FAR 10 IFRS
Segment cash flow is not reported under
IFRS (or U.S. GAAP).
IFRS requires component depreciation
Under component depreciation, the machinery, component, and inspection cost are recognized and depreciated separately:
On December 31, Year 1, an entity adopted the IFRS revaluation model for reporting its long-term assets and revalued a patent with a carrying value of $85,000 and a 10 year life to its fair value of $75,000. On December 31, Year 2, before recording any amortization, the entity determined that the patent had a fair value of $90,000. In its December 31, Year 2 financial statements, the entity will report a revaluation gain of:
$10,000 on the income statement and $5,000 in other comprehensive income. The total Year 2 revaluation gain is $15,000 ($90,000 fair value on 12/31/Y2 - $75,000 fair value on 12/31/Y1). $10,000 of the revaluation gain will be recognized on the income statement to reverse the revaluation loss of $10,000 ($75,000 fair value - $85,000 carrying value) reported on the income statement in Year 1. The remaining $5,000 will be recognized as a revaluation surplus in Year 2 other comprehensive income.
The research costs associated with an internally developed asset will always be expensed. Assuming a company can reliably measure the costs associated with each component, under IFRS the development costs may be capitalized if all of the following criteria are met:
- Technical feasibility has been established. - The company intends to complete the asset. - The company has the ability to sell or use the asset. - Sufficient resources are available to complete the development and sell / use the asset. -The asset will generate future economic benefits.
Hut Co. has temporary differences that will reverse during the next year and decrease taxable income. These differences relate to current assets. Under IFRS, the deferred income taxes based on these temporary differences should be classified in Hut's balance sheet as a:
A temporary difference that decreases future taxable income results in the recognition of a deferred tax asset, which will be reported as noncurrent under IFRS. Under IFRS, all deferred tax assets (DTA) and deferred tax liabilities (DTL) are reported as noncurrent on the balance sheet.
How should a first-time adopter of IFRS recognize the adjustments required to present its opening IFRS statement of financial position?
All of the adjustments should be recognized directly in retained earnings or, if appropriate, in another category of equity.
Which of the following statements characterizes convertible debt under IFRS?
An equity component should be recognized upon issuance equal to the difference between the proceeds received and the fair value of the bond liability. Under IFRS, both a liability (bond) and an equity component (conversion feature) should be recognized when convertible bonds are issued. The bond liability is valued at fair value, with the difference between the actual proceeds received and the fair value of the bond liability recorded as a component of equity. The conversion feature is recognized as a component of equity under IFRS. No recognition is given to the conversion feature under U.S. GAAP.
Markson Co. traded a concrete-mixing truck with a book value of $10,000 to Pro Co. for a cement-mixing machine with a fair value of $11,000. Markson needs to know the answer to which of the following questions in order to determine whether the exchange has commercial substance?
Are the future cash flows expected to change significantly as a result of the exchange? A transaction is considered to have commercial substance if future cash flows will change as a result of the transaction. Markson Co. needs to know the answer to the question, "Are the future cash flows expected to change significantly as a result of the exchange?" to determine if the exchange has commercial substance.
Under IFRS, loans to officers and key management compensation would require disclosure:
Consolidated officers' salaries $ 125,000 Consolidated loans to officers 175,000 Total
Which of the following expenditures related to internally generated intangible assets is most likely to be capitalized, rather than expensed as incurred, under IFRS? a. Costs to maintain goodwill acquired in a business combination. b. Research costs associated with the development of a new trademark for the company. c. Development costs incurred in designing a product that has just been granted a patent. d. Legal costs related to the unsuccessful defense of an internally developed patent.
Choice "c" is correct. Under IFRS, development costs may be capitalized if certain criteria are met. If the patent has been granted, it is generally appropriate to capitalize the related design costs. Choice "a" is incorrect. Costs incurred to maintain goodwill must be expensed under IFRS (and U.S. GAAP). Choice "d" is incorrect. Legal costs related to the unsuccessful defense of a patent must be expensed. Legal costs related to the successful defense of a patent would be capitalized under IFRS (and U.S. GAAP). Choice "b" is incorrect. Research costs must be expensed under IFRS (and U.S. GAAP).
In order to improve its operating cash flow to total debt ratio, a firm reporting under IFRS will classify:
Dividends paid as CFF. Under IFRS, dividends paid can be classified as CFF or CFO. The operating cash flow to total debt ratio will be improved by classifying dividend payouts as CFF.
On December 31, Year 1, Classic Company revalued a patent under IFRS. On that date, the patent had a carrying value of $250,000, a fair value of $200,000, and a remaining useful life of 5 years. On December 31, Year 2, the patent's fair value was $175,000. In its December 31, Year 2 financial statements, Classic will report a current period revaluation:
During Year 2, Classic will record amortization on the patent of $40,000 ($200,000 revalued patent / 5 years). The carrying value of the patent on December 31, Year 2 will be $160,000 ($200,000 fair value on revaluation date − $40,000 amortization) and a revaluation gain of $15,000 will be recorded in Year 2 income to adjust the patent to its December 31, Year 2 fair value of $175,000. This represents a revaluation gain that partially offsets a previously recorded revaluation loss, so this is an income statement item.
Under the IFRS partial goodwill method, goodwill is calculated as follows
Goodwill = Acquisition cost - Fair value of subsidiary's net assets acquired
Under IFRS, a company that receives $150,000 in interest and pays $55,000 in dividends may show which of the following on its cash flow statement?
Interest received can be classified as CFO or CFI. Dividends paid can be classified as CFO or CFF. If both interest received and dividends paid are classified as CFO, the net inflow would be 95,000.
IFRS state that the inventory accounting method used by an entity should match the actual flow of goods.
LIFO rarely reflects the actual flow of goods and is therefore prohibited under IFRS.
Under the IFRS partial goodwill method, noncontrolling interest (NCI) is calculated as follows:
NCI = FV of subsidiary net assets × NCI %
Oak Co. leased equipment for its entire nine-year useful life, agreeing to pay $50,000 at the start of the lease term on December 31, Year 1, and $50,000 annually on each December 31 for the next eight years. Oak paid $3,000 in initial direct costs at lease inception. The present value on December 31, Year 1, of the nine lease payments over the lease term, using the rate implicit in the lease which Oak knows to be 10% was $316,500. The December 31, Year 1, the present value of the lease payments using Oak's incremental borrowing rate of 12% was $298,500. Oak accounts for the finance lease under IFRS and uses straight-line depreciation. What amount should Oak report as finance lease asset on its December 31, Year 2 balance sheet?
On December 31, Year 1, this lease should be recorded at present value using the lower implicit rate of 10%. Under IFRS, initial direct costs must be added to the finance lease asset at lease inception. This lease would be recorded using the following JE: Finance lease asset $ 319,500 Finance lease obligation ($ 316,500) Cash (3,000) The finance lease asset is then amortized over the lease term/useful life of 9 years: Annual depreciation = $319,500/9 = $35,500 On December 31, Year 2, after recording one year of depreciation, the finance lease asset will be reported as: Finance lease asset, 12/31/Y2 = Finance lease asset, 12/31/Y1 - Year 2 depreciation = $319,500 - $35,500 = $284,000
Under IFRS, dividends paid during a period are reported on the statement of cash flows in:
Operating or financing cash flow. Under IFRS, dividends paid may be reported in either operating cash flow or in financing cash flow. Under U.S. GAAP, dividends paid must be reported in financing cash flow because dividends are paid on equity and are not reported on the income statement.
Under IFRS, interest paid during a period is reported on the statement of cash flows in:
Operating or financing cash flow. Under IFRS, interest paid may be reported in either operating cash flow or in financing cash flow. Under U.S. GAAP, interest paid must be reported only in operating cash flow because interest expense is reported on the income statement.
Under IFRS, interest received during a period is reported on the statement of cash flows in:
Operating or investing cash flow. Under IFRS, interest (and dividends) received may be reported in either operating cash flow or in investing cash flow. Under U.S. GAAP, interest (and dividends) received must be reported in operating cash flow because interest (and dividend) income is reported on the income statement.
An entity incurred the following costs related to a patent purchased during the current year: Patent purchase price $ 300,000 Nonrefundable VAT taxes 3,000 Research expenditures related to the patent 25,000 Legal costs to register the patent 12,000 Training production staff on the use of the patent 5,000 Administrative salaries 2,000 Under IFRS, the entity should recognize a patent asset of:
The capitalized costs of the patent include the purchase price of the patent, the VAT taxes, and the legal costs to register the patent: Patent asset = $300,000 + 3,000 + 12,000 = $315,000 VAT taxes (value added taxes) are similar to sales taxes. Research expenditures must be expensed under IFRS (and U.S. GAAP). Staff training and administrative salaries must also be expensed.
The following information pertains to a sale and leaseback of equipment by Mega Co. on December 31, Year 1: Sales price $400,000 Carrying amount 300,000 Present value of lease payments 373,620 The estimated remaining life of the asset is 25 years and the lease term is 25 years. Mega uses IFRS. The sales price is equal to the fair value of the leaseback asset. What amount of deferred gain on the sale should Mega report at December 31, Year 1?
The entire gain is deferred. The leaseback will be classified as a finance lease because the lease transfers substantially all the risks and rewards inherent in ownership to the lessee (the present value of the lease payments is substantially all of the fair value of the leased asset and the lease term is the entire economic life of the asset). When the lease in an IFRS sale-leaseback transaction is classified as a finance lease, all profit is deferred and amortized over the lease term. Deferred gain = $400,000 sales price - $300,000 carrying amount = $100,000
Which of the following criteria could result in a lease being classified as an operating lease under U.S. GAAP and a finance lease under IFRS?
The present value of the minimum lease payments amounts to 88% of the fair value of the asset. If the present value of the minimum lease payments amounts to 88% of the fair value of the asset, the lease would be classified as an operating lease under U.S. GAAP and would most likely be classified as a finance lease under IFRS. Under IFRS, a lease is classified as a finance lease if the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset. An argument could be made that 88% is "at least substantially all of the fair value of the asset."
Under IFRS, impairment exists when the carrying value of a fixed asset exceeds the fixed asset's recoverable amount.
The recoverable amount is the greater of the asset's fair value less costs to sell and the asset's value in use (present value of future cash flows).
Under IFRS, which of the following would be included in income from continuing operations on the income statement? I. A large loss from a foreign currency transaction. II. A union strike that shuts down operations for three months. III. A foreign government takes possession of a company's only plant. IV. Damage to a factory due to an earthquake in an area that had not previously experienced earthquakes.
Under IFRS, all of these items would be included in income from continuing operations. The same treatment would be applied to these items under U.S. GAAP.
In a sale-leaseback transaction accounted for under IFRS, a gain resulting from the sale should be deferred at the time of the sale-leaseback and subsequently amortized when:
The seller-lessee accounts for the lease as a finance lease. The seller-lessee accounts for the lease as an operating lease and the sales price is above fair value. Under IFRS, recognition of a gain resulting from a sale-leaseback transaction should be deferred and subsequently amortized if the lease is classified as a finance lease, or the lease is classified as an operating lease and the sales price is above fair value. If the lease is classified as an operating lease and the sales price is equal to fair value, the gain is recognized immediately. If the lease is classified as an operating lease and the sales price is below fair value, the gain is recognized immediately (although losses may be deferred in certain circumstances).
Per IFRS 1 (First-Time Adoption of International Financial Reporting Standards), an entity's first financial statements should include at least:
Three balance sheets (statements of financial position), Two statements of comprehensive income, Two separate income statements, Two statements of cash flows, Two statements of changes in equity, and Related notes, including comparative information.
On January 1, Year 1, Cain Corp. issued 200 of its 9%, $1,000 bonds at 103. The bonds are dated January 1, Year 1 and mature on January 1, Year 11. Interest is payable semiannually on January 1 and July 1. Cain paid bond issue costs of $5,000. Cain Corp. uses IFRS. On January 1, Year 1, the net carrying value of the bond liability is:
Under IFRS, bond issue costs reduce the cash received from the bond issuance and are deducted from the carrying value of the liability. This bond was issued at a premium for $206,000 ($200,000 x 103%). The net premium on the bond is $1,000 ($6,000 premium on issuance - $5,000 bond issue costs). The bond issuance is recorded as follows: Cash $ 201,000 Premium ($ 1,000) Bond liability (200,000) The net carrying value of the bond liability on January 1, Year 1, is: $200,000 bond liability + $1,000 net premium = $201,000.
On September 30, year 10, a nonpublic U.S. company that had previously used U.S. GAAP adopted IFRS. The end of the company's first IFRS reporting period is December 31, Year 10. The company will present one year of comparative information. The company's date of transition to IFRS is:
Under IFRS, if an entity is presenting one year of comparative information, the first IFRS financial statements must include three balance sheets (end of current period, end of prior period, and beginning of prior period), and two of each other statement. The date of transition to IFRS is the opening balance sheet date, which would be the date of the beginning of the prior period. For this entity, the date of the beginning of the prior period is January 1, Year 9.
Under U.S. GAAP, inventory is valued at the lower of cost or market. Market is defined as the median value of the market ceiling, market floor, and replacement cost. Cost is $5,700. The median value between the market ceiling ($5,820), the market floor ($5,515) and replacement cost ($5,480) is the market floor. Since $5,515 is lower than $5,700, the inventory will be valued at $5,515.
Under IFRS, inventory is valued at the lower of cost or net realizable value. Net realizable value is equal to the net selling price less the costs to complete and dispose, which is equivalent to the market ceiling under U.S. GAAP. Comparing the cost ($5,700) to the net realizable value/market ceiling ($5,820), the lower value is the cost of $5,700.
Zen Transportion Inc.'s pension trustee provided the company with the following information for its defined benefit pension plan at December 31: Defined benefit obligation $2,500,000 Fair value of pension plan assets 1,950,000 Prior service cost from plan amendment 375,000 Actuarial gain 50,000 Current service cost 440,000 Zen has an effective tax rate of 40%. Under IFRS, what amount would Zen report in accumulated other comprehensive income related to its pension plan on its December 31 balance sheet?
Under IFRS, remeasurements of the defined benefit liability (asset), including remeasurements from actuarial gains, are reported in other comprehensive income and are not reclassified (amortized) to the income statement.
On December 31, Year 1, an entity revalued its machinery. On that date, the entity gathered the following information to aid in the revaluation: Historical cost $ 500,000 Accumulated depreciation 140,000 Fair value 420,000 On December 31, Year 1, the entity will report:
Under IFRS, revaluation gains and losses are calculated as the difference between the fair value and carrying value (cost - accumulated depreciation) of the revalued assets on the revaluation date: Revaluation gain(loss) = $420,000 fair value - $360,000 carrying value = $60,000 gain
A company reporting under IFRS holds a position in BE Corp. bonds that it classifies as available-for-sale. In the previous year, the company recorded an impairment loss related to the bonds. In the current year, the company reversed a portion of the impairment loss. How should the company account for the impairment loss reversal on its current year financial statements?
Under IFRS, reversals of impairment losses are allowed and the increase would be booked to the current year's income statement.
Ace, Ltd. reports under IFRS. For the current fiscal year, Ace showed the following gains and losses related to its available for sale securities: Stock A, unrealized gain of $5,000 Stock B, foreign exchange gain of $1,500 Bond A, foreign exchange loss of $2,300 Bond B, unrealized loss of $450 The amount that Ace will report as other comprehensive income is:
Under IFRS, unrealized gains and losses for all available for sale securities and foreign exchange gains and losses for available for sale equity securities are reported as other comprehensive income. Foreign exchange gains and losses on available for sale debt securities are reported on the income statement. The $5,000 unrealized gain for Stock A, the $1,500 foreign exchange gain for Stock B, and the $450 unrealized loss for Bond B should all be included in other comprehensive income ($5,000 + $1,500 - $450 = $6,050). The foreign exchange loss of $2,300 for Bond A should be reported on the income statement.
On June 15 of the current year, Solid Co. decided to change from moving average inventory system to the FIFO inventory system. Solid uses IFRS, is on a calendar year basis, and complies with IFRS minimum comparative reporting requirements. The cumulative effect of the change is shown as an adjustment to beginning retained earnings on the balance sheet for:
Under IFRS, when an entity records a change in accounting principle, the entity must (at a minimum) present three balance sheets (end of current period, end of prior period, and beginning of prior period) and two of each other financial statement (current period and prior period). The cumulative effect adjustment is shown as an adjustment to beginning retained earnings on the balance sheet for the beginning of the prior period, which would be January 1 of the prior year.
Which of the following statements regarding the accounting for investment property under IFRS is correct?
When investment property is reported at cost less accumulated depreciation, fair value must be disclosed.
On December 31, Year 1, an entity revalued its buildings to their fair value of $2,700,000 and recorded a revaluation gain of $200,000. On December 31, Year 4, the buildings had a carrying value of $2,295,000 and a recoverable amount of $2,000,000. What amount of impairment loss will the entity report on its December 31, Year 4 income statement?
When the buildings were revalued in Year 1, the $200,000 revaluation gain was booked to other comprehensive income as a revaluation surplus. Under IFRS, if a revalued asset becomes impaired, the impairment is recorded by first reducing any revaluation surplus to zero, with further impairment losses reported on the income statement. In this problem, the buildings were impaired on December 31, Year 4 because the $2,295,000 carrying value of the buildings exceeded the $2,000,000 recoverable amount. The $295,000 ($2,000,000 - $2,295,000) impairment loss is recorded by first reducing to zero the $200,000 revaluation surplus from the Year 1 revaluation, and then recorded the $95,000 remaining impairment loss on the income statement.
Under IFRS, exchanges of dissimilar assets are regarded as exchanges that generate revenue
and all gains and losses are recognized.
Under IFRS, investment property is
defined as land and buildings held by an entity to earn rentals or for capital appreciation.
On the opening IFRS balance sheet,
inventory must be reported at the lower of cost or net realizable value, with cost determined using an IFRS method (specific identification, FIFO, weighted/moving average).
Under IFRS, a sponsoring company must consolidate an SPE if
it controls the SPE. Control exists when the sponsoring company is benefitted by the SPE's activities, has decision making powers that allow it to benefit from the SPE, absorbs the risks and rewards of the SPE, and has a residual interest in the SPE.
Under IFRS, bond issue costs are deducted from the carrying value of the liability and included in the debit entry to bond discount upon issuance.
s part of the discount from par, bond issue costs are amortized over the life of the bond using the effective interest method. Bond issue costs are booked as an asset under U.S. GAAP, not under IFRS
Under IFRS, the impairment loss is recognized as the difference between
the carrying value ($12,500) and the recoverable amount. The recoverable amount is the greater of the fair value of the assets less cost to sell ($11,200 - $600 = $10,600) and the asset's value in use (otherwise known as the present value of future cash flows, or $10,950). The carrying value of $12,500 less the recoverable amount of $10,950 equals an impairment loss of $1,550.
Under IFRS, goodwill impairment is analyzed at
the cash-generating unit level. Goodwill is analyzed for impairment at the reporting unit level under U.S. GAAP.
Under IFRS, if an individual fixed asset is revalued, then
the entire class of fixed assets to which that asset belongs must be revalued. Individual fixed assets cannot be revalued alone.
Under IFRS, the goodwill impairment test is a one-step test in which the carrying value of a cash-generating unit ( CGU) is compared to the CGU's recoverable amount
which is the greater of the CGU's fair value less costs to sell and its value in use (PV of future cash flows expected from the CGU). For this CGU, the fair value less costs to sell of $955,000 is the recoverable amount because it exceeds the value in use of $940,000.
