Acct 2337 Chapter 4
What is IAS 41?
Agriculture, adopts the view that biological assets should be measured at fair value. The reasoning is that it better captures the value transformation that occurs with growth. Differs from US GAAP in that it generally requires biological asset to be measured at fair value (less cost to sell) period by period, with revaluation gains or losses included in the income statement. IAS 41 no longer applies after the point of harvest, as the product becomes similar to inventory
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 asset
The following information was taken from the fixed asset records of Bosco Ltd. as of December 31, 2010: Carrying value€100,000 Selling price€85,000 Costs of disposal€3,000 Expected future cash flows€75,000 Present value of expected future cash flows€63,000 What is the amount of impairment loss under U.S. GAAP?
Carrying value - Expected Future cash flows 100,000 - 75,000 = 25,000
IAS 16 allows what two asset treatments for PPE?
Cost model: depreciation Revaluation model: fair value date of revaluation minus subsequent depreciation
The following inventory information was taken from the records of GlobeKom Ltd.: Historical cost$12,000 Replacement cost$9,000 Expected selling Price$10,000 Expected selling cost$500 Normal profit margin10% of selling price Under U.S. GAAP, what should the balance sheet report for Inventory?
Current replacement cost but should not exceed net realizable value (10,000 - 500 = 9500) or be lower than net realizable value less a normal profit margin (9,500 - 1000 = 8500) 9000
Under IAS 38, which of the following items is specifically EXCLUDED from being recognized as an internally generated intangible asset?
Customer lists
Depreciation under IAS 16
Depreciation is based on estimated useful lives, taking residual value into account. The depreciation method should reflect the pattern in which the asset's future economic benefits are are expected to be consumed; SL depreciation will not always be appropriate. IAS 16 requires estimates of useful life, residual value, and method of depreciation to be reviewed on an annual basis.
Agro-World Technologies Inc. incurred $1,000,000 to construct a pilot plant to study the feasibility of building agricultural machinery more inexpensively for emerging economies. How would this cost be classified under IAS 38 (Intangible Assets)?
Development costs
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 (Property, Plant and Equipment), 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
How does the revaluation model work?
Fair value date of revaluation minus subsequent depreciation -Must do entire class of assets -Must revalue often -Increases in value go to OCI; decreases reduce OCI to historical cost then reduce income -Accumulated depreciation with revaluation -Proportional to new value -Eliminated with excess/shortage against asset account
In what way does IAS 16 (Property, Plant, and Equipment) differ from U.S. GAAP concerning fixed asset measurement subsequent to initial recognition?
IAS 16 allows for upward revaluation of the asset based on fair value.
Does IAS 38 allow the use of the revaluation model for intangible assets?
IAS 38 allows the use of the revaluation model for intangible assets with finite lives, but only if the intangible asset has a price that is available on an active market; a condition that is rarely met in practice
Internally generated intangibles
IAS 38 closely associated the development of homegrown, or internally generated intangibles with the R&D process. The standard requires that all research expen
How does IAS 38 define intangible assets?
Identifiable, non-monetary assets without physical substance that are held for use in the production of goods or services, for rental to others, or for administrative purposes. EX: patents, brands (Trademarks), copyrights, and various operating rights. IAS 38 further stipulates that the intangibles must be controlled by the enterprise
Reversal of Impairment
If, subsequent to recognizing an impairment loss, the recoverable amount of an asset exceeds the new carrying amount, the impairment loss should be reversed. However, the loss should only be reversed if there are changes in the estimates used to determine the original impairment loss or there is a change in the basis for determining the recoverable amount. The carrying value is increased, but not to exceed what it would have been if no impairment loss had been recognized. The reversal of an impairment loss shouldn't be recognized in income immediately.
What are the central reliability risks that IFRS accountants must overcome? (Fair Valuation)
Illiquidity of the markets in which the assets trade, resulting in the need to use valuation modeling in lieu of observed asset prices Competing valuation models and frameworks that lead to different results Subjectivity in estimates of modeling inputs once a particular model is agreed upon Long forecasting horizons, which add to uncertainty of the subjective estimates Management's incentive to exploit modeling choices to improve perceptions of the company's performance and financial health
What is IAS 36
Impairment of assets, requires impairment testing and recognition of impairment losses for PPE, intangible assets, goodwill, and investments in subsidiaries, associates, and joint ventures. It does not apply to inventory, construction in progress, deferred tax assets, employee benefit assets, or financial assets such as accounts and notes receivable
The following inventory information was taken from the records of a foreign corporation whose stock is listed on an exchange in the U.S. Historical cost$15,000 Replacement cost$11,000 Expected selling Price$13,500 Expected selling cost$800 Normal profit margin$2,500 The following inventory information was taken from the records of a foreign corporation whose stock is listed on an exchange in the U.S. How will income under the U.S. GAAP compare to income the company reported under IFRS after reconciliation?
Income under U.S. GAAP will be lower by $1,700.
Treatment of Revaluation Surpluses and Deficits: First Revaluation
Increases: credited directly to a revaluation surplus in the other comprehensive income component of equity Decreases: are charged to the income statement as an expense
Which intangible assets are subject to annual impairment testing?
Indefinite-lived intangibles and goodwill are subject to impairment testing at least annually.
What is IAS 38?
Intangible assets, it provides the primary guidance on accounting for intangible assets within the IFRS framework. It is very similar to US GAAP, except with regard to internally generated intagibles. Specifically, IAS 38 requires companies to capitalize many R&D expenditures as development costs
The following inventory information was taken from the records of Kleinfeld Inc.: Historical cost$12,000 Replacement cost$7,000 Expected selling Price$9,000 Expected selling cost$500Normal profit margin50% of price Assume that subsequent to your adjustment the expected selling price increases to $13,000 (all the rest of the facts are the same). What adjustment to inventory should be made under IAS 2 after this event?
Inventory should be increased (debited) by $3500
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.
Which of the following inventory valuation methods, commonly used under the U.S. GAAP, is NOT allowed under IAS 2 (Inventories)?
LIFO
The following inventory information was taken from the records of GlobeKom Ltd.: Historical cost$12,000 Replacement cost$9,000 Expected selling Price$10,000 Expected selling cost$500 Normal profit margin10% of selling price Under IAS 2, what should the balance sheet report for Inventory?
Lower of Historical Cost or Net Realizable Value $9500 10,000 - 500
Under IAS 38, which of the following items might qualify for capitalization as internally generated intangible assets? Brands Publishing titles Market share Customer lists
Market share
What types of differences can cause issues between International Financial Reporting Standards and U.S. GAAP?
Measurement Alternatives available Disclosure All of the above may be different between IFRS and U.S. GAAP.
How should PPE be initially measured under IAS 16?
PPE should be measured at cost: 1. Purchase price including import duties and taxes 2. All costs directly attributable to bringing the asset to the location and condition necessary for it to perform as intended 3. An estimate of the costs of dismantling and removing the asset and restoring the site on which it is located
What should be the basis for choosing depreciation methods for fixed assets under IAS 16 (Property, Plant, and Equipment)?
Pattern of economic benefits to be derived from the asset
What is IAS 40?
Prescribes the accounting treatment for investment property, which are defined as land and/or buildings held to earn rentals, capital appreciation, or both.
Research vs. Development
Research: the search for new knowledge Development: the application of this knowledge to the creation of commercially viable products or services.
Intangible acquired in a business acquisition
Should be recognized as assets apart from goodwill at their fair values. The acquirer should recognize these assets even if they were not recognized by the acquiree, so long as they are identifiable and controlled and their fair value can be measured reliably. If any of these criteria are not met, the intangible is not recognized as a separate asset but is instead included in goodwill.
What valuation methods does IAS 40 allow?
Similar to IAS 16, IAS 40 allows companies to measure assets using either the historical cost or fair value approaches. For companies choosing historical cost, IAS 40 resembles IAS 16 in most aspects. However, for companies choosing the fair value method IAS 40 differs in two important ways.
Recoverable amount
The greater of net selling price (the price of an asset in an active market less selling costs) and value in use (the present value of future net cash flows expected to arise from the continued use of the asset over its remaining useful life and upon disposal)
Under IAS 2, what adjustment needs to be made after an inventory write-down if the selling price subsequently increases?
The inventory write-down should be reversed to bring it in line with the new net realizable value.
As defined by IAS 38, how are intangible assets unlike other assets?
They are nonmonetary and lack physical substance.
When a patent or trademark is acquired in a business combination, what does IAS 38 say about recording these intangibles?
They should be recorded as separate intangible assets if their fair value can be reliably measured.
Treatment of Revaluation Surpluses and Deficits: Subsequent Revaluations
To the extent that there is a previous revaluation surplus with respect to the asset, a decrease should be charged against it first, and any excess of deficit over that previous surplus should be expensed. To the extent that a previous revaluation resulted in a charge to expense, a subsequent upward revaluation first should be recognized as income to the extent of the previous expense and any excess should be credited to other comprehensive income in equity.
Which of the following is generally true about the differences between U.S. GAAP and IFRS?
U.S. GAAP tends to be more rules-based and IFRS tend to be principles-based.
What is component depreciation?
When an asset is comprised of significant parts for which different depreciation methods or useful lives are appropriate, each part must be depreciated separately. Component depreciation is not commonly used under US GAAP
When should development expenditures be capitalized as development cost assets?
When the enterprise can demonstrate all of the following: 1. The technical feasibility of completing the intangible asset so that it will available for use or sale 2. The intention to complete the intangible asset and use or sell it 3. The ability to use or sell the intangible asset 4. How the intangible asset will generate probable future economic benefits. Among other things, the enterprise should demonstrate the existence of a market for the output of the intangible asset or, if it is to be used internally, the usefulness of the intangible asset 5. The availability of adequate technical, financial, and other resources to complete the development and to use or sell the intangible asset 6. The ability to reliably measure the expenditure attributable to the intangible asset during its development If any of these 6 criteria are not met, the development expenditures must be expensed
Impairment under U.S. GAAP (Recoverability test)
When: Carrying value > Future *undiscounted* cash flows of the asset No reversal of impairment under US GAAP
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.
Definition of impairment under IAS 36
an asset is impaired when its carrying amount exceeds its recoverable value
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.
What are external events that might indicate that an asset is impaired?
decline in market value, increase in market interest rates, economic, legal, or technological changes that adversely affect the value of the asset
Under IAS 16 (Property, Plant, and Equipment), subsequent revaluation decreases are:
first recognized as a reduction in any related revaluation surplus.
purchased intangibles
initially measured at cost, and its useful life is assessed as finite or indefinite. The cost of an asset with a finite life is amortized over the life of the asset. The residual value is assumed to be zero unless 1. a third party has agreed to purchase the asset at the end of its useful life or 2. there is an active market for the asset from which a residual value can be estimated.
IAS 38's sixth capitalization criteria disallows the recognition of
internally generated marketing intangibles such as brands, customer lists, mastheads, and publishing titles IAS 38 asserts that measuring expenditures to create and enhance the above intangibles is impossible because they are not distinguishable from the costs of developing the business as a whole
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.
What are internal events that might indicate that an asset is impaired?
physical damage, obsolescence, idleness of an asset, the restructuring of part of an asset, or worse than expected economic performance of the asset
What is the definition of fair value according to IAS 16?
the amount that could be exchanged between knowledgable, willing parties in an arms length transaction
What is IFRS 10
the primary international standard governing consolidation and its scope
IAS 2 requires inventory to be reported at
§the lower of cost or net realizable value
The following inventory information was taken from the records of Kleinfeld Inc.: Historical cost$12,000 Replacement cost$7,000 Expected selling Price$9,000 Expected selling cost$500 Normal profit margin50% of price Under U.S. GAAP, what should the balance sheet report for Inventory?
$7000
Under U.S. GAAP, if the carrying value of a fixed asset was $50,000, the undiscounted expected future cash flows was $55,000, the discounted expected future cash flows was $51,000, and the selling price was $53,000, what is the amount of impairment loss?
0 Carrying value is less than the expected future cash flows
How does the fair value method in IAS 40 differ from IAS 16?
1. Changes in fair value are recognized as gains or losses in current income period by period, not as changes to revaluation surplus in comprehensive income. 2. Period by period updating of fair values is done in lieu of depreciation, eliminating depreciation expenses in the income statement and accumulated depreciation accounts in the balance sheet.
What does IAS 16 cover?
1. Recognition of initial costs of PPE 2. Recognition of Subsequent Costs 3. Measurement at initial cost recognition 4. Measurement after initial cost recognition 5. Depreciation 6. Derecognition (retirement and disposals)
What are the two alternative treatments of Accumulated Depreciation when an asset is revalued?
1. Restate the AD proportionately with the change in the gross carrying amount of the asset so that the carrying amount of the asset after revaluation equals its revalued amount. The standard comments that this method is often used where an asset is revalued by means of an index and is the appropriate method for those companies using current cost accounting 2. Eliminate the accumulated depreciation against the gross carrying amount of the asset, and restate the net amount to the revalued amount of the asset
According to IFRS 10, control exists when what conditions are met?
1. The investor has power over the investee 2. The investor has rights to participate in, or exposure to downside risk from, the variable returns from its involvement with the investee 3. The investor has the ability to use its power over the investee to affect those returns
How does the definition of asset impairment differ between IAS 36 and U.S. GAAP?
1. U.S. GAAP does not consider selling price in determining impairment, but IAS 36 does. 2. U.S. 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 U.S. GAAP.
Camerata Construction borrowed €19,000,000 for 10 years at 6% specifically to modernize its operations with new equipment. The average rate of interest on Camerata's debt after considering the most recent loan was 5.5%. What rate of interest should be used for capitalizing the borrowing costs on the new equipment under IAS 23?
6%
The following inventory information was taken from the records of Kleinfeld Inc.: Historical cost$12,000 Replacement cost$7,000 Expected selling Price$9,000 Expected selling cost$500 Normal profit margin50% of price Under IAS 2, what should the balance sheet report for Inventory?
8500
