c. Measurement differences d. Presentation differences

c. Measurement differences

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? a. The reported profits would be deflated relative to a full-expensing system. b. The reported profits would be doubled, compared to a full-expensing system. c. The reported profits would be inflated relative to a full-expensing system. d. There would be no impact on the reported profits.

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

According to IAS 2, all of the following costs are expressly excluded from the costs of inventories, except ______. a. storage costs unrelated to the production process b. costs of abnormal amounts of wasted materials c. costs of purchase d. costs of abnormal amounts of labor

c. costs of purchase

Select the best answer to complete the following statement: "Under IAS 38, intangibles acquired in a business combination must be classified as having a(n) ______ or a(n) ______ useful life." a. short-term, long-term b. finite, determinable c. finite, indefinite d. indeterminable, determinable

c. finite, indefinite

Which of the following best describes the accounting for goodwill subsequent to initial recognition? a. goodwill is amortized over its expected useful life, not to exceed 20 years b. goodwill is tested for impairment whenever impairment indicators are present c. goodwill is tested for impairment on an annual basis d. goodwill is revalued using a revaluation model

c. goodwill is tested for impairment on an annual basis

Select the best answer to complete the following statement: "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." a. acquired, acquiring b. acquired, subsidiary c. parent, subsidiary d. subsidiary, parent

c. parent, subsidiary

Select the best answer to complete the following statement: "Under IAS 36, value in use is determined as the ______ value of ______ net cash flows expected to arise from continued use of the asset over its remaining useful life and upon disposal." a. highest, total b. lowest, total c. present, future d. current, present

c. present, future

Select the best answer to complete the following statement: "IAS 16 requires estimates of useful life, ______ value, and the method of depreciation to be reviewed on an annual basis." a. fair b. market c. residual d. current

c. residual

On January 1, Year 1, an entity acquires a new machine with an estimated useful life of 20 years for $100,000. The machine has an electrical motor that must be replaced every five years at an estimated cost of $20,000. Continued operation of the machine requires an inspection every four years after purchase; the inspection cost is $10,000. The company uses the straight line method of depreciation. What is the depreciation expense for year 1? a. $5,000 b. $5,500 c. $8,000 d. $10,000

d. $10,000

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? a. 5% b. 7% c. 7.3% d. 10%

d. 10%

Which IAS provides the primary guidance in accounting for the acquisition and use of property, plant, and equipment under IFRS? a. IAS 39 b. IAS 1 c. IAS 2 d. IAS 16

d. IAS 16

Under which condition can the revaluation model be used for intangible assets with finite lives? a. Only if the intangible asset was internally developed b. Only when the intangible asset was purchased c. Only if a similar intangible asset is owned by another company in the same industry d. Only if the intangible asset has a price that is available on an active market

d. 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? a. Depreciation b. Accumulated depreciation c. Impairment loss d. Purchase price

d. Purchase price

Select the best answer to complete the following statement: "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." a. disposal, purchases b. purchase, incomes c. purchase, economic benefits d. disposal, economic benefits

d. disposal, economic benefits

According to IAS 16, depreciation is based on all of the following factors, except ______. a. residual value b. estimated useful lives c. depreciation method d. payment method when purchasing

d. payment method when purchasing

An asset is considered to be impaired when its carrying amount is greater than its a. net selling price b. value in use c. undiscounted future cash flows d. recoverable amount

d. recoverable amount

Which of the following is a criterion that must be met in order for an item to be recognized as an intangible asset? a. the items fair value can be measured reliably b. the item is part of the entity's activities aimed at gaining new scientific or technical knowledge c. the item is expected to be used in the production or supply of goods or services d. the item is identifiable and lacks physical substance

d. the item is identifiable and lacks physical substance

IAS 40 (Investment Property)

describes the accounting treatment for land and/or building held to earn rentals, capital appreciation, or both recorded at historical or fair value costs, under fair value, a revaluation must be done every period to include gains or losses in the income statement

Definition Differences

differences in definition even though concepts are similar

Disclosure Differences

differences in information presented in the notes to financial statements on if and how something is disclosed

Recognition Differences

differences in recognition criteria and/or guidance related to if and how an item is recognized

Measurement Differences

differences in the amount recognized due to different methods or guidance

Internal Events

physical damage, obsolescence, idleness of an asset, restructuring of an asset, etc.

IAS 2 (Inventories)

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 16 (Property, Plant, and Equipment)

provides primary guidance in accounting for acquisition of PPE, requiring it to be initially recorded at cost including purchase price, import duties, and taxes as well as all costs directly attributable to bringing the asset to the location and condition necessary to function and estimated disposal and site restoration costs.; requires all assets of the same class be revalued at the same time, allowing for selectivity of a class

IAS 38 (Intangible Assets)

provides the primary guidance on accounting for intangible assets initially measured at cost

IAS 23 (Borrowing Costs)

require companies to capitalize borrowing costs that are attributable to the acquisition, construction, or production of qualifying assets

IAS 41 (Agriculture)

requires companies to measure biological assets at fair value period and record the gains or losses in the income statement

Recoverable Amount

the greater of net selling price and value in use

Net Selling Price

the price of an asset in an achieve market less disposal costs

Derecognition

the removal of an asset or liability from the balance sheet and the accounts and is realized on disposal or when no future economic benefits are expected with any gain or loss included in net income

Impairment

when an assets carrying amount exceeds its recoverable amount