IFRS Flashcards
The European Specialty Company, which prepares its financial statements under IFRS, has reported income before taxes of $1,300 on its financial statements and taxable income of $900. The $400 difference is due exclusively to a gain recognized for financial statement purposes in the current year that will be taxed 3 years later. The company is subject to a tax rate of 25% in the current year and, based on enacted tax law, will be subject to tax at the rate of 35% in the year in which the $400 will be taxable. After the date of the financial statements, but prior to their issuance, the future tax rate was reduced from 35% to 30%. What amount of deferred tax liability will European Specialty recognize in its current financial statements?
120
use the substantially enacted rate
though not enacted at F/S date, it was enacted at the date of issuance and therefore is substantially enacted
The difference of $400 will result in deferred taxes at the future tax rate, applying a rate that is considered substantially enacted. In this case, the rate will be 30% since, although it was not enacted as of the financial statement date, it was enacted as of the issuance, as a result of which it will be considered substantially enacted. Deferred taxes will be $400 x 30% or $120, recognized as a noncurrent deferred tax liability.
Under IFRS the equity method of accounting is used for both joint operations and joint ventures. Joint ventures involve both shared control and rights to the arrangement’s net assets. Joint operations involve shared control but no rights to the arrangement’s net assets, and are accounted for with an equity method approach known as
Proportionate consolidation
The equity method accounting approach used for joint operations under IFRS is known as the proportionate consolidation approach.
Greenway has a variety of financial instruments some of which are bonds of publicly-held entities. It is Greenway’s business model to hold the bonds for the purpose of collecting the scheduled cash flows, which consist exclusively of principal and interest payments. No inconsistencies with the rest of Greenway’s financial reporting would result from recognizing bond gains or losses on the amortized cost basis. Under IFRS, Greenway will account for these bonds:
at amortized costs
Under IFRS, a financial instrument is accounted for at amortized cost if the entity’s business model is to hold the asset to collect its scheduled cash flows and if those cash flows consist exclusively of principal and interest payments. All others are reported at fair value, which may not be elected. This instrument will be accounted for at amortized cost.
At the end of year 1, a company reduced its inventory cost from $100 to its net realizable value of $80. As of the end of year 2, the inventory was still on hand and its net realizable value increased to $150. Under IFRS, what journal entry should the company record for year 2 to properly report the inventory value?
Unlike GAAP, which does not allow for recovery of previously recorded inventory impairment losses, under IFRS such a loss can can be recovered, but only to the extent of the previously recorded loss.
With a previously recorded impairment loss of $20, the journal entry to recover the previous markdown is
Inventory $20
Inventory markdown expense* $20
*This is a reversing journal entry. It reverses the markdown expense recorded during the previous period.
A manufacturer has the following per-unit costs and values for its sole product:
Cost $10.00
Current replacement cost $5.50
Net realizable value $6.00
Net realizable value less normal profit margin $5.20
In accordance with IFRS, what is the per-unit carrying value of inventory in the manufacturer’s statement of financial position?
6.00
Under IFRS, inventory is valued at the lower of cost or net realizable value. Because the net realizable value of $6.00 per unit is lower than the cost of $10.00 per unit, the per-unit carrying value of the inventory in the manufacturer’s statement of financial position will be $6.00.
A company that presents its financial statements under IFRS is using the revaluation model to account for its fixed assets. In 20X1, it recognized a $50,000 impairment loss. During 20X2, those assets increased in value by $75,000. How will the increase be reported?
With $50,000 reported in profit or loss and the remaining $25,000 in other comprehensive income.
Under the revaluation method, increases in the value of an asset are recognized in profit or loss only to the extent of previously recognized losses. Any excess gains are recognized in other comprehensive income (OCI). In this case, $50,000 of the $75,000 increase in value represents a recovery of a previously recognized loss and will be reported in profit or loss. The remaining $25,000 will be recognized in OCI.
During the year, there had been significant decreases in the fair market value of Roger Co’s manufacturing equipment. The following information regarding the costs associated with the equipment was gathered:
Original cost of the equipment $700,000
Accumulated depreciation $400,000
Expected net future cash inflows
(present value) related to the continued
use and eventual disposal of the equipment $275,000
Fair value of the equipment $225,000
Under IFRS, how much impairment loss should be reported on Roger Co’s income statement for the year?
25,000
When a long-lived asset is impaired, which is when the carrying value exceeds its fair value, the asset is written down to its recoverable amount, which is the greater of its net realizable value or its value in use, which is the present value of expected future cash flows from the continued use and ultimate disposal of the asset. The carrying value of $700,000 - $400,000, or $300,000 will be reduced to the recoverable amount of $275,000, resulting in an impairment loss of $25,000.
An entity purchased new machinery from a supplier before the entity’s year end. The entity paid freight charges for the purchased machinery. The entity took out a loan from a bank to finance the purchase. Under IFRS, what is the proper accounting treatment for the freight and interest costs related to the machinery purchase?
The freight cost should be capitalized as part of property, plant and equipment, and the interest cost should be immediately expensed.
Since freight costs were necessary in order to make the machinery available, it is a cost of getting the asset ready for its intended use and is capitalized. The interest, on the other hand, is incurred while the asset is being used and will be recognized as expense when incurred.
Under IFRS, an entity that acquires an intangible asset may use the revaluation model for subsequent measurement only if
An active market exists for the intangible asset
The revaluation model may be applied to an intangible asset provided there is an active market for the asset allowing for a reliable measure of fair value at a given balance sheet date.
Under IFRS, what valuation methods are used for intangible assets?
IFRS provides for two methods of accounting for intangibles, the cost method or the revaluation method.
Under IFRS, which of the following is a criterion that must be met in order for an item to be recognized as an intangible asset other than goodwill?
Under IFRS, an intangible is defined as an identifiable nonmonetary asset without physical substance.
Under the revaluation model allowed under IFRS for the accounting for identifiable intangible assets:
Under the revaluation model allowed by IFRS, assets are periodically revalued and adjusted to their fair values. Revaluation is required to be done relatively frequently, generally at least every three years, but is not required annually. In between revaluation dates, the asset is amortized and may be written down due to impairment.
Which of the following is true regarding reporting deferred taxes in financial statements prepared in accordance with IFRS?
Deferred tax assets and liabilities may only be classified as noncurrent.
Under IFRS, deferred tax assets and liabilities are always reported as noncurrent.
How should a first-time adopter of IFRS recognize the adjustments required to present its opening IFRS statement of financial position?
All of the adjustments should be recognized directly in retained earnings or, if appropriate, in another category of equity.
When first-time adopters of IFRS present their opening IFRS statements of financial position, all of the adjustments should be recognized directly in retained earnings or, if appropriate, in another category of equity.
