Section 3L - Difference between IFRS & GAAP

Question 1

• A. A. Corporation has a loading dock that is situated next to a local highway. Recently, a new major highway was completed nearby, which bypasses the loading dock, and has thus made the installation of questionable future value to the corporation.
• The carrying amount of the loading dock is $400,000. The undiscounted present value of the future cash flows related to the loading dock is $410,000. The discounted present value of the future cash flows related to the loading dock is $380,000.
• The loading dock could be sold for $401,000 right now, less a broker’s commission of $6,000.

If A. A. Corporation applies IFRS, does it need to recognize an impairment loss?

No, because the dock can be sold for its carrying value

No, since the undiscounted cash flows are larger than the carrying value

Yes, because the discounted present value of the cash flows from the asset are less than the carrying valu

Yes, because the carrying value is not recoverable

Answer 1

Yes, because the carrying value is not recoverable

The answer choice, “No, since the undiscounted cash flows are larger than the carrying value,” is wrong, but would be the rule under U.S. GAAP today, IFRS does not use undiscounted future cash flows.

Question 2

Long-lived assets: Differences under IFRS include the following:

a. Revaluation is ___(but not __)
b. Increases in the asset’s carrying amount are recognized in __and accumulated in equity in a Revaluation Surplus account.
c. Decreases in the asset’s carrying amount are recognized fully in profit or loss, and recognized in__
d. An asset is tested for impairment when there is reason to suspect loss in value. The test is to determine if the carrying value is ___.
e. The estimated useful life and residual value must be reviewed at least___
f. Component depreciation is required whenever a part of an item is __in cost compared to the total cost of the item.
g. __costs related to the acquisition, construction, or production of a qualifying asset are defined more broadly, and may include more components under IFRS than under GAAP.
h. The estimated cost of dismantling and removing an asset and restoring a site (also called decommissioning an asset) is __in the cost of the related asset.
i. Biological assets consist primarily of __ and __; the harvested product is referred to as agriculture produce. Biological assets are recognized after certain criteria have been met, and are carried at their ___ less point-of-sale costs

Answer 2

permitted ( required)

Other Comprehensive Income (OCI)

OCI

recoverable

annually

significant

Borrowing

included

plants and animals, FV

Question 3

Lessees are permitted to apply the leasing guidance to leases of intangible assets, other than those under licensing arrangements, under:

U.S. GAAP.

IFRS.

either IFRS or U.S. GAAP.

neither IFRS nor U.S. GAAP.

Answer 3

IFRS.

Under IFRS 16, Leases, lessees are allowed (but not required) to apply the leasing guidance to leases of intangible assets, other than those under licensing arrangements. U.S. GAAP does not include this option

Question 4

ease definition: Under GAAP, the definition of a lease is restricted to identified property, plant, or equipment. Under IFRS, a lease can be ___ (including ___)

IFRS standard considers all leases to be ___leases

GAAP and IFRS require that a lessee record a __asset and a lease liability on the balance sheet,

• Under IFRS, a lessor has two lease categories: an operating lease or a finance lease. Selling profit may be recognized at the lease commencement for all finance leases.
  
  • Under GAAP, a lessor has three lease categories: an operating lease, a direct financing lease, or a sales-type lease

Answer 4

any asset; (intangibles)

finance

right-of-use (ROU)

Question 5

Materiality exemption: The IFRS standard includes a recognition exemption for low-value assets (approximately $___) such as cell phones and computers. The GAAP standard does not list a specific cost threshold but does state that “immaterial” leased assets do not need to be ___.

Lease term: Both IFRS and GAAP permit a lessee to apply a short-term lease exemption for a lease with a term of ___

Asset measurement: Under IFRS, a lessee can choose ___measurement bases for the right-of-use asset (e.g., the fair value model or the cost model). Under GAAP, a lessee measures its right-of-use asset at the ___of lease payments.

Answer 5

5,000, capitalized

f 12 months or less.

alternative , present value

Question 6

A transportation company purchased a passenger bus for $100,000 on January 1, year 1. The company expects the bus to be used for 20 years if it follows a maintenance schedule of replacing the engine after 10 years and replacing the seats every 8 years. It estimates that the current cost to replace the engine is $25,000 and the current cost to replace the seats is $10,000. The company uses straight-line depreciation and the bus has no residual value. The company considers any component equal to or greater than 10% of the overall cost to be significant. Under IFRS, how much depreciation expense should the company recognize for the bus for the year ended December 31, year 1?

$5,000

$7,000

$8,500

$7,250

Answer 6

$7,000

Question 7

A. A. Corporation sells t-shirts displaying humorous sayings or pictures of popular artists. As such, they often have to deal with permanent writedowns of inventories that may only be able to be sold at reduced prices. A particular item, Shirt G, of which A. A. has 1,000 units on hand at the end of the year, has the following characteristics:

1. Cost of Shirt G $12
2. Replacement cost of Shirt G 10
3. Net realizable value of Shirt G 11
4. Normal profit margin for Shirt G 2

Assuming that A. A. Corporation writes its inventory items down on an individual item basis, and further, that A. A. Corporation applies the rules of IFRS, what would the unit price of Shirt G be after the writedown?

$10

$11

$12

$9

Answer 7

$11

IFRS applies an inventory valuation rule of lower of cost or net realizable value, which is defined as the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

Replacement cost and normal profit margin are not used in IFRS. Since net realizable value is less than cost, the inventory item is written down to $11 per unit.

Question 8

Inventory: Differences under IFRS include the following:

a_____is not an acceptable method of accounting for inventory.

b. All inventory is carried at the ___. Inventory carrying cost cannot be reduced below the .
c. Under certain circumstances, impairment losses may be ___, up to the amount of the __loss.
d. Any ____are considered when computing the average gross margin used to apply the retail inventory method.

Answer 8

. LIFO (last in, first out)

lower of cost or net realizable value (NRV), lower of cost or NRV

reversed, original

permanent markdowns

Question 9

A lessee measures their right-of-use asset at the present value of lease payments, less any guaranteed residual value; they must prepare their financial statements in accordance with:

U.S. GAAP.

IFRS.

either IFRS or U.S. GAAP.

neither IFRS nor U.S. GAAP.

Answer 9

neither IFRS nor U.S. GAAP.

Lessees measure the right-of-use assets under both IFRS (International Financial Reporting Standards) and U.S. GAAP. Right-of-use (ROU) assets under both start with the lease liability measurement, which adds guaranteed residual values to the liability and ROU, rather than subtracting it.

Question 10

A. A. Corporation has a loading dock that is situated next to a local highway. Recently, a new major highway was completed nearby, which bypasses the loading dock, and has thus made the installation of questionable future value to the corporation. The carrying amount of the loading dock is $600,000. However, due to the fact of the loss of the access to the best thoroughfare, the loading dock was written down and an impairment loss was recognized based on the estimated value in use of the dock at present. An impairment loss of $160,000 was recognized, and the loading dock now has a carrying value of $440,000. The next year, however, a local businessman decided to and built an airport near to the loading dock, and the estimated value in use has now been calculated to be $550,000. Given these facts, and also that A. A. applies IFRS, what would the carrying value of the loading dock be now (ignoring depreciation)?

1. $490,000
2. $440,000
3. $550,000
4. $600,000

Answer 10

550,000

Under IFRS, after an impairment loss has been recognized, if facts change and the estimated value of the asset has increased, the impairment loss can be considered recovered and, to the extent of the recovered loss, the impairment can be undone.

Here, the building has recovered some of the loss and can be written back up to the current estimated value in use of $550,000.

Question 11

An entity is required to remeasure variable lease payments every time an adjustment to the lease payments takes effect that could result in a change in the contractually required cash flows. The entity must prepare their financial statements in accordance with:

neither IRFS nor U.S. GAAP.

either IFRS or U.S. GAAP.

IFRS.

U.S. GAAP.

Answer 11

IFRS.

Under both IFRS (International Financial Reporting Standards) and U.S. GAAP, lessees initially measure variable lease payments based on an index (e.g., Consumer Price Index) or a rate (e.g., LIBOR (London Interbank Offered Rate))..

However, IFRS requires an entity to remeasure variable lease payments every time an adjustment to the lease payments takes effect that could result in a change in the contractually required cash flows, while U.S. GAAP only requires a lessee to remeasure the payments when an entity is required to reassess the lease obligation for other purposes (i.e., adjustment to an index or rate does not constitute a reassessment event).

Question 12

Despite the issuance of IFRS 16 and FASB ASU 2016-02, there are still significant differences between accounting for leases under IFRS versus U.S. GAAP. Which of the following statements regarding lease accounting is correct?

1. U.S. GAAP includes a recognition exemption for low-value assets (approximately $5,000) such as cell phones and computers. The IFRS standard does not list a specific cost threshold but does state that “immaterial” leased assets do not need to be capitalized.
2. Both IFRS and U.S. GAAP permit a lessee to use alternative measurement bases for the right-of-use asset.
3. The U.S. GAAP standard considers all leases to be finance while IFRS differentiates between an operating lease and a finance lease.
4. IFRS permits, but does not require, that a lessee may apply the leasing guidance to leases of intangible assets other than those under licensing arrangements. U.S. GAAP does not include this option.

Answer 12

IFRS permits, but does not require, that a lessee may apply the leasing guidance to leases of intangible assets other than those under licensing arrangements. U.S. GAAP does not include this option.

Question 13

With respect to the income statement, what are U.S. GAAP and IFRS differences?

The IFRS definition of discontinued operations is narrower than that of U.S. GAAP.

Under IFRS, companies may classify expenses by either nature (salaries, rent, etc.) or function (cost of goods sold, sales, etc.).

All of the answer choices are differences in U.S. GAAP and IFRS.

Under IFRS, if a company uses the functional method, it must disclose expenses by nature in the notes to the financial statement.

Answer 13

All of the answer choices are differences in U.S. GAAP and IFRS.

There are very few differences between International Financial Reporting Standards (IFRS) and generally accepted accounting principles (GAAP) income statements. Under IFRS:

1. companies may classify expenses by either nature (salaries, rent, etc.) or function (cost of goods sold, sales, etc.).
2. companies using the functional method must disclose expenses by nature in the notes to the financial statement.
3. net income or loss is simply “income” or “loss.”
4. the definition of discontinued operations is narrower than that of U.S. GAAP.

Question 14

There are very few differences between International Financial Reporting Standards (IFRS) and generally accepted accounting principles (GAAP) income statements. Under IFRS:

1. companies may classify expenses by either __ or __
2. companies using the __method must disclose expenses by __in the notes to the financial statement.
3. net income or loss is simply__ or __
4. the definition of discontinued operations is ___than that of U.S. GAAP.

Answer 14

nature (salaries, rent, etc.) or function

functional , nature

“income” or “loss.”

narrower

Question 15

IFRS requires ___of income statements; GAAP requires ___. Other differences include the following:

a. Income attributable to a noncontrolling interest is shown on the face of the
b. Expenses are classified by __ or __. If the functional method is used, additional information on the nature of certain expenses (i.e., depreciation, employee benefits) must be disclosed in the financial statement notes.
c. Discontinued operations are defined more ___than under GAAP.

Answer 15

two years , three years

income statement.

nature or function

narrowly

Question 16

___allows a separate statement of profit and loss along with a separate statement of comprehensive income, or a single, combined statement.

Answer 16

IFRS

Question 17

Despite the issuance of IFRS 16 and FASB ASU 2016-02, there are still significant differences between accounting for leases under IFRS versus U.S. GAAP. Which of the following statements regarding lease accounting is incorrect?

Both IFRS and U.S. GAAP permit lease guidance to apply to intangible assets.

IFRS uses a single-lease accounting model where all leases are classified as finance leases.

IFRS includes a recognition exemption for low-value lease assets (approximately $5,000) such as cell phones and computers.

U.S. GAAP restricts the definition of a lease to identified property, plant, or equipment only.

Answer 17

Both IFRS and U.S. GAAP permit lease guidance to apply to intangible assets.

Only IFRS (International Financial Reporting Standards) permits that a lessee may apply the leasing guidance to leases of intangible assets other than those under licensing arrangements; U.S. GAAP does not include this option.

Question 18

Lessees initially measure variable lease payments based on an index or a rate; they must prepare their financial statements in accordance with:

U.S. GAAP.

neither IFRS nor U.S. GAAP.

IFRS.

either IFRS or U.S. GAAP.

Answer 18

either IFRS or U.S. GAAP.

Under both IFRS (International Financial Reporting Standards) and U.S. GAAP, lessees initially measure variable lease payments based on an index (e.g., Consumer Price Index) or a rate (e.g., LIBOR (London Interbank Offered Rate)).

Question 19

In a sale/leaseback transaction, the seller-lessee measures the right-of-use asset at the present value of the lease payments; only a loss can be recognized, based on the difference between the sale proceeds and the carrying amount of the underlying asset. Gain recognition is permitted under:

either IFRS or U.S. GAAP.

U.S. GAAP.

neither IFRS nor U.S. GAAP.

IFRS.

Answer 19

either IFRS or U.S. GAAP.

For a sale/leaseback transaction accounted for under U.S. GAAP, the seller-lessee measures the right-of-use asset at the present value of the lease payments; a gain or loss is recognized for the difference between the sale proceeds and the carrying amount of the underlying asset.

Under IFRS (International Financial Reporting Standards), the seller-lessee measures the right-of-use asset at the retained portion of the previous carrying amount of the underlying asset (i.e., at cost); only the amount of any gain or loss related to the rights transferred to the buyer-lessor is recognized.

Question 20

For a sale/leaseback transaction accounted for under U.S. GAAP, the seller-lessee measures the right-of-use asset at the ___of the lease payments; a gain or loss is recognized for the difference between the sale proceeds and the carrying amount of the underlying asset.

Under IFRS (International Financial Reporting Standards), the seller-lessee measures the right-of-use asset at the __of the previous ___of the underlying asset (i.e., at cost); only the amount of any gain or loss related to the rights transferred to the buyer-lessor is recognized.

Answer 20

present value

retained portion , carrying amount

Question 21

Which of the following is a similarity between IFRS and U.S. GAAP in accounting for defined benefit pension plans?

Neither IFRS nor U.S. GAAP recognizes interest as part of benefit cost (pension expense).

Both IFRS and GAAP immediately recognize in profit and loss (income) past service cost (prior service cost).

Neither IFRS nor U.S. GAAP can use the corridor approach.

Both U.S. GAAP and IFRS use service cost in computing benefit cost (pension expense).

Answer 21

Both U.S. GAAP and IFRS use service cost in computing benefit cost (pension expense).

Both IFRS and U.S. GAAP include service cost as part of the net periodic pension cost computation (pension expense).

Both IFRS and U.S. GAAP include interest as part of the pension expense determination. U.S. GAAP permits the corridor approach but since unrecognized gain and losses are never eliminated from other comprehensive income under IFRS, the corridor approach is not needed. While IFRS recognized past (prior) service cost immediately in income, U.S. GAAP still allows prior service cost to be amortized over future periods.

Question 22

With respect to the footnote disclosure, what are U.S. GAAP and IFRS differences?

U.S. GAAP and IFRS require about the same amount of footnote disclosure.

IFRS requires very little footnote disclosure.

IFRS requires more footnote disclosure than U.S. GAAP.

U.S. GAAP requires more footnote disclosure than IFRS.

Answer 22

IFRS requires more footnote disclosure than U.S. GAAP.

IFRS (International Financial Reporting Standards) is principle-based, with fewer rules and standards than GAAP. Consequently, disclosure of the reasoning behind the information on the financial statements requires a great deal of footnote disclosure, including a footnote for accounting policies.

Question 23

Notes to the financial statements must include:

a. an explicit statement that the entity’s financial statements comply with __.
b. a summary of ___(apart from management estimates) that had a significant impact on the amounts recognized in the financial statements.
c. information that will assist ___on the financial statements to evaluate the entity’s objectives, policies, and processes for capital management.

Answer 23

IFRS

judgments

users

Question 24

Maxwell Company is the lessee in an operating lease. Maxwell must prepare its financial statements in accordance with:

neither IFRS nor U.S. GAAP.

IFRS.

either IFRS or U.S. GAAP.

U.S. GAAP.

Answer 24

U.S. GAAP.

IFRS (International Financial Reporting Standards) uses the single lease accounting model, so from the lessee’s perspective, all leases are accounted for as finance leases. Under IFRS, only lessors distinguish between finance and operating leases. Under U.S. GAAP, the lessee classifies a lease as either an operating lease or a finance lease.

Question 25

Under IFRS 16, Leases t/f

Under IFRS, ___leases are those having a value less than $5,000.

Only IFRS has a practical expedient for short-term leases (expense lease payments as incurred).t/f

IFRS allows small-ticket leases to use the same practical expedient as short-term leases use. t/f

Answer 25

small- ticket

False - Both GAAP and IFRS have a practical expedient that short-term leases do not have to record the right-of-use (ROU) asset or lease liability; rather, the lease payments are expensed.

true

true

Question 26

A company has a parcel of land to be used for a future production facility. The company applies the revaluation model under IFRS to this class of assets. In Year 1, the company acquired the land for $100,000. At the end of Year 1, the carrying amount was reduced to $90,000, which represented the fair value at that date. At the end of Year 2, the land was revalued, and the fair value increased to $105,000. How should the company account for the Year 2 change in fair value?

By recognizing $10,000 in profit or loss and $5,000 in other comprehensive income

By recognizing $15,000 in other comprehensive income

By recognizing $15,000 in profit or loss

By recognizing $10,000 in other comprehensive income

Answer 26

By recognizing $10,000 in profit or loss and $5,000 in other comprehensive income.

An entire class of assets whose value can be measured reliably can be carried at fair value. This company does this for its land. At the end of the first year, the land lost value, and thus the difference lost of $10,000 is taken as a loss.

When the value is regained in the second year, the prior loss is undone with a gain of $10,000, but the additional $5,000 increase in value must go to an equity account in other comprehensive income.

Question 27

Which of the following statements is correct about the statement of cash flows with respect to IFRS and U.S. GAAP treatments?

IFRS requires that noncash investing and financing activities be included on the face of the statement of cash flows.

IFRS encourages companies to disclose the aggregate amount of cash flows that are attributable to the increase in operating capacity separately from those cash flows that are required to maintain operating capacity.

Similar to U.S. GAAP, the cash flow statement can be prepared using either the indirect or direct method under IFRS.

Both U.S. GAAP and IFRS consider bank overdrafts to be part of cash and cash equivalents.

Answer 27

Similar to U.S. GAAP, the cash flow statement can be prepared using either the indirect or direct method under IFRS.

Both U.S. GAAP and IFRS allow entities to choose between the direct and indirect method of preparing the statement of cash flows.

Question 28

Both the IASB and the FASB encourage use of the ___to report cash from operating activities on the statement of cash flows. Under IFRS:

a. bank overdrafts are classified as __activities.
b. only expenditures that result in a recognized asset can be classified as an __activity.
c. cash flow from the acquisition or disposal of a subsidiary is presented separately as an __activity.
d. interest and dividends received are reported as either operating or investing while interest and dividends paid are reported as either __ or __.
e. noncash investing and financing activities are not reported on the cash flow statement but rather in the_–

Answer 28

direct method

operating

investing

investing

operating or financing

notes to the financial statements.

Question 29

Which of the following is an item of other comprehensive income that is included in IFRS but is not allowed in U.S. GAAP?

Gains and losses related to the translation of a foreign subsidiary’s financial statements

Revaluation gains

Prior (past) service cost related to defined benefit pension plans

Unrealized holding gain and losses on available-for-sale debt investments

Answer 29

Revaluation gains.

IFRS includes revaluation gains in comprehensive income, whereas U.S. GAAP does not. This account is necessary to report increases in fair value of assets when entities elect to use the revaluation model to account for classes of tangible fixed assets.

The other three options are elements of other comprehensive income under both systems.

Question 30

With respect to the statement of comprehensive income, what are U.S. GAAP and IFRS differences?

IFRS does not allow a combined statement of net income and comprehensive income.

IFRS does not require a statement of comprehensive income.

IFRS does not allow a separate statement of comprehensive income.

Both U.S. GAAP and IFRS allow a separate statement of comprehensive income or a combined statement.

Answer 30

Both U.S. GAAP and IFRS allow a separate statement of comprehensive income or a combined statement.

Both U.S. GAAP and IFRS (International Financial Reporting Standards) allow either a separate statement of comprehensive income or a combined statement of net income and comprehensive income. Also, operating activities would include interest and dividends under IFRS.

Question 31

The following information relates to a company’s year-end inventory:

• Inventory cost $910
• Selling price of inventory $1,000
• Normal profit margin 10% of selling price
• Current replacement cost $740
• Cost of completion and disposal $100

Under IFRS, what is the company’s year-end inventory balance?

$910

$740

$900

$800

Answer 31

$900

Under IFRS, inventory is carried at the lower of cost or net realizable value (estimated selling price less costs of completion and disposal). For the given information, NRV (net realizable value) is $900 ($1,000 − $100); cost is $910. The company’s year-end inventory balance is $900.

Question 32

Under IFRS accounting for business combinations, which of the following is correct?

Full goodwill accounting is required.

Accounting for goodwill is optional but not required.

A bargain purchase cannot be recognized as an extraordinary gain.

Accounting for goodwill is not permitted.

Answer 32

Accounting for goodwill is optional but not required.

IFRS differs from U.S. GAAP when accounting for a business combination. IFRS does not require goodwill to be recognized but allows it as an option.

Question 33

A manufacturer has the following per-unit costs and values for its sole product:

1. Cost $10.00
2. Current replacement cost 5.50
3. Net realizable value 6.00
4. NRV 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

$5.50

$10.00

$5.20

Answer 33

$6.00

The International Financial Reporting Standards (IFRS) apply an easier lower of cost or net realizable value rule. Here, net realizable value is less, so it is used ($6.00).

Question 34

Under U.S. GAAP, an exception is allowed for the “impracticality” of calculating the impact of changes in accounting principles. For which category does IFRS allow an exception of “impracticality”?

Correction of errors

Changes in accounting principles

Changes in accounting estimates

Changes in accounting principles and correction of errors

Answer 34

Changes in accounting principles and correction of errors

IFRS allows an exception of reporting the impact of both changes in accounting principles and correction of errors.

Unless an individual standard specifies otherwise, a change in accounting principle or an accounting error is applied retrospectively, except to the extent that it is impracticable to determine the effects of the change. In that case, the principle or error change is applied from the earliest date practicable.

Question 35

A company is working on a direct-response advertising campaign that will likely provide the company future benefits in the form of increased sales over the next two years. The company identified the following costs associated with the advertising campaign:

Catalogs on hand to be mailed to potential customers $100,000
Coupons printed to be mailed to existing customers 50,000
Employee salaries for call center support 45,000
Postage to be paid to mail the catalogs and coupons 25,000

What cost, if any, should be capitalized under IFRS?

$150,000

$0

$220,000

$100,000

Answer 35

$0

This is an area where IFRS and GAAP differ. Under GAAP, direct-response advertising costs may be capitalized if specific criteria are met. However, under IFRS, advertising and promotional costs are expensed as incurred. Therefore, $0 would be capitalized under IFRS.

Question 36

Under IFRS, which of the following statements about intangible assets is correct?

Research and development costs are capitalized as incurred.

Internally generated goodwill cannot be recognized as an asset.

Intangible assets with indefinite lives must be amortized annually.

Intangible assets within a class may be measured differently using either the cost model or the revaluation model.

Answer 36

Internally generated goodwill cannot be recognized as an asset.

IFRS (International Financial Reporting Standards) explicitly states that internally generated goodwill shall not be recognized as an asset. Intangible assets within a class must all be measured using the same model; different classes can use different models.

Research and development costs are expensed until economic viability is reached, then they are capitalized, similar to R&D treatment under GAAP.

An intangible asset that has an indefinite life should be reviewed annually for impairment, but it is not amortized until its useful life is determined to no longer be indefinite; from that point on, it should be amortized on a prospective basis.

Question 37

ntangibles: Differences under IFRS include the following:
a. Intangibles are measured under the ___ or the ___. Under the ___model, the asset is carried at fair value on the date of revaluation, less any subsequent accumulated amortization and/or impairment losses.
b. Development costs are ___, provided certain requirements are met. (Research costs are ___, as under GAAP.)
c. Expenditures on certain internally developed items (e.g., brands, publishing titles, customer lists) cannot be differentiated from the cost of developing the business as a whole; therefore, ___.
d. Acquired research and development (R&D) assets are ___if it is probable there is future economic benefit(s).

Answer 37

cost method or the revaluation method, revaluation

capitalized, expensed

these items are not capitalized as intangible assets but rather as expenses

capitalized

Question 38

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 and interest costs should be capitalized as part of property, plant, and equipment.

The freight and interest costs should be immediately expensed.

The interest cost should be capitalized as part of property, plant, and equipment, and the freight cost should be immediately expensed.

The freight cost should be capitalized as part of property, plant, and equipment, and the interest cost should be immediately expensed.

Answer 38

The freight cost should be capitalized as part of property, plant, and equipment, and the interest cost should be immediately expensed…

The costs to buy equipment, along with the costs to bring it to its location for use and make it ready for use, are capitalized into the cost of the equipment. Any interest costs in financing the purchase of equipment (which is otherwise ready to use) are finance (interest) costs and are expensed.

Question 39

Answer 39

A gain of $30,000

Under IFRS (International Financial Reporting Standards), a foreign currency transaction should be recorded initially at the rate of exchange at the date of the transaction. At each subsequent balance sheet date, and at settlement, the transaction should be adjusted for the current amount, with differences being reported in profit or loss in the period incurred.

At 11/1, the liability was $300,000 (€200,000 × 1.5), and on 12/31, the liability had decreased to $270,000 (€200,000 × 1.35), for a gain of $30,000.

Question 40

A company recorded a decommissioning liability and recognized the amount recorded as part of the cost of the related property. After the property was fully depreciated, the decommissioning liability was reviewed and adjusted. How should this change in the decommissioning liability be recognized under IFRS?

The change in the liability is recognized as a change in the carrying amount of the property if the liability increases but is otherwise recognized in profit or loss.

The change in the decommissioning liability is not recognized until it is settled.

The change in the liability is recognized in other comprehensive income.

The change in the liability is recognized in profit or loss.

Answer 40

The change in the liability is recognized in profit or loss

• A decommissioning liability is a term used by IFRS (International Financial Reporting Standards) and is similar to asset retirement obligations (AROs) under U.S. GAAP.
• Decommissioning liabilities are initially recognized as a part of the cost of an item of property, plant, and equipment (e.g., a liability that was recognized by the operator of a nuclear power plant for costs that it expects to incur in the future when the plant is shut down (decommissioned)).
• Since the change in the liability account would exceed the carrying amount of the related asset (i.e., fully depreciated), the change would be recognized in profit or loss.

Question 41

A ___liability is a term used by IFRS (International Financial Reporting Standards) and is similar to asset retirement obligations (AROs) under U.S. GAAP.

Decommissioning liabilities are initially recognized as a part of the __of an item of property, plant, and equipment (e.g., a liability that was recognized by the operator of a nuclear power plant for costs that it expects to incur in the future when the plant is shut down (decommissioned)).

Answer 41

decommissioning

cost

Question 42

With respect to the categories of assets, liabilities, and stockholders’ equity presented on the balance sheet (statement of financial position), what are U.S. GAAP and IFRS differences?

With convergence of U.S. GAAP and IFRS, the balance sheet categories for both are exactly the same.

IFRS does not require a separation of current assets and noncurrent assets.

IFRS does not present minority interests as a separate category.

IFRS statements may present property, plant, and equipment first in the balance sheet.

Answer 42

IFRS statements may present property, plant, and equipment first in the balance sheet.

The categories of assets, liabilities, and stockholders’ equity are quite similar within U.S. GAAP and IFRS (International Financial Reporting Standards). However, IFRS statements may present property, plant, and equipment first in the balance sheet.

Question 43

Louisiana Designer Yarn, Inc., applies IFRS and does substantial research and development work in designing new processes to produce its products.

One yarn-producing machine design, which is in an advanced stage of development, and which the company thinks its present prototype model should be both technologically feasible and affordable to produce, is still going to be developed, internally, for 18 months prior to being finished.

Can the corporation recognize and capitalize any of the costs of developing the new machine design?

1. Yes, as long as the design is likely to be feasible and marketable or profitable to use internally for future production
2. No, because the machine design is an internally developed intangible asset, with no purchase transaction
3. Yes, but only if the machine is to be used by the corporation itself for internal operations and production
4. No, because all research and development costs are expensed as incurred

Answer 43

Yes, as long as the design is likely to be feasible and marketable or profitable to use internally for future production

Once a development project reaches the stage of a working model or prototype, and is found to be technologically feasible and financially affordable to complete, then it can be capitalized, and additional development costs added to its cost on the company books. The asset can be intended for sale or internal use, so long as it is expected to be valuable for that purpose.

Question 44

When valuing ending inventory on a balance sheet and cost of goods sold on an income statement, U.S. GAAP allows for the use of the LIFO, FIFO, and the average cost flow assumptions. IFRS allows the use of which of the following?

1. LIFO
2. FIFO
3. Average cost flow

I, II, and III

I and II only

II and III only

I and III only

Answer 44

II and III only

U.S. GAAP allows the use of specific identification and any of the three cost flow assumptions mentioned, but IFRS specifically disallows the use of LIFO (last in, first out) (IAS 2.IN13).

Question 45

Under IFRS, each of the following is a disclosure requirement related to the correction of a material prior-period error, except:

the nature of the error.

the impact of the correction on basic and diluted earnings per share for each period presented.

the amount of the correction at the beginning of the earliest period presented.

a description of the internal controls put in place to prevent the occurrence of the error in the future periods.

Answer 45

a description of the internal controls put in place to prevent the occurrence of the error in the future periods.

For a correction of an error, IFRS requires that the following be disclosed:

1. The nature of the error
2. The correction to specific line items and earnings per share
3. The amount of the correction at the beginning of the earliest period presented

There is no requirement to describe how the error will be prevented in the future.

Question 46

For a correction of an error, IFRS requires that the following be disclosed:

1. The ___of the error
2. The correction to specific line items and___
3. The amount of the correction at the beginning of the ___period presented

There is no requirement to describe how the error will be ___in the future.

Answer 46

nature

EPS

earliest

prevented

Question 47

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?

Debit inventory for $70 and credit expense for $70

Debit inventory for $20, debit expense for $30, and credit retained earnings for $50

Debit inventory for $20 and credit expense for $20

Debit inventory for $70, credit retained earnings for $50, and credit expense for $20

Answer 47

Debit inventory for $20 and credit expense for $20

Question 48

With respect to the statement of cash flows, what are U.S. GAAP and IFRS differences?

All of the answer choices are differences in U.S. GAAP and IFRS.

For IFRS, but not for U.S. GAAP, interest and dividends received are reported as operating or investing activities.

For IFRS, but not for U.S. GAAP, bank overdrafts are presented separately as an operating activity.

For IFRS, but not for U.S. GAAP, comparative periods must be presented.

Answer 48

All of the answer choices are differences in U.S. GAAP and IFRS.

IAS 7, Cash Flow Statements, is similar to the GAAP statement except that:

1. bank overdrafts are presented as operating activities for IFRS and financing activities in U.S. GAAP,
2. interest and dividends received are presented as operating or investing activities for IFRS and only as operating activities in U.S. GAAP, and
3. the most recent two years (i.e., comparative periods) must be presented.

Question 49

IAS 7, Cash Flow Statements, is similar to the GAAP statement except that:

1. bank overdrafts are presented as ___activities for IFRS and ___activities in U.S. GAAP,
2. interest and dividends received are presented as __ or __activities for IFRS and only as ___activities in U.S. GAAP, and
3. the most recent ___years (i.e., comparative periods) must be presented.

Answer 49

operating , financing (Gaap)

operating or investing, operating (gaap)

two

Question 50

Under IFRS, which of the following items is considered investment property?

A building held for use for administrative purpose

Land held for sale in the ordinary course of business

Part of a building held to earn rentals

Land held for use in the production or supply of goods or services

Answer 50

Part of a building held to earn rentals

The International Financial Reporting Standards (IFRS), like U.S. GAAP, distinguish between items used in operations and items held as long-term investments. A building that is rented out is an investment property, as the company is not using the building for its own operations.

Question 51

Lester the Lessee signed an 11-month lease with Lenore the Lessor. Lester plans to apply the short-term lease exemption as his lease term is less than 12 months. Lester must prepare his financial statements in accordance with:

either IFRS or U.S. GAAP.

neither IFRS nor U.S. GAAP.

IFRS.

U.S. GAAP.

Answer 51

either IFRS or U.S. GAAP.

Both IFRS (International Financial Reporting Standards) and U.S .GAAP permit a lessee to apply a short-term lease exemption for a lease with a term of 12 months or less, although IFRS and U.S. GAAP have different criteria for determining the lease term.

Under U.S. GAAP, the lessee excludes only those purchase options that it is reasonably certain to exercise. Under IFRS, a lessee excludes all purchase options from determination of the lease term.

Question 52

• Corporation sells t-shirts displaying humorous sayings or pictures of popular artists. As such, they often have to deal with writedowns of inventories to present net realizable value that may only be able to be sold at reduced prices.
• A particular item, Shirt S, of which A. A. has 1,000 units, which originally cost $25, was written down to its net realizable value at the end of the prior year of $20, since it featured an artist that had not been producing any new material for some time.
• At the beginning of the new year, this artist introduced a new CD that was very popular, and the Shirt S item has also been selling at a price above what it had been selling for before.
• The present replacement cost to buy another unit of Shirt S now is $27. Since the item now has a net realizable value of $35, which is greater than its original cost, and since A.

A. Corporation applies IFRS, it must carry the value of its inventory of Shirt S at:

the net realizable value of the item last year of $20, since an inventory writedown cannot be reversed.

the replacement cost of $27.

the original cost of $25.

the net realizable value for this new year of $35.

Answer 52

the original cost of $25.

IFRS requires that inventories be valued at lower of cost or net realizable value. If net realizable value falls below cost, then inventory must be written down to net realizable value.

If net realizable value increases back up above cost, then a recovery of the writedown must occur, and the inventory must be written back up to cost, which is now the lower of cost and net realizable value.

Replacement cost is not used in this procedure.

Question 53

• Pitbull Construction Corporation applies IFRS, has equipment that it can reliably measure fair value of, and has chosen to apply the revaluation model to valuing this equipment on its accounting records.
• The carrying value of this equipment on Pitbull’s books at the end of last year, December 31, 20X1, was $200,000. At the end of this year, December 31, 20X2, due to decreased demand for the equipment, especially when resold as used, the fair value is $150,000

. For the year 20X2, in relation to this equipment for which Pitbull has chosen to apply the revaluation method, Pitbull must:

1. increase asset revaluation surplus, an equity account like other comprehensive income, by the $50,000 decrease to fair value.
2. not account for the loss in fair value of an unsold long-term asset used in operations.
3. decrease asset revaluation surplus, an equity account like other comprehensive income, by the $50,000 decrease to fair value.
4. decrease the operating income for the period 20X2 by the decrease to fair value, $50,000.

Answer 53

decrease the operating income for the period 20X2 by the decrease to fair value, $50,000

.

When a class of assets’ fair value can be reliably measured, a corporation applying IFRS can elect to apply the revaluation model to the class of assets.

When the carrying value of the assets differs materially from the fair value of the assets, a revaluation must occur, with any increase being included in asset revaluation surplus, an equity account, like other comprehensive income, and a decrease being accounted for as an other loss included in income from operations.

Question 54

• A. A. Corporation has a loading dock that is situated next to a local highway. Recently, a new major highway was completed nearby, which bypasses the loading dock, and has thus made the installation of questionable future value to the corporation.
• The carrying amount of the loading dock is $500,000. The undiscounted present value of the future cash flows related to the loading dock is $480,000. The discounted present value of the future cash flows related to the loading dock is $440,000.
• The loading dock could be sold for $450,000 right now, less a broker’s commission of $16,000.

If A. A. Corporation applies IFRS, how much of an impairment loss does it need to recognize?

$60,000

$66,000

$50,000

$20,000

Answer 54

$60,000

• When an asset may have sustained a loss in value, due to circumstances occurring by the end of the year, it must be tested for impairment. Under IFRS, the test for and measure of an impairment loss is the excess of carrying value ($500,000) above recoverable amount ($440,000).
• The recoverable amount is the higher of the value in use (present value of discounted future cash flows) or net realizable value (sales proceeds less cost to sell).
• The recoverable amount here is the value in use of $440,000, which is larger than the net realizable value of $450,000 - $16,000, or $434,000. Thus, a $60,000 impairment loss is recognized.

Question 55

• Pitbull Construction Corporation applies IFRS, has equipment that it can reliably measure fair value of, and has chosen to apply the revaluation model to valuing this equipment on its accounting records.
• The carrying value of this equipment on Pitbull’s books at the end of last year, December 31, 20X1, was $200,000. At the end of this year, December 31, 20X2, due to increased demand for the equipment, even when resold as used, the fair value is $250,000.

For the year 20X2, in relation to this equipment for which Pitbull has chosen to apply the revaluation method, Pitbull must:

increase asset revaluation surplus, an equity account like other comprehensive income, by the $50,000 addition to fair value.

increase the operating income for the period 20X2 by the addition to fair value, $50,000.

not account for the addition in fair value of an unsold long-term asset used in operations.

decrease asset revaluation surplus, an equity account like other comprehensive income, by the $50,000 addition to fair value.

Answer 55

increase asset revaluation surplus, an equity account like other comprehensive income, by the $50,000 addition to fair value.

• When a class of assets’ fair value can be reliably measured, a corporation applying IFRS can elect to apply the revaluation model to the class of assets.
• When the carrying value of the assets differs materially from the fair value of the assets, a revaluation must occur, with any increase being included in asset revaluation surplus, an equity account, like other comprehensive income, and a decrease being accounted for as an other loss included in income from operations.

Question 56

A company acquired an aircraft for $120 million, with the cost consisting of the airframe, $60 million; the engine, $40 million; and other components, $20 million. The company applies the cost model and uses the straight-line method of depreciation. The aircraft has a total estimated useful life of 20 years and no residual value. The estimated useful lives of the components are as follows:

1. Airframe 20 years
2. Engine 16 years
3. Other components 4 years

Under IFRS, what amount should the company record as annual depreciation expense?

$6 million

$10.5 million

$3 million

$6.5 million

Answer 56

$10.5 million

IFRS requires component depreciation. Separable parts of property, plant, and equipment need to be separately depreciated. Depreciation for the plane needs to be based on three separate annual amounts, added together:

1. For the airframe: $60 million ÷ 20 years = $3 million a year
2. For the engine: $40 million ÷ 16 years = $2.5 million a year
3. For the other components: $20 million ÷ 4 years = $5 million a year

Adding them all up for this year: $3 million + $2.5 million + $5 million = $10.5 million.

Question 57

Under IFRS, which of the following measurements is allowed to estimate and report the liability for the cost of settling a lawsuit?

Estimate only the smallest item in the estimated range of losses

Estimate only the best estimate to settle and discount amounts of estimated loss to present value

Estimate only the best estimate to settle

Discount amounts of estimated loss to present value

Answer 57

Estimate only the best estimate to settle and discount amounts of estimated loss to present value

When a range of amounts that may be lost in a lawsuit are established, the best number in the range must be chosen to accrue. The chosen amount must always be discounted to present value.

Question 58

Answer 58

Decrease goodwill by $13,000

Under IFRS, impairment is measured at the level of the cash generating unit.

Total carrying amount $45,000
Recoverable amount 32,000
Impairment $13,000

Question 59

Which of the following statements about IFRS and U.S. GAAP is true?

1. Neither IFRS nor U.S. GAAP use a valuation account related to deferred tax assets.
2. For both IFRS and U.S. GAAP, deferred tax assets have a related valuation account to reflect the possibility that not all of the deferred tax asset may be used.
3. For both IFRS and U.S. GAAP, unrecognized deferred tax assets must be evaluated at the end of each year to see if they should be recognized.
4. For IFRS (but not U.S. GAAP), unrecognized deferred tax assets must be evaluated at the end of each year to see if they should be recognized.

Answer 59

For IFRS (but not U.S. GAAP), unrecognized deferred tax assets must be evaluated at the end of each year to see if they should be recognized.

• U.S. GAAP recognizes deferred tax assets in full and uses a valuation account if the benefit from those deferred tax assets is less likely than not.
• IFRS recognizes only the portion of deferred tax assets that are more likely than not to be realized.
• Thus, IFRS requires unrecognized deferred taxes assets to be evaluated each period.

Question 60

Taxes: Under IFRS, the following apply:

a. Deferred taxes are recognized for temporary differences that arise when an entity’s taxable profit or tax loss are measured in a currency ____(GAAP prohibits any deferred tax recognition in this situation.)
b. Deferred taxes are not recognized for the ___of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither accounting profit nor taxable profit. (GAAP does not have an exception.)
c. Deferred tax assets (DTAs) are recognized to the extent that it is probable that sufficient taxable profits will be available to utilize the __ or __deductible or unused tax losses.
d. Tax impacts to the consolidated financial statements from intercompany transactions are recognized as __. Deferred taxes are recognized on the elimination of intercompany profits, and are calculated with reference to the tax rate of the __. Taxes paid by the seller are recorded as a ___.
e. Accounting for uncertain tax positions is not specifically __
f. Allocation of current and deferred tax amounts (related to a consolidated tax return) among group members for their separate financial statements is not___
g. Disclosures for ___tax assets and liabilities are required, but a tabular __is not required as under GAAP.

Answer 60

different than its functional currency.

initial recognition

deductible or unused tax losses

incurred,buyer, current tax expense

addressed

contingent

reconciliation

Question 61

Tally Inc. recently signed a lease for office computer equipment. Since each computer is under the $5,000 recognition exemption, Tally does not have to capitalize the leased assets. Tally must prepare its financial statements in accordance with:

IFRS.

either IFRS or U.S. GAAP.

U.S. GAAP.

neither IFRS nor U.S. GAAP.

Answer 61

IFRS.

IFRS 16, Leases, includes a specific recognition exemption for low-value lease assets (approximately $5,000) such as cell phones and computers; these leases can be expensed rather than capitalized. FASB ASC Topic 842, Leases, does not list a specific cost threshold, although U.S. GAAP does permit “immaterial” assets to be expensed rather than capitalized.

Question 62

With respect to the statement of changes in equity, which of the following statements is correct?

Both U.S. GAAP and IFRS use the term “retained earnings.”

IFRS uses “Paid-in Capital” to account for revaluation of property, plant, and equipment; mineral resources; and intangible assets.

IFRS uses the same stock account titles as U.S. GAAP.

U.S. GAAP and IFRS account for treasury stock in the same manner.

Answer 62

Both U.S. GAAP and IFRS use the term “retained earnings.”

• Both GAAP and IFRS (International Financial Reporting Standards) use the term “retained earnings.” IFRS includes a “revaluation surplus” related to revaluation of property, plant, and equipment; mineral resources; and intangible assets.
• IFRS uses different stock account titles than U.S. GAAP. Instead of “Common Stock,” IFRS uses an account titled “Share Capital.”
• IFRS accounts for treasury stock retirements only by charging an excess in purchase price and issue cost to paid-in capital.

Question 63

IAS 1 contains an example of a “Statement of Changes in ___” very similar to the GAAP statement.

Differences under IFRS include:

a. use of the term “__” for comprehensive income items and for transactions related to convertible debt and stock option contracts.
b. use of the term “___” for revaluation of property, plant, and equipment; mineral resources; and intangible assets.
c. use of the account title “___” rather than “Common Stock” and “___” for preferred stock.

Answer 63

Equity

reserve

revaluation surplus

Share Capital,Preference Shares

Question 64

Answer 64

$191,000

The International Financial Reporting Standards (IFRS) apply a lower of cost and net realizable value, applied on an item-by-item basis. For each item, one must figure out the net realizable value: the sales price less cost to sell.

• For blades, net realizable value is $50,000 less $2,000, or $48,000. For blades the cost is less, so blades will be carried at cost, $41,000.
• Towers sell for $54,000 less $4,000 to sell, for a net realizable value of $50,000, which is below cost of $52,000. Towers are carried at $50,000.
• Generators sell for $30,000 less $2,000 for a net realizable value of $28,000, and cost of $20,000 is below that. Generators will be carried at cost, $20,000.
• Gearboxes sell for $120,000 less $12,000, or a net realizable value of $108,000, which is higher than cost of $80,000. Gearboxes will be carried at cost of $80,000.

The total of all four items at lower of cost or net realizable value is thus $41,000 + $50,000 + $20,000 + $80,000 = $191,000.

Question 65

U.S. GAAP and IFRS differ on the allowance of which cost flow assumption to be applied to value ending inventory on a balance sheet, and cost of goods sold on an income statement?

Average costing

First in, first out

U.S. GAAP and IFRS do not differ on the allowance of the three cost flow assumptions usage.

Last in, first out

Answer 65

Last in, first out

U.S. GAAP allows the use of specific identification and any of the three cost flow assumptions mentioned, but IFRS specifically disallows the use of LIFO (last in, first out) (IAS 2.IN13).

Question 66

As of December 31, year 2, a company has an inventory item that was originally purchased for $80 in year 1. The inventory item was written down to its net realizable value of $60 as of December 31, year 1. As of December 31, year 2, the inventory item had a net realizable value of $75 and a replacement cost of $65. Normal profit margins for this company are 20%. Under IFRS, what is the carrying amount of the inventory item as of December 31, year 2?

$65

$75

$60

$80

Answer 66

$75

Under IFRS, all inventory is carried at the lower of cost or net realizable value (NRV). Under certain circumstances, impairment losses may be reversed, up to the amount of the original loss.

In this question, the inventory can be written up from the year 1 net realizable value (NRV) of $60 to the $75 year 2 NRV. Any future write-ups (i.e., recoveries) cannot exceed the original cost of $80. The 20% normal profit margin is not relevant.

Question 67

• On January 1, year 1, a company purchased equipment for $100 million. The equipment consists of four major components, of which two components comprise 80% of the total cost and each has a 20-year useful life.
• The remaining two components have costs of $10 million each; one of them has a useful life of 4 years, and the other has a useful life of 5 years.
• The company applies the cost model to the equipment and uses the straight-line method of depreciation..

Under IFRS, what is the depreciation expense for the year ended December 31, year 1?

$8,000,000

$4,000,000

$8,500,000

$5,000,000

Answer 67

$8,500,000

Under IFRS, component depreciation is required whenever a part of an item is significant in cost compared to the total cost of the item. Component depreciation is computed as follows:

($80,000,000 × 1/20) + ($10,000,000 × 1/4) + ($10,000,000 × 1/5) = $4,000,000 + $2,500,000 + $2,000,000 = $8,500,000