International Accounting Exam #1

What accounting issues arise for a company as a result of engaging in international trade (w/ imports & exports)?

- translating foreign currency amounts into company's reporting currency -reporting the effects of change in the exchange rate in the fin statements

What fin reporting issues arise as a result of making foreign direct investments?

-Converting foreign GAAP to parent company Gaap -translating currency

What taxation issues arise as a result of making a foreign direct investment `

-double taxation -know about foreign tax credits

Why might a company want its stock listed on a stock exchange outside of its home country?

-obtain capital in that country(more cost friendly) -to acquire acquisition currency for acquiring firms in that country through stock swaps

Sony Corporation reported the following in the summary of Signifi cant Accounting Policies included in the company's 2012 annual report on Form 20-F (p. F-16): All asset and liability accounts of foreign subsidiaries and affi liates are translated into Japanese yen at appropriate fi scal year end current exchange rates and all income and expense accounts are translated at exchange rates that approximate those rates prevailing at the time of the transactions. The resulting translation adjustments are accumulated as a component of accumulated other comprehensive income. Receivables and payables denominated in foreign currency are translated at appropriate fi scal year end exchange rates and the resulting translation gains or losses are taken into income Explain in your own words the policies that Sony uses in reflecting in the financial statements the impact of changes in foreign exchange rates.

1. In case of Sony's invetsment in a foreign subsidiary , the financial statement of the foreign subsidiary needs to be translated in reporting currency of the parent , that is Japanese yen in this case. The rate of conversion will be the exchange rate of the closing date for Balance Sheet Items and for P/L items the exchange rate prevailing on the date of actual transaction shall be used. The exchange difference arising from the translation of foreign subsidiaries and affiliates financial statement will be recognized in Other Comprehensive Income in Parent company's book. 2. At the end of each rporting period , the Foreign Currency Monetary items like Receivables and Payables in the book will be retransalted using the closing exchange rate. The gain or loss arisisng out of such retransalation will be recognized in the profit and loss statement.

What would be the advantage of having a single set of accounting standards used world wide?

1.) reduce cost of preparing consolidated fin statements 2. reduce cost of gaining access to foreign capital 3. facilitate the analysis and comparison of fin statements of competitors and potential acquisitions

What is a constructive obligation?

A constructive obligation exists when an entity, through past actions or current statements, indicates it will accept certain responsibilities and as a result creates a valid expectation on the part of other parties that it will discharge those responsibilities.

What is a contingent liability? What is the financial reporting treatment for contingent liabilities?

A contingent liability is (a) a possible obligation or (b) a present obligation that is not recognized as a provision because (1) an outflow of resources to settle the obligation is not probable or (2) the obligation cannot be reliably estimated. Contingent liabilities are disclosed unless the likelihood of an outflow of resources is remote.

What are the rules related to the recognition of a deferred tax asset?

A deferred tax asset is recognized only when it is probable that a tax benefit will be realized in the future.

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.

What is the IASB's principles-based approach to accounting standard setting?

A principles-based approach to accounting standard setting refers to the development of standards that provide the basic guidelines for accounting in a particular area without getting bogged down in detailed rules. The IASB uses a principles-based approach in developing IFRS. Traditionally, the U.K. and the member countries of the British Commonwealth have adopted this approach.

What is a provision, and when must a provision be recognized?

A provision is a liability of uncertain timing or amount. A provision must be recognized when: (1) there is a present obligation, (2) an outflow of resources to settle the obligation is probable, and (3) the obligation can be reliably estimated.

. What information is provided in a statement of added value?

A statement of added value added presents information on the wealth created by the company and the distribution of this wealth to employees, banks, stockholders, and the government. Value added is calculated as income before deduction of the amounts distributed to employees (wages, salaries, pensions, etc.), banks (interest), and the government (taxes).

What happens if a significant amount of held-to-maturity investments is reclassified as available-for-sale?

An entity is prohibited from classifying financial instruments as held-to-maturity for two years in this situation.

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 property, plant, and equipment may be accounted for under the revaluation model, and how frequently must revaluation occur?

Any item of property, plant, and equipment 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.

1. 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 a. Prior to issuance of its Year 1 financial statements that gives the company until January 1, Year 3, to rectify the debt covenant violation. b. Prior to December 31, Year 1, that gives the company until January 1, Year 3, to rectify the debt covenant violation. c. Prior to issuance of its Year 1 financial statements, that gives the company until June 30, Year 2, to rectify the debt covenant violation. d. Prior to December 31, Year 1, that gives the company until June 30, Year 2, to rectify the debt covenant violation.

B

What are the two most common methods used internationally for the order in which assets are listed on the balance sheet? Which of these two methods is most common in North America? In Europe?

Companies in North America commonly present assets in order of liquidity, beginning with cash; companies in Europe commonly present assets in reverse order of liquidity, beginning with "fixed assets."

What is the difference in measuring compensation expense associated with stock options that vest on a single date (cliff vesting) and in installments (graded vesting)?

Compensation cost associated with stock options that vest on a single date is recognized as expense on a straight-line basis over the vesting period. When stock options vest in installments, the compensation cost associated with each installment is recognized as expense on a straight-line basis over that installment's vesting period.

What is the basis for determining compensation cost in an equity-settled share-based payment transaction with non-employees? With employees?

Compensation cost in an equity-settled share-based payment (SBP) transaction with non-employees should be based on the fair value of the goods or services received. If this cannot be reliably determined, then the fair value of the equity instruments should be used to determine compensation cost. Compensation cost in an equity-settled share-based payment (SBP) transaction with employees should be based on the fair value of the equity instruments granted because the fair value of the employee's services generally is not reliably measurable.

How are the various costs that comprise cost of goods sold refl ected in a "type of expenditure" format income statement?

Cost of goods sold is comprised of materials, labor, and overhead. In a type of expenditure format income statement, such as that presented by Südzucker AG in Exhibit 2.10, separate line items for cost of materials, personnel expenses, and depreciation are presented in the income statement. In addition, the line item change in work in process and finished goods inventories adjusts for the manufacturing costs included in cost of materials, personnel expenses, and depreciation that are not part of the cost of the inventory that was sold in the current year.

How are deferred taxes classified on the balance sheet?

Deferred taxes are classified as noncurrent items on the balance sheet.

What are the types of differences that exist between IFRS and U.S. GAAP?

Definition Differences, Recognition differences, Measurement differences, alternatives, Lack of requirements or guidance, Presentation differences, Disclosure differences.

What are the different ways in which financial statements differ across countries?

Financial statements can differ across countries in terms of: a. which financial statements are included in an annual report; b. the format used to present individual financial statements; c. the level of detail provided in financial statements; d. terminology; e. disclosure requirements; and f. recognition and measurement rules.

What are the criteria that must be met in order to recognize revenue from the sale of goods?

Five criteria must be met to recognize revenue from the sale of goods:1. The significant risks and rewards of ownership of the goods have been transferred to the buyer.2. Neither continuing managerial involvement normally associated with ownership nor effective control of the goods sold is retained.3. The amount of revenue can be measured reliably.4. It is probable that the economic benefits associated with the sale will flow to the seller.5. The costs incurred or to be incurred with respect to the sale of goods can be measured reliably.

What are the alternative methods used internationally to present fixed assets on the balance sheet subsequent to acquisition?

Fixed assets can be reported on the balance sheet subsequent to acquisition at:a. historical cost,b. historical cost adjusted for changes in the general purchasing power of the currency,and/orc. fair value.

What approaches are available for disclosing the relationship between tax expense and accounting profit?

IAS 12 requires an explanation of the relationship between tax expense and accounting profit using one of two approaches: (a) a numerical reconciliation between tax expense and the product of accounting profit multiplied by the applicable tax rate, or (b) a numerical reconciliation between the average effective tax rate and the applicable tax rate.

What is the current treatment with respect to borrowing costs?

IAS 23 borrowing costs deals with borrowing costs that should be capitalized to fixed assets. the two methods are benchmark treatment and alternative treatment

Why was IOSCO's endorsement of IASs so important to the IASC's efforts?

IOSCO's endorsement of IASs legitimized the IASC's claim as "the" international accounting standard setter. This also helped in addressing, at least partly, the problem of IASC's lack of enforcement power.

How does an entity account for a choice-of-settlement share-based payment transaction?

In a choice-of-settlement share-based payment (SBP) transaction in which the supplier of goods and services has the choice, the entity has created a compound financial instrument which must be split into its debt and equity components.

What are the major problems caused by worldwide accounting diversity for international portfolio investment?

problem associated with trying to directly compare a company that uses one set of accounting standards to measure income and report financial position with another company that uses a different set of accounting standards

What are the potential benefi ts that a multinational corporation could derive from the international convergence of accounting standards?

reduction of financial reporting costs for multinational corporations that seek to list their stocks on foreign stock exchanges; reduction of cost of preparing worldwide consolidated financial statements; and ability to transfer accounting staff to other subsidiaries overseas more easily.

How does application of the lower of cost or market rule for inventories differ between IFRS and U.S. GAAP?

In applying the lower of cost and market rule for inventories, IAS 2 defines market as net realizable value (NRV) and U.S. GAAP defines market as replacement cost (with NRV as a ceiling and NRV less normal profit margin as a floor). In addition, the rule generally is applied on an item by item basis under IAS 2, whereas it may be applied on an item by item, group of items, or total inventory basis under U.S. GAAP.

How does the relationship between financial reporting and taxation affect the manner in which income is measured for financial reporting purposes?

In those countries in which published financial statements form the basis for taxation, there is an incentive for companies to minimize financial statement income so as to also minimize income taxes. This incentive does not exist in those countries in which expenses taken for tax purposes are not required to be recognized in the financial statements.

Which income tax rates should be used in accounting for income taxes?

Income tax rates that have been enacted or substantively enacted should be used in measuring current and deferred income taxes. In jurisdictions in which distributed profits are taxed at a different rate from undistributed profits, the tax rate on undistributed profits should be used to measure current and deferred income taxes.

Which intangible assets are subject to annual impairment testing?

Indefinite-lived intangibles and goodwill are subject to impairment testing at least annually.

According to Nobes, what are the two most important factors infl uencing differences in accounting systems across countries?

Nobes (1998) argues that the two most important factors influencing differences in accounting systems across countries are (a) nature of culture and (b) type of financing system. Nobes' notion of culture appears to go beyond the rather narrow notion in Gray's framework to include institutional structures found in a country. Countries that are culturally dominated by a country with a self-sufficient culture are expected to have an accounting system similar to the dominant country. Some cultures lead to strong equity-outside shareholder financing systems, and other cultures lead to weak equity-outside shareholder financing systems. Countries with a strong equity-outside shareholder financing system use a Class A accounting system in which measurement practices are less conservative, disclosure is extensive, and accounting practice differs from tax rules. Countries with a weak equity-outside shareholder financing system use a Class B accounting system in which measurement is more conservative, disclosure is not as extensive, and accounting practice more closely follows tax rules.

In accounting for post-employment benefits, when are past service costs and actuarial gains and losses recognized in income?

Past service costs related to:a. vested and inactive/retired employees are recognized immediately, andb. non-vested employees are recognized over the remaining vesting period.Actuarial gains/losses related to:a. inactive/retired employees are recognized immediately, andb. active (vested and non-vested) employees are recognized over their remaining working life.

What approaches are used to recognize revenue from the rendering of services? Under what conditions is each of these approaches used?

Revenue from the rendering of services is recognized using either (a) the stage of completion method or (b) the cost recovery method. The stage of completion method is appropriate when the outcome of a service transaction (1) can be estimated reliably and (2) it is probable that economic benefits of the transaction will flow to the enterprise; otherwise, the cost recovery method should be used.

What are the four classes of financial assets?

Stocks or equities. Fixed Income or bonds. Money market or cash equivalents. Real estate or other tangible assets.

What are the hypothesized relationships between the cultural value of uncertainty avoidance and the accounting values of conservatism and secrecy?

Strong uncertainty avoidance countries are hypothesized to favor conservative measures of profit and assets following from a concern with security and a perceived need to adopt a cautious approach to cope with uncertainty of future events. They are also hypothesized to prefer secrecy (less disclosure) following from a need to restrict information so as to avoid conflict and competition and to preserve security.

At what point in time should a company recognize the liability and expense associated with termination benefits? What is the basis for measuring the amount of termination benefits to recognize?

Termination benefits should be recognized as an expense and a liability when an employer is demonstrably committed to an employee termination plan. The amount recognized should be based on the number of employees expected to accept the offer.

How are the Anglo and less developed Latin cultural areas expected to differ with respect to the accounting values of conservatism and secrecy?

The Anglo cultural area is expected to favor less conservatism and more disclosure and the Less developed Latin cultural area is expected to favor more conservatism and less disclosure.

Were the EU directives effective in generating comparability of financial statements across companies located in member nations? Why or why not?

The EU Directives were not completely effective in generating comparability across EU member nations because the Directives: a. allowed countries to choose among available options in many areas and b. did not cover many accounting issues, such as leases and translation of foreign currency financial statements.

How are the estimated costs of removing and dismantling an asset handled upon initial recognition of the asset?

The estimated costs of dismantling and removing an asset must be included in the asset's cost upon initial recognition.

What are the five steps to follow in revenue recognition as proposed in the IASB/FASB Exposure Draft on revenue from contracts with customers?

The five steps to follow in revenue recognition as proposed in the IASB-FASB exposure draft Revenue from Contracts with Customers are: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.

Who are the major providers of capital (financing) for business enterprises? What influence does the relative importance of equity financing in a country have on financial statement disclosure?

The major providers of financing are equity investors (shareholders), banks, family members, and government. As equity financing becomes more important in a country so does the disclosure of information available to the public. It is not feasible for a company to allow hundreds and thousands of investors' access to internal accounting records.

How does a company measure the net pension benefit liability (asset) to report on the balance sheet under IFRS and U.S. GAAP?

The net amount recognized as a pension liability (or asset) is measured as:+ Present value of the defined benefit obligation (PVDBO)- Fair value of plan assets+/- Unrecognized actuarial gains (+) and losses (-)- Unrecognized past service costIf the resulting amount is negative (net pension asset), the amount of asset to be reported on the balance sheet is limited to sum of the following:• unrecognized actuarial losses• past service cost• present value of any refunds available from the plan• any available reduction in future employer contributions to the plan.Under U.S. GAAP, the pension liability or asset is simply measured as:+ Present value of the defined benefit obligation (PVDBO)- Fair value of plan assetsThere is no limit to the amount recognized as a net pension asset.

How is the revaluation surplus handled under the revaluation model?

The revaluation surplus is an element of other comprehensive income in stockholders' equity. The revaluation surplus is transferred to retained earnings as the revalued asset is realized, either through its use or upon its disposal. The surplus is transferred to retained earnings either: (1) as a lump sum when the asset is disposed of, or (2) each period, as the difference between depreciation on the revalued amount and depreciation on the historical cost. A third treatment for revaluation surplus is to allow it to stay in other comprehensive income indefinitely.

What are the three major types of intangible asset, and how does the accounting for them differ?

The three types of intangible assets are: (1) purchased, (2) acquired in a business combination, and (3) internally generated. (1) and (2) are classified as having a finite or indefinite useful life; (3) can only be classified as finite-lived. Finite-lived intangibles are amortized on a systematic basis over their useful lives. All intangibles are subject to impairment testing. Indefinite-lived intangibles must be tested for impairment at least annually.

What are the two major types of legal systems used in the world? How does the type of legal system affect accounting?

The two major types of legal system are "code law" and "common law." Code law countries tend to have an accounting law, which is rather general and does not provide much detail. In common law countries, a non-legislative organization generally develops accounting standards, which tend to provide much more detail than is found in the accounting laws of code law countries.

What are the two models allowed for measuring property, plant, and equipment at dates subsequent to original acquisition?

The two models allowed by IAS 16 are the cost model and the revaluation model. Under the revaluation model, property, plant, and equipment is reported on the balance sheet at a revalued amount, measured as fair value at the date of remeasurement, less accumulated depreciation and any accumulated impairment losses.

How does harmonization differ from convergence?

The ultimate goal of both harmonization and convergence is to achieve international comparability in financial reporting, and both are processes that take place over time. However, while harmonization refers to the reduction of alternative accounting practices in different countries, convergence refers to the process of developing a set of high quality financial reporting standards for use internationally (the process of global standard setting).

Would the worldwide adoption of IFRS result in worldwide comparability of financial statements? Why or why not?

There are several factors that might inhibit worldwide comparability of financial statements even if IFRS are required in every country. First, even though the Comparability Project of the 1990s reduced the number of alternative methods allowed, several IFRS continue to allow companies to choose between a benchmark and an allowed alternative treatment. If the benchmark is adopted by one company and the allowed alternative by another company, strict comparability will not exist. (It should be noted that this is also true within a country if domestic GAAP allows choice among alternatives, for example, in depreciation and inventory valuation methods.) Second, even if the same treatments are selected, cross-national comparability could be harmed if accountants apply the principles-based IFRS differently. Differences in cultural values across countries could cause accountants to have biases, for example, with respect to conservatism that could influence their judgment in applying IFRS.

How does the structure of the IASB help to establish its legitimacy as a global standard-setter?

Twelve of 14 members of the IASB are full-time. They are required to sever all ties to former employers to establish their independence. The most important criterion for selection of IASB members is technical competence. These aspects of the Board's structure confirm the IASB's commitment to develop the highest quality standards possible. In addition, the IASB follows an open process in which constituents are able to provide input and feedback on IASB projects and proposed standards. The geographical representation is achieved through the method of appointing the IASC Foundation Trustees.

How is an impairment loss on property, plant, and equipment determined and measured under IFRS? How does this differ from U.S. GAAP?

Under IAS 36, an impairment loss arises when an asset's recoverable amount is less than its carrying value, where recoverable amount is the greater of net selling price and value in use. Value in use is determined as the expected future cash flows from use of the asset discounted to present value. The amount of the loss is the difference between carrying value and recoverable amount. Under U.S. GAAP, an impairment loss arises when the expected future cash flows (undiscounted) from the use of the asset are less than its carrying value. If impairment exists, the amount of the loss is equal to the difference between carrying value and fair value, which can be determined in different ways.

How are internally generated intangibles handled under IFRS? How does this differ from U.S. GAAP?

Under IAS 36, expenditures giving rise to a potential intangible are classified as either research or development expenditures. Research expenditures are expensed as incurred. Development expenditures are recognized as an intangible asset when six criteria are met. Under U.S. 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

In what way does the fair value model for investment property differ from the revaluation model for property, plant, and equipment?

Under the fair value model for investment property, changes in fair value are recognized in net income, whereas changes in fair value under the revaluation model are taken to other comprehensive income.

How can use of the "fair value option" solve the problem of an accounting mismatch?

When (1) a financial instrument measured at fair value through profit or loss is hedged with (2) a financial instrument classified as available-for-sale, the gain/loss on (1) will be reported in net income but the gain/loss on (2) will be taken to other comprehensive income. As a result, a net gain/loss in reported in net income that is not economically meaningful. Adopting the fair value option for (2) removes this accounting mismatch.

How is depreciation determined for an item of property, plant, and equipment that is comprised of significant parts, such as an airplane?

When an item of property, plant, and equipment is comprised of significant parts that have different useful lives, as is the case for an airplane, the asset must be split into components and each component must be depreciated separately.

What are the major problems caused by worldwide accounting diversity for a multinational corporation?

Worldwide accounting diversity causes additional complexity for MNCs in the preparation of consolidated financial statements on the basis of parent company GAAP. Each foreign subsidiary must either keep two sets of books - one in local GAAP and one in parent company GAAP - or the foreign subsidiary's local GAAP financial statement must be reconciled to parent company GAAP. Accounting diversity also complicates MNCs gaining access to foreign capital markets, as investors and lenders in foreign countries might require financial statements prepared in local GAAP. A third problem for MNCs caused by worldwide accounting diversity relates to a lack of comparability of financial statements when making foreign acquisition decisions. The MNC might need financial statements for the potential acquisition target prepared in accordance with a set of accounting standards with which the MNCs managers are familiar and that fairly present operating performance and financial position.