Chapter 4 Flashcards
What are the types of differences that exist between IFRS and U.S. GAAP?
The types of differences that exist between IFRS and U.S. GAAP can be classified as: • Definition differences • Recognition differences • Measurement differences • Differences in allowed alternatives • Differences in (lack of) guidance • Presentation differences • Disclosure differences
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 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 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.
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.
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.
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.
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 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.
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 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.
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
Which intangible assets are subject to annual impairment testing?
Indefinite-lived intangibles and goodwill are subject to impairment testing at least annually.
How is goodwill measured in a business combination with a non-controlling interest?
Goodwill is measured as the excess of (a) consideration transferred plus noncontrolling interest over (b) the fair value of the acquired firm’s net assets. Two alternative methods are available to measure noncontrolling interest; therefore, two different measures of goodwill exist for a given business combination.
What is a gain on bargain purchase?
A gain on bargain purchase exists when (a) consideration transferred plus noncontrolling interest is less than (b) the fair value of the acquired firm’s net assets. The difference between (a) and (b) is sometimes referred to as “negative goodwill.”
