Chapter 4 International Reporting Standards: Part 1

Question 1

What are some Differences between IFRS and U.S. GAAP?

Answer 1

• definition differences
• recognition differences
  -measurement differences
  -alternatives
  -lack of requirements or guidance
  -presentation differences
  -disclosure differences

Question 2

What are some characteristics of IFRS that differ from GAAP?

Answer 2

IFRS is:

• more flexible in some cases with choice between alternative treatments in accounting
• generally has less bright-line guidance; more judgement is required in IFRS

-IFRS is principles-based vs GAAP being rules-based

Question 3

What are some important resources for IFRS reporting?

Answer 3

-Critical accounting policies: required by IAS 1
-Similar to disclosures required by U.S. SEC
-(KAMs) Key Audit Matters: required by ISA 701

Question 4

Most material differences of IFRS/GAAP are revealed in

Answer 4

critical policies or (KAMs) Key Audit Matters
particularly true for differences in:
-asset recognition
-measurement policies

Question 5

Cost of Inventories in IFRS includes:

Answer 5

Costs of purchase
Cost of conversion
Other costs: design, interest costs if it takes time to bring to saleable condition

Question 6

Cost of inventories excludes:

Answer 6

-Abnormal amounts of waste
-Storage, unless necessary for the production process
-Selling costs

Question 7

What does IFRS say about cost formulas?

Answer 7

-LIFO is not allowed
-Standard cost method and retail method are acceptable only if they approximate cost as per IAS 2
-Cost inventories are not ordinarily interchangeable
-Goods and services produced and segregated for specific projects should use Specific Identification

*an entity MUST use the same cost formula for similar inventory items

Question 8

IAS 2 requires inventory to be reported at

Answer 8

the lower cost or (NRV) Net Realizable Value)

-Typically applied on an item-by-item basis but grouping is allowed for items of inventory relating to the same product line

-Write-downs must be reversed when selling price increases

*U.S. GAAP now uses same approach without allowing reversal of write-downs

Question 9

What aspects of accounting does IAS 16 cover for fixed assets such as PPE?

Answer 9

1. Recognition of initial costs of PPE
2. Recognition of subsequent costs
3. Measurement at initial recognition
4. Measurement after initial recognition
5. Depreciation
6. Derecognition (retirements and disposals)

Question 10

How does IFRS recognize Initial Costs

Answer 10

Cost includes:

-Purchase price
-All costs needed for asset to perform as intended
-Estimate of the costs of dismantling and removing asset along with restoring site
-Exchange of assets- FV unless no commercial substance or FV cannot be determined

Question 11

How does IFRS recognize Subsequent Costs?

Answer 11

IAS 16 allows for 2 treatments for reporting fixed assets:

1) Cost Model: Depreciation
which is consistent with U.S. GAAP
2) Revaluation model

Question 12

Revaluation model

Answer 12

= FV at the date of revaluation -subsequent accumulated depreciation - subsequent impairment losses

-Must do entire class of assets
-Must revalue often (3-5 yrs)
-Increases in value go to OCI; decreases reduce OCI to historical cost then reduce income
-Accumulated depreciation with revaluation: Proportional to new value and Revaluation to retained earnings when asset is disposed

*Revaluation is covered under IAS 16

Question 13

IFRS and Accumulated Depreciation (IAS 16)

Answer 13

1. Restate the accumulated depreciation proportionally with the change in gross carrying value of the asset.
2. Eliminate accumulated depreciation against the gross carrying value of the asset and restate net asset to the revalued amount of the asset.

Question 14

Treatment 1 of Accumulated Depreciation upon Revaluation

Answer 14

Example:

Building Cost = 1,000,000, Book Value = 400,000 is determined to be worth $750,000

Question 15

Treatment 2 of Accumulated Depreciation Upon Revaluation

Answer 15

Acc Dep. Bldg. 600k
Bldg. 600k

To eliminate accumulated depreciation on buildings to be revalued

Bldg 350k
Revaluation Surplus 350k

Question 16

How does IFRS treat Revaluation Surpluses and Deficits?

Answer 16

Fist Revaluation:
-Increases: credited directly to revaluation surplus in the OCI component of equity
-Decreased: expenses against income

Subsequent Revaluations:
-If there is a previous revaluation surplus, then it is first removed with any excess against income
-If a previous revaluation resulted in expense, show income to historical cost and credit the rest to OCI

Question 17

How does IFRS handle Revaluation Transfers to Retained earnings?

Answer 17

1. Lump sum when asset is disposed.
2. Within each period, the difference between depreciation expense on the revalued asset and depreciation using historical cost can be transferred to R/E.

Question 18

IFRS and Depreciation

Answer 18

-it’s based on estimated lives, residual value, and method reviewed annually
-treats any changes prospectively
-when comprised of significant parts, use component depreciation

Question 19

IFRS and Derocgnition

Answer 19

Derecognize carrying amount of property, plant, and equipment:
-when asset is disposed
-when no future economic benefits are expected

Gain or loss is included in net income
Classify as “noncurrent asset held for sale” if appropriate.

Question 20

IFRS and Investment Property

Answer 20

Land or buildings held for rental, capital appreciation, or both

Same general principles as per IAS 16-choice of cost or revaluation model:

-Changes in FV is recognized in current income and not revaluation surplus
-With FV, use change in value and not depreciation
-Must show FV in footnotes with cost model
-U.S. GAAP generally requires use of cost model

Disclose fair value in notes when using cost model

Question 21

Biological Assets and IFRS

Answer 21

U.S. GAAP cost method:
-Ignores growth of biological asset
-No income until final product sold

IFRS (IAS 41) FV (Less costs to sell at point of harvest)

-Changes in value over time go to income even before harvesting
-Mandatory for biological assets

*Once harvested, treat like inventory

Question 22

The Relevance-Reliability Trade-Off

Answer 22

IASB: FV, relevance over reliability

FASB: Cost Method, reliability over relevance

Question 23

Reliability challenges with FV

Answer 23

-liquidity of markets, so valuation modeling instead of observed prices is used

-Competing valuation frameworks and models that lead to different results

-Subjectivity in estimates

• Long forecasting horizons, which add to uncertainty

-Management’s incentives to exploit modeling choices

Question 24

Impairment of assets IFRS

Answer 24

Must test annually for impairment to PPE, intangible assets, goodwill, investments in subsidiaries, associates, and joint ventures.

*DOES NOT apply to inventory, construction in progress, deferred tax assets, employee benefit assets, or financial assets 9e.g., accounts and notes receivable).

Question 25

Impairment under IAS 36 =

Answer 25

carrying amount > recoverable amount

*recoverable amount is the greater of net selling price and PV of future cash flows

Question 26

Impairment is more likely under IFRS or U.S. GAAP?

Answer 26

more under IFRS since discounted cash flows are used

U.S. GAAP uses undiscounted future cash flows

Question 27

Reversal of impairment losses IFRS

Answer 27

Reverse impairment loss when recoverable amount is > new carrying amount

Question 28

Recognition of a Reversal of Impairment loss is recognized in

Answer 28

income immediately

Question 29

Does U.S. GAAP allow reversals?

Answer 29

No

Question 30

What is an intangible asset?

Answer 30

• applies to intangibles that are:
  purchased
  acquired in business combinations
  internally generated

it is an identifiable, non-monetary asset without administrative purposes or physical substance

IAS 38

Question 31

Is Goodwill covered under Intangible assets?

Answer 31

No, it is covered separately under IFRS 3.
IFRS 3 allows for two options in measuring non-controlling interest, which results in two possible measures of goodwill.

*U.S. GAAP only allows one method for measuring non-controlling interest

Question 32

Cost Model

Answer 32

The asset is carried at cost less accumulated depreciation and impairment. [IAS 16.30]

= Cost - Acc. Dep.- Impairment loss

also applies to investment property accounted for using the cost model under IAS 40 Investment Property. [IAS 16.5]

Question 33

Recognition
Items of property, plant, and equipment should be recognized as assets when it is probable that: [IAS 16.7]

Answer 33

-It is probable that the future economic benefits associated with the asset will flow to the entity, and
-The cost of the asset can be measured reliably.

*if the asset is not controlled by the entity it can not be recognized

Question 34

This recognition principle in IAS 16 is applied to all PPE and costs at the time they are

Answer 34

-are incurred.
-These costs include costs incurred initially to acquire or construct an item of PPE, and costs incurred subsequently to add to, replace part of, or service it.

Question 35

PPE

Answer 35

-tangible items
-can b movable assets or immovable assets
-held for use in production and supply of goods and services, rented to others, or administrative purposes
-expected to be used for more than one period
*buildings for rental are considered investment property=> IAS 40

Question 36

Movable tangible assets

Answer 36

items that you can move from one location to another

-motor vehicles
-plant or machinery
-office equipment
-furniture

Question 37

Tangible immovable assets

Answer 37

assets that cannot be moved from one location to another

-land
-buildings

Question 38

PPE Initial cost examples

Answer 38

PPE necessary for environmental and safety reasons

Question 39

Subsequent costs of PPE

Answer 39

Major inspections, overhauling, replacement of parts

Question 40

Initial measurement of PPE

Answer 40

Cost = Purchase price + Cost attributable to bringing asset to the location and condition for its planned operation+ Removal costs

purchase price *(import duties and non-refundable taxes; expressed net after deducting any rebates or discounts)

Question 41

Directly attributable costs to PPE

Answer 41

-cost that bring asset to the location
-preparation costs in initial delivery and handling
-professional fees
-capitalized interest
-testing

Question 42

Removal costs

Answer 42

-dismantling the asset
-removal of the asset
-restoring the site where asset is located (ex. nuclear power plant)

Question 43

In the revaluation model when the carrying amount is increased it should be

Answer 43

credited to Equity as Revaluation Surplus

Question 44

If asset was impaired before, under the Revaluation model, and impairment was recognized to profit or loss, then an increase of carrying amount shall be

Answer 44

credited to Income to the extent of such reversal of impairments

Question 45

Decreases to an asset’s carrying amount under the Revaluation Model shall be

Answer 45

Debited to Expenses in proficient loss but if asset was previously revalued to revaluation surplus, then

-the decrease in carrying amount should be debited to Equity to reverse the revaluation surplus

Question 46

Depreciable amount:

Answer 46

Cost Model:
= Cost- Residual Value

Residual Value = Estimated Salvage Value - Cost of Asset Disposal

Salvage Value- value of asset after it has been fully depreciated and is no longer useful

Question 47

Derecognition of PPE

Answer 47

Carrying amount will be derecognized on disposal (sell, finance lease as a lessor, or donate asset.)

Must be derecognized when no future economic benefits are expected from use or disposal

Gain or loss may arise: = Net disposal - Carrying amount
*gains or losses are included in Profit or Loss but not as Revenue; shown as gain on sale/loss on sale

Question 48

Purchased Intangibles

Answer 48

-initially measured at cost
-useful life could be assessed as finite or indefinite

Question 49

Distinction between intangibles with finite life and indefinite life is made in

Answer 49

IAS 38

Question 50

Intangibles with finite lives are

Answer 50

amortized with zero salvage unless:
-A third party has agreed to purchase the asset
-There is an active market for the asset where residual value can be estimated

Question 51

Intangibles acquired in a business combination

Answer 51

-Patents, trademarks, and customer lists recognized as assets measured at fair value.
*Even if not previously recognized by target.

Must have finite or infinite life.

-Special treatments for in–process research and development.
1) Capitalize when certain criteria is met.
2) Otherwise, include in goodwill.

Question 52

Internally Generated Intangibles

Answer 52

Major difference with U.S. G A A P.

Research: search for new knowledge.

Development: application of this knowledge to creation of viable products/services.

I F R S allows some development costs to be capitalized.

U.S. G A A P expenses all research and virtually all development.

Question 53

Criteria for development cost capitalization of Internally Generated Intangibles:

Answer 53

1.Technical feasibility of completion.
2. Intention to complete asset for use or sale.
3. Ability to use or sell the asset.
4. How probable future economic benefits will be generated. (Market or Internal use)
5. Availability of adequate technical, financial, and other resources to complete the asset for use or sale.
6. Ability to reliably measure expenditures pegged to development.

Question 54

Development Costs of Internally Generated Intangibles

Answer 54

All costs directly attributable to development activities.

Costs that can be reasonably allocated to such activities, including:

1. Personnel costs.
2. Materials and services costs.
   3 . Depreciation of P P E.
3. Overhead costs.
4. Amortization of patents.

Question 55

Income statement effects of Capitalizing Product Development Costs

Answer 55

With increasing R and D expenditures…higher income.

Inflates shareholder equity (retained earnings).

Question 56

Balance sheet effects of Capitalizing Product Development Costs

Answer 56

Inflates intangible assets net of accumulated amortization.

Offset is higher shareholder equity (retained earnings).

Increases deferred tax liability.

Question 57

Cash flow statement effects of Capitalizing Product Development Costs

Answer 57

Reclassifies expenditure as capex (capital expenditure) outflow.

Expenditure is investing instead of operating outflow.

Question 58

Other issues of Capitalizing Product Development Costs

Answer 58

-Revaluation model is allowed with finite–lived intangibles.

1. If there is a price on an active market.
2. Through revaluation surplus or income.

-Impairment of intangible assets.

1. If carrying amount can’t be recovered on finite–lived assets–need to look at changes in events or circumstances.
2. For indefinite–lived intangibles and goodwill: Test annually.
   3 Under special circumstances, can be reversed, as per I A S 36.
3. Goodwill not subject to reversal of impairment.

Question 59

Business Combinations and Consolidated Financial Statements

Answer 59

Business combination: the acquisition of one business by another.

Ways to combine operations:

• Acquired company is legally dissolved.
• Both companies are legally dissolved;
  new company is formed.
  -One company controls the other, but both legally exist.

Question 60

Determination of Control and the Scope of Consideration

Answer 60

Parent must consolidate all subsidiaries over which they exercise control.

Control:
Ownership of more than 50% of voting shares.

Effective control:
-Rights to appoint key managers or install a controlling block of board members.
-The ability to direct the investee to enter agreements that benefit the investor.
-The ability to direct operating activities of the investee, such as selling and purchasing goods.
-The ability to direct investments, such as capital spending or R and D.
-The ability to determine the investee’s financial structure.
-The investor’s right to obtain direct control of the investee by buying additional voting shares at a later date or in response to certain triggering events.

Question 61

Determination of Control and the Scope of Consideration; control exists when

Answer 61

each of the following is present:

1. The investor has direct or indirect ability to make decisions about the entity’s activities.
2. The investor has the obligation to absorb the expected losses of the entity if they occur.
3. The investor has the right to receive the expected residual returns of the entity if they occur.

Question 62

The Acquisition Method

Answer 62

Used by both I F R S and G A A P.
Must have acquirer and acquire.
Acquirer’s assets and liabilities shown at F M V.

Question 63

Goodwill and Noncontrolling Interest

Answer 63

Recognize goodwill only in business combinations.
Goodwill is the difference between:
The consideration paid by the acquirer, plus noncontrolling interest over the fair value of net assets acquired.

Question 64

Negative goodwill must be recognized as

Answer 64

income

Question 65

Goodwill depends on the option selected to measure any noncontrolling interest.
Measured at either:

Answer 65

A proportionate share of the fair value of the acquired firm’s net assets, excluding goodwill.

The fair value, including the noncontrolling interest’s share of goodwill.

Question 66

Impairment of Goodwill

Answer 66

Not amortized as it is an indefinite–lived intangible asset.

Impairment of goodwill must be tested annually.

Impairment is tested at the level of the cash–generating unit (C G U).

Compare the carrying value of the C G U, including goodwill, with its recoverable amount.

*Under U.S. G A A P, impairment is tested at the level of the reporting unit, which can be different (and typically larger) than a C G U.

Question 67

Prior to 2020, under U.S. G A A P:
If fair value of the reporting unit is less than its book value, the company must determine if the decline is goodwill or

Answer 67

other intangible assets.

Question 68

Under I F R S, if fair value of G C U is less than its book value, then

Answer 68

first reduce goodwill and, if more reduction is needed, determine which other intangibles to reduce.

2020 onwards: U.S. G A A P is the same as I F R S.

Question 69

Borrowing Costs

Answer 69

-Similar to U.S. G A A P in general approach.

-Capitalize all borrowing costs to the extent that they are attributable to acquisition, construction, or production of a qualifying asset.

-Expense all other borrowing costs.

-Borrowing costs include interest and other costs incurred in connection with borrowing.

-I A S 23 includes foreign currency exchange to the extent that they related to interest costs.

-Under I A S 23, inventories qualify if they require a substantial period to manufacture.

Question 70

Borrowing Costs 2

Answer 70

Capitalize interest that could have been avoided in the absence of expenditure on the qualifying asset.

Amount capitalized determined by multiplying the weighted–average accumulated expenditures by an appropriate interest rate.

Can use the actual interest rate if average expenditures are less than specific borrowing total.

Interest income on the temporary investment of a specific new borrowing offsets interest capitalized under I F R S.

*No netting allowed under U.S. G A A P.

Question 71

IAS 2 requires inventory to be reported on the balance sheet at the

Answer 71

lower of cost and NRV

Question 72

IAS 16 requires an item of PPE comprised of significant parts for which different useful lives or depreciation methods are appropriate to be split into components for purposes of depreciation. Is component depreciation common with U.S. GAAP?

Answer 72

No

Question 73

Does GAAP allow fair value accounting or apply any special accounting rules
for investment property?

Answer 73

No. Only IAS 40 does, with revaluation of gains and losses included in the income statement

Question 74

IAS 41

Answer 74

requires fair value accounting for biological assets, with revaluation gains and losses included in the income statement

*exception made for bearer plants; considered part of PPE for accounting purposes

Question 75

IAS 36 requires

Answer 75

impairment testing of
PPE
Intangibles: Goodwill
Long-term investments

Question 76

An asset is impaired when

Answer 76

its carrying value exceeds its recoverable amount, which is greater of net selling price and value in use

Question 77

IFRS 10 provides

Answer 77

-a comprehensive framework for determining control and the scope of consolidation.
-Consolidation is Required when a parent company exercises effective control over another entity.
-Even if the parent does not own a majority of the entity’s shares of voting stock.
-control is exercised through mechanisms other than through stock rights

Question 78

IAS 38

Answer 78

requires development costs to be capitalized as an intangible asset when six specific criteria are met.

Question 79

Finite-lived intangibles are

Answer 79

amortized over their useful lives using the straight line method

are tested for impairment whenever changes in circumstances indicate an asset’s carrying amount may not be recoverable

Question 80

Indefinite-lived intangibles are reviewed for impairment

Answer 80

each year to determine if the useful life remains indefinite, if no, then it is reclassified as having finite life and amortization begins

Question 81

IAS 23 requires

Answer 81

borrowing costs to be capitalized to the extent they are attributable to the acquisition of a qualifying asset

other borrow costs are expensed immediately

Question 82

Borrowing costs included

Answer 82

interest and other costs such as:

foreign exchange gains and losses on foreign currency borrowings, incurred in connections with a borrowing

Question 83

The amount of borrowing costs to be capitalized is

Answer 83

reduced by any interest income earned from the temporary investment of the amount borrowed.

*U.S. GAAP has a narrower definition of capitalizable interest costs and does not allow the netting of interest income