#08 – Reporting: Special Areas (1.7, 1.8, 2.5)

Question 0

Development-Stage Enterprises (US GAAP) – Additional Disclosures

Answer 0

1. identify the financial statements as those of you development stage enterprises
2. Balance sheet – Cumulative net losses described as “deficit accumulated during the development stage”
3. Income statement
   – Also show cumulative income (loss) from the company’s inception
4. Statement of cash flows
   – Also include cumulative cash inflows and cash outflows from company’s inception
5. Include in Stockholder’s equity
   – Number of shares of stock or other securities issued
   – Date of issuance
   – Dollar amount assigned
   – If non cash consideration involved in issuance, include description of nature of consideration, and basis for its valuation

Question 1

Development-Stage Enterprises (US GAAP)

Answer 1

Under US GAAP, a development-stage enterprise is one in which either
– Principal operations have not yet commenced, or
– Operations have generated an insignificant amount of revenue (or a lost)

During the development stage, a company devotes most of its activities and resources towards establishing the business

Development stage enterprises issue the same financial statements as any other enterprise. The statements should be prepared in conformity with US GAAP

Question 2

First-Time Adoption of IFRS

Answer 2

First IFRS statements are the first annual financial statements in which
1) Entity adopts IFRS
and
2) Makes unreserved statement that financial statements are in compliance with IFRS
and
3) Makes then available to owners or other external parties

If adopts IFRS but no statement, not considered first IFRS statement

If adopt IFRS but only use internally, not considered first IFRS statement

Question 3

First-Time Adoption of IFRS – Opening IFRS Financial Statements

Answer 3

First IFRS statement must include
– 3 balance sheets
– 2 statements of comprehensive income
– 2 income statements (if using 2 statement approach to presenting comprehensive income
– 2 statements of cash flow
– 2 statements of changes in equity

Question 4

First-Time Adoption of IFRS – Opening IFRS Financial Statements: Date of Transition

Answer 4

The date of transition to IFRS is the date of the first balance sheet presented.

e.g. First IFRS report is FYE 12/31/03. Includes 3 balance sheets: FYE 12/31/03, FYE 12/31/02, and FYE 12/31/01 ››› Transition date = 12/31/01 = 1/1/02

Question 5

First-Time Adoption of IFRS – Opening IFRS Financial Statements: Asset and Liability Recognition on Date

Answer 5

Recognize all assets and liabilities required by IFRS

Apply IFRS in measuring and classifying all recognized assets and liabilities

Adjustments needed to restate assets and liabilities in conformity with IFRS should be made directly to retained earnings

Previously recognized financial asset or liability can be designated at fair value through profit or loss

Long-term assets (fixed assets, investment property, or intangible assets) may be valued using fair value. If so, disclose
– Total of fair value
– Total adjustment to carrying amount reported under previous GAAP

For investments in subsidiaries, joint ventures, and associates, disclose
– Total of investments whose deemed cost is same as it had been under previous GAAP
– Total of investments whose deemed cost is fair value on transition date
– Total adjustment to carrying amount reported under previous GAAP

Question 6

First-Time Adoption of IFRS – Opening IFRS Financial Statements: Accounting Policies

Answer 6

Use same accounting policies in all period presented

Exemptions from initial application IFRS if cost of application exceeds benefit to financial statement users.

Mandatory exceptions to retrospective application of IFRS at time of initial adoption of IFRS
1. Derecognition of financial assets and liabilities
2. Hedge accounting
3. Non-controlling interest
4. Classification and measurement of financial assets
5. Embedded derivatives.
These items required judgements by management at the time when the outcome of particular transaction was unknown.

Question 7

First-Time Adoption of IFRS – Opening IFRS Financial Statements: Accounting Estimates

Answer 7

Accounting estimates on date of IFRS transition should be consistent with estimates for the same date made under previous GAAP, after adjustments for any differences in accounting policies.

Question 8

First-Time Adoption of IFRS – Opening IFRS Financial Statements: Explanation of Transition to IFRS

Answer 8

Disclose impact of transition on reported financial position, financial performance, and cash flows.

Include a reconciliation of equity reported under previous GAAP to equity under IFRS for (1) IFRS transition date, and (2) End of last period presented in entity’s most recent annual financial statement in accordance with previous GAAP

Include reconciliation of total comprehensive income under IFRS with that under GAAP for the latest period in the entity’s most recent financial statements

Include disclosures related to the recognition or reversal of impairment losses if impairment losses or reversals were recognized for the first time when preparing the opining IFRS balance sheet.

Question 9

Financial Reporting and Changing Prices

Answer 9

Under US GAAP, certain large, publicly held companies can choose to disclose information concerning the effect of changing prices

Some definitions
– Historical cost = actual amount exchange when asset was acquired or liability assumed
– Current cost = cost that would be incurred at the present time; the replacement cost
– Nominal dollars = unadjusted for changes in purchasing power
– Constant dollars = dollars restated based on calculation of CPI rations.

Question 10

Financial Reporting and Changing Prices – Measurement Methods and Current Cost Determination

Answer 10

Historical Costs/Nominal Dollars (HCND) – historic prices without restatement for changes n the purchasing power of the dollar
– Basis for GAAP used in the primary financial statements

Historical Cost/Constant Dollars (HCCD) – Historic prices adjusted for changes in the general purchasing power of the dollar.
– Retains historic cost basis
– A general price index used for adjustment

Current Cost/Nominal Dollars (CCND) – Current cost without restatement for changes in general purchasing power of the dollar

Current Cost/Constant Dollars (CCCD) – Current cost adjusted for changes in the general purchasing power of the dollar.
– A general price index used for adjustment

Question 11

Financial Reporting and Changing Prices – Monetary and Non-Monetary Items

Answer 11

Monetary assets and liabilities are fixed or denominated in dollars regardless of changes in specific prices or the general price level Ie.g. A/R)
– Holding monetary assets during periods of inflation will result in a loss of purchasing power and holding monetary liabilities will results in a gain of purchasing power

Non-Monetary assets and liabilities fluctuate in value with inflation and deflation
–Holders of non monetary items may lose or gain with the rise or fall of the CPI if the non monetary item does not rise or fall in proportion to the change in CPI.

Question 12

Financial Reporting and Changing Prices – Classification: Monetary Assets & Liabilities

Answer 12

Monetary Assets
– Cash
– Bonds - nonconvertible
– Accounts/notes receivable (and allowances)
– Long-term receivables

Monetary Liabilities
– Accounts and notes payable
– Accrued expenses
– Bonds/notes payable

Question 13

Financial Reporting and Changing Prices – Classification: Non-Monetary Assets, Liabilities, and Equities

Answer 13

Non-monetary Assets
– Marketable common stock
– Inventory
– Investment in subsidiary (equity)
– Plan, property, and equipment (and accumulated depreciation)
– Intangible assets- patents and trademarks

Non-Monetary Liabilities
– Deferred charges and credits

Non-Monetary Equities
– Preferred Stock
– Common stock

A contract account (e.g. allowance for doubtful accounts, or accumulated depreciation) is classified as monetary or non-monetary based upon the classification of the related account