Chapter 5: IFRS, Part 2

Question 1

Current Liabilities in IAS 1

Answer 1

1. Expect to settle within the normal operating cycle
2. Holds primarily for the purpose of trading
3. Expect to settle within 12 months of B/S date
4. Does not have the right to defer until 12 months after the balance sheet date

Question 2

Current Liabilities Classifications Differences between US GAAP and IFRS

Answer 2

Refinanced short-term debt: IFRS-classified as long-term debt if refinancing completed prior to the B/S date. US GAAP-refinancing agreement must be reached by B/S date

Amounts payable on demand due to violation of debt covenant: IFRS-classified as current, unless a waiver of at least 12 months is obtained by B/S date. US GAAP-waiver must be obtained by annual report issuance date

Bank overdrafts: IFRS-netted against cash if the overdrafts form an integral part of entity’s cash management, otherwise classified as current liabilities. US GAAP-always current liabilities

Question 3

Provision Definition

Answer 3

A liability of uncertain timing or amount

Question 4

Contingent Liabilities Definition

Answer 4

_ Possible obligation that arise from past events and whose existence will be confirmed by the occurrence or noncurrence of a future event

_A present obligation is not recognized because: 1) it is not probable an outflow of resources will be required to settle, or 2) amount cannot be measured

Question 5

Provision should be recognized when:

Answer 5

1. Entity has a present obligation as a result of a past event
2. Probable outflow of resources will be required to settle the obligation
3. A realistic estimate of the obligation can be made

Question 6

Constructive Obligation

Answer 6

Based on past or current statements, a company will accept certain responsibilities and has created a valid expectation for other parties it will discharge those responsibilities

Recognized as provision when probable and estimable

Question 7

Contingent Liability Recognition

Answer 7

Only disclosed in IFRS, unless the possibility of an outflow of resources embodying the economic future benefit is remote

US GAAP:
+ Neither disclosed or recognized if outflow of resource if remote
+ Discloses if outflow is possible
+ Recognized if out flow is probable (70-90%) by accrual at the low-end range

Question 8

Probable Definition in IFRS

Answer 8

More likely than not ( greater 50%)

Question 9

Provision Measurement

Answer 9

Best estimate
Must be discounted at present value
+US GAAP: discount when amount and timing of payments are fixed
Must be reviewed at the end of each accounting period and adjusted for current best estimate

Question 10

Best Estimate

Answer 10

Midpoint within a range if all estimates are equally likely or probability-weighted expected value when a range of estimates exists

Question 11

Subsequent Reduction of Provision can be made

Answer 11

only for the expenditures for which the provision was established

Question 12

Provision Recognition for Onerous Contract

Answer 12

Recognized the unavoidable costs of the contracts (lower of the cost of fulfillment and penalty for non-fulfillment). Resulting provision should not be recognized until that action has occurred

Recognition for expected future operation losses is not allowed

Question 13

Onerous Contract

Answer 13

a contract in which the unavoidable costs of meeting the obligation exceed the economic benefits expected to be received from it

Question 14

Restructuring

Answer 14

a program that is planned and controlled by management that changes either 1) scope of a business or 2) manner the business in conducted

Question 15

Restructuring Provision Recognition

Answer 15

IFRS: recognized when there is a detailed plan and valid expectation the plan will be carried out

US GAAP: does not allow recognition of a restructuring until a liability has been incurred.

Question 16

Contingent Asset Definition

Answer 16

a probable asset that arises from past events and existence will be confirmed by future event

Question 17

Contingent Asset Recognition

Answer 17

When the inflow of economic benefits is probable, contingent asset should be disclosed

Recognized when it’s virtually certain

Question 18

Four Types of Employee Benefits

Answer 18

1. Short-term employee benefits
2. Post-employment benefits
3. Other long-term employee benefits
4. Termination benefits

Question 19

Short-term benefits

Answer 19

Amount is undiscounted

1. Compensated absences: amount is accrued if compensated absences accumulate and can be carried forward to future. Expense and liability when when absence occurs in case of non-accumulating.
2. Profit-sharing and bonus plans: expense and liability are accrued if
   a) company has present legal or constructive obligation to make such payments
   b) amount can be reliably estimated

Question 20

Defined contribution plan

Answer 20

1. Accrues an expense and liability at the time the employee renders services
2. Reduces liability when contributions are made

Question 21

Net Defined Benefit Liability (Asset) =

Answer 21

+Present value of defined benefit obligation (PVDBO)

- Fair value of plan assets (FVPA)

Question 22

Net Defined Benefit Liability (Asset) Deficit and Surplus

Answer 22

Deficit: PVDBO > FVPA. The net defined benefit liability is reported on balance sheet

Surplus: PVDBO < FVPA. The amount for net defined benefit asset is the larger of:

a. The surplus, and
b. The asset ceiling: PV of any economic benefits in the form of refunds from the plan or reduction in future contributions to the plan (No asset ceiling for GAAP)

Question 23

Two Components for Defined Benefit Pension Plans

Answer 23

1) Net Defined Benefit Liability (Asset)

2) Defined Benefit Cost

Question 24

Defined Benefit Cost For Components

Answer 24

Recorded in net income:

1. Current service cost
2. Past service cost and gains and losses on settlements: recognized in net income in period the benefit plan is changed (GAAP: recognized in OCI and amortized to net income)
3. Net interest on the net defined benefit liability (asset): multiply by discount rate used in PVDBO

Recorded in OCI:
4. Remeasurement of net defined benefit liability (asset):

Question 25

Remeasurement of net defined benefit liability (asset) includes:

Answer 25

1. Actual gains and losses: arises when an employer changes the actuarial assumptions (GAAP: choice between OCI or net income) 2. Difference b/w actual return on plan assets in the current period and interest income component of NIDBA (FVPA x discount rate) 3. Any change in the effect of the asset ceiling

Question 26

Other Long-Term Employee Benefits

Answer 26

A liability should be recognized for the difference between: 1. Present value of defined benefit obligation 2. Fair value of plan assets

Question 27

Share-based payment types

Answer 27

1. Equity-settled share-based payment transactions: 2. Cash-settled share-based payment transactions 3. Choice-of-settlement share-based payment transactions

Question 28

Equity-settled share-based payment transactions:

Answer 28

_To nonemployees: payments are measured at fair value of goods or serviced received. If this is not available, use fair value of equity instrument (measurement date the entity obtains goods) US GAAP: use fair value of equity instruments _To employees: transaction is measured at the fair value of the equity instruments granted. _Modification of stock option plans: require entity to recognize the original amount of compensation cost as measured at grant date. FV reduced, no change. FV increased, total compensation cost must increase by the fair value.

Question 29

Stock Options

Answer 29

;Total compensation cost= number of options expected to vest x fair value of the options. APIC is used to offset for the increase of the options. Cliff vesting (vest on a single date): compensation is recognized on straight-line. ``` Graded vesting (vest on installments): compensation is amortized over installment's (or tranche) vesting period. US GAAP: allows a choice ```

Question 30

Cash-settled share-based payment transactions

Answer 30

Recognize as liability and expense, which is measured at fair value of share appreciation rights at each balance sheet date. Change in fair value reflected in net income US GAAP: classified as equity

Question 31

Choice-of-settlement share-based payment transactions

Answer 31

The fair value must be split into debt and equity components. +Debt component: remeasured at fair value at balance sheet date, change reflected in net income. Cash payment applied to debt component (reduce liability) +Equity component: debt component is transferred to equity when supplier chooses to receive settlement in equity

Question 32

Tax Laws and Rates in IFRS

Answer 32

Current and deferred taxes are required to be measured on the basis of tax laws and rates that have been "enacted" or "substantively enacted" by balance sheet date.

Question 33

Recognition of Deferred Tax Asset

Answer 33

IFRS: recognizes if future realization of a tax benefit is probable US GAAP: recognizes when it's more likely than not.

Question 34

Income Tax Disclosures in IFRS

Answer 34

requires an explanation of relationship between tax expense based on statutory tax rate and effective tax rate using one of the two approaches: 1. Reconciliation between tax expense based on statutory tax rate in home country and tax expense based on effective tax rate 2. Reconciliation between tax expense based on weighted-average statutory tax rate across jurisdictions and effective tax rate expense

Question 35

IFRS vs GAAP in Income Taxes

Answer 35

IFRS can create temporary differences unknown under GAAP Different amounts of temporary differences

Question 36

Financial Statement Presentation for Income Tax

Answer 36

IFRS: deferred tax assets and liabilities are classified as noncurrent US GAAP: deferred tax assets and liabilities can classified as either current or noncurrent based on the related asset or liability

Question 37

Five Conditions to Recognize Revenue for Sale of Goods

Answer 37

1. The significant risks and rewards of ownership of the goods have been transferred to buyer* (can be difficult and requires judgement) 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. Probable economic benefits with the sale will flow to seller 5. The costs incurred or to be incurred with respect to the sale of goods can be measured reliably.

Question 38

Revenue Recognition for Service Transaction

Answer 38

Recognize when 1) outcome of a service transaction can be estimated reliably and 2) probable economic benefits of transaction will flow to the enterprise Revenue should be recognized in proportion to some measure of the extent of services rendered (stage of completion basis)

Question 39

Outcome of a service transaction can be estimated reliably when:

Answer 39

1) amount of revenue, 2) costs incurred and 3) stage of completion can be measured reliably. When outcome of service transaction cannot be estimated, revenue should be recognized to the extent that expense incurred are probable of recovery. If not probable of recovery, only expense should be recognized

Question 40

Stage of Completion Ways of Estimation:

Answer 40

_Basis of percentage of total services to be performed _Percentage of total costs to be incurred _Survey of works performed US GAAP: does not allow stage of completion in service contracts

Question 41

Interest, Royalties, and Dividends Revenue Recognition

Answer 41

Recognize when probable of economic benefits will flow in business Revenue should be recognized on bases: +Interest income is recognized on an effective yield basis +Royalties are recognized on an accrual basis +Dividends are recognized when shareholders' right to receive payment is established

Question 42

Exchanges of Goods or Services

Answer 42

Exchanged items are similar: no revenue is recognized Exchanged items are different, revenue = fair value of goods or services received. Fair value of received items cannot be measured, use fair value of items given up

Question 43

Bill-and-Hold Sales

Answer 43

Delivery is delayed at buyer's requests, but accept billing 4 conditions to recognize the revenue: 1. It is probable the delivery will be made 2. Item is on hand, identified and ready for delivery when sale is recognized 3. Buyer acknowledges the deferred delivery instructions 4. Usual payment terms apply

Question 44

Servicing Fees included in the Price of the Product

Answer 44

Portion of the sale price should be deferred and recognized as revenue over the period during the service is performed. The amount must be sufficient to cover the expected costs of the service

Question 45

Customer Loyalty Programs

Answer 45

The award credits is treated as a separately identifiable component of sales transaction. Fair value received on the sale is allocated between the award credits (based on their fair value) and other component of sales If company supplies the award itself, it recognizes the amount to award credits as revenue when it is redeemed and the obligation to provide a free or discount is fulfilled.

Question 46

Fixed-Price Construction Contracts

Answer 46

Use percentage of completion method Criteria: +Probable of economic benefits inflow +Contract costs can be identified and reliably measured +Total contract revenue must be reliably measurable +Costs to complete and stage of completion at balance sheet date must be reliably measurable Cost of recovery method is used when construction contract outcome can not be estimated

Question 47

Cost-plus Construction Contract

Answer 47

Use percentage of completion method Criteria: +Probable of economic benefits inflow +Contract costs can be identified and reliably measured

Question 48

Cost of recovery method for construction contract

Answer 48

Contract costs are expense as incurred and revenue is recognized to the extent contract costs are likely to recovered

Question 49

Construction Contract under IFRS and GAAP

Answer 49

Expected loss is recognized immediately | GAAP requires percentage-of-completion and completed contract method when percent of completion cannot be used

Question 50

5 Steps in IASB-FASB Revenue Recognition Project Proposal (pg. 203)

Answer 50

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

Question 51

Financial Instruments Defintions

Answer 51

any contract gives rise to financial asset of one entity and financial liability or equity instrument of another entity.

Question 52

Financial asset

Answer 52

_Cash _A contractual right: to receive cash or any financial asset; to exchange financial assets or liability _An equity instrument of another entity _A contract that will be settled in the entity's equity instrument

Question 53

Financial liability

Answer 53

_A contractual obligation: to deliver cash or financial asset; to exchange financial assets or liability _A contract that will or may be settled in the entity's equity instrument

Question 54

Equity instrument

Answer 54

_Any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities

Question 55

Classification of Financial Assets

Answer 55

_Financial assets at fair value through profit or loss: an entity either holds for trading purpose or elect to classify into this category under so-called fair value option _Held-to-maturity investment: finc assets with fixed payments and maturity _Loans and receivables _Available for sales: finc asset not clasified in one of other categories or entity elect to be AFS. Changes in fair value recognized in OCI

Question 56

Classification of Financial Liability

Answer 56

_Financial liabilities at fair value through profit or loss | _Financial liabilities measured at amortized cost:

Question 57

Fair Value Option Conditions to Designate Financial Asset or Liability

Answer 57

1. It eliminates or reduces a measurement inconsistency that would arise from measuring asset/liability or recognizing gain/loss on them on different basis 2. A group of financial assets/liabilities that is evaluated on a fair value basis and information about the group of instruments is provided internally to key management.

Question 58

Transfer between Categories of Financial Assets and Liabilities

Answer 58

Restricted to avoid management earning Reclassification between available for sale to held to maturity than insignificant amount results in a two-year ban on its use.

Question 59

Initial Measurement of Financial Instruments

Answer 59

Recognize at fair value | For FVPL, transaction costs are capitalized and expensed as incurred

Question 60

Subsequent Measurement of Financial Instruments

Answer 60

Measure using: 1) cost, 2) amortized cost, or 3) fair value Unquoted investment (financial asset cannot be measured at fair value) is measured at cost Measure at amortized cost: held-to-maturity, loans & receivable, liabilities Measure at fair value: FVPL financial asset and liability, available-for-sale

Question 61

Available-for-Sale Financial Asset Denominated in a Foreign Currency

Answer 61

Asset's fair value in foreign currency must be translated into fair value in entity's reporting currency. Change in fair value 2 components: + Change in fair value in the foreign currency (OCI) + A foreign exchange gain or loss from changes in exchange rate (net income)

Question 62

Impairment for Financial Asset

Answer 62

_Assess for impairment at each balance sheet date _FVPL assets are not subject to impairment testing, unrealized gain/loss recognized in net income _Investment in a loan impairment= principle and interest of investment - expected future cash flows discounted at historical effective interest rate. +written-down can be direct or through an allowance +recognize in net income +can write up to carrying amount would have been without the impairment. reverse recognize against net income

Question 63

Derecognition

Answer 63

_Remove an asset or liability from balance sheet _Need to meet two criteria: +The contractual rights to cash flows of financial assets have expired +The financial assets have been transferred and to the extent to which risks and rewards of ownership have been transferred

Question 64

So-Called-Pass-Through-Arrange Derecognition

Answer 64

_Entity continues to hold the asset, but transfer the payments to other parties immediately _Need to meet two criteria _Carrying amount is removed from balance sheet and gain/loss is recognize in net income

Question 65

Derecognition of Financial Liability

Answer 65

_Allows when the obligation is extinguished (paid, canceled, expired) _Difference between carrying amount and amount paid to extinguish is recognized as gain or loss in net income _Cost incurred is included as part of gain or loss

Question 66

Modification of Terms of Existing Debt

Answer 66

Treated as an extinguishment of old debt and issuance of new debt US GAAP: debt modification costs are expensed as incurred, except when old debt is issued for new debt

Question 67

Derivatives

Answer 67

Financial instruments (options, forwards, futures, swaps) whose value changes in response to the change in a specified interest rate, financial instrument price, foreign exchange rate, etc. Measured at fair value Recognized in net income (not hedge) or OCI US GAAP 3 types of heding relationship: fair value hedge, cash flow hedge, hedge of a net investment in a foreign operation

Question 68

Receivables (IAS 39)

Answer 68

Measured initially at fair value Subsequently measured at amortized cost using an effective interest method

Question 69

Impairment of Receivables

Answer 69

Significant receivables should be tested for impairment individually and insignificant receivables can be tested as a group Bad debt loss and provision for uncollectible is estimated Loss is difference between carrying amount and present value of future cash flows expected to be received Aging method of estimating the provision for uncollectible is not appropriate

Question 70

Sale of Receivables-Truly Sale of an Asset

Answer 70

Appropriate to recognize sale and derecognize the asset Significant risks and rewards have been transferred

Question 71

Sale of Receivables-Simply a Borrowing Secured by Account Receivable

Answer 71

Receivable not derecognized Cash received from sale of receivable is treated as a loan payable

Question 72

So-Called Pass-Through for Sales of Receivables

Answer 72

When an entity regains the right to collect cash flows from a receivable and transfer to a third-party Derecognition criteria: + Entity has no obligation to pay cash to buyer of receivables + Entity is prohibited from selling or pledging the receivables + Entity has an obligation to remit any cash flows it collects on the receivables to eventual recipient without delay