Deck 11: Worldwide Accounting Diversity and International Standards

Question 1

The IASB and FASB are working on several joint projects. Which of the following is not a topic of the Revenue Recognition Project?

A) Eliminate inconsistencies in existing literature.
B) Cash flow presentation of revenue.
C) Business models issues for revenue recognition.
D) Conceptual basis as framework for future issues of revenue recognition.
E) Contract-based revenue recognition.

Answer 1

B

Question 2

A U.S. company has many foreign subsidiaries and wants to convert its consolidated financial statements from U.S. GAAP to IFRS. Which of the following items is not one of the likely accounting issues to resolve for the opening IFRS balance sheet?

A) Measuring asset impairment.
B) Classifying extraordinary items.
C) Sale and leaseback gain recognition.
D) Measuring salaries expense.
E) Prior service cost recognition for pension amendments.

Answer 2

D

Question 3

Which of the following is not a problem caused by diverse accounting practices across countries?

A) Preparation of consolidated financial statements.
B) Gaining access to foreign capital markets.
C) Lack of comparability of financial statements between companies in the same country.
D) Cost and expertise required of consolidations accounting staff.
E) Need for a company to maintain multiple sets of accounting records.

Answer 3

C

Question 4

Which of the following is not true about IFRS?

A) The IASB does not have the ability to enforce proper usage of IFRS.
B) IFRS is available to any organization or nation that wishes to use those standards.
C) IFRS is a comprehensive set of financial reporting standards.
D) IFRS includes only pronouncements issued by the IASB.
E) IFRS are considered as generally accepted accounting principles.

Question 5

Which of the following statements is false regarding a country's legal system?

A) The two major types of legal systems are common law and codified Roman law.
B) Common law originated in the Roman jus civile.
C) Code law countries tend to have more statutes governing a wider range of human activity.
D) Accounting law is rather general in code law countries.
E) A nongovernmental organization is more likely to develop in a common law country than in a code law country.

Question 6

In countries of Latin America:

A) accounting practice is designed to provide adequate information to investors and creditors.
B) accounting standards emphasize accounting for high inflation situations.
C) banks are the primary source of financing for companies.
D) accounting focuses are based on recent market economy reforms.
E) accounting information is prepared to meet the needs of governmental planners.

Question 7

Foreign companies whose stock is listed on a U.S. stock exchange and using foreign GAAP other than IFRS must file their annual report with the SEC on:

A) Form 8-A.
B) Form 10-A.
C) Form 16-K.
D) Form 20-F.
E) Form 20-K.

Question 8

What international organization currently promulgates IFRS?

A) IASB.
B) IASC.
C) IOSCO.
D) FASB.
E) EU.

Question 9

Which one of the following is not a background requirement for any IASB members?

A) Audit.
B) Tax.
C) Financial statement preparation.
D) Academia.
E) Financial statement user.

Question 10

Which of the following statements is false regarding providers of financing?

A) There is less pressure to provide accounting information in those countries in which financing is primarily by banks.
B) In countries where capital stock is the primary source of financing, accounting emphasizes the income statement.
C) Disclosures are less extensive in those countries financed primarily by stock.
D) Bankers tend to focus more on solvency and stockholders focus more on profitability.
E) As companies become more dependent on financing by stock, more information is demanded.

Question 11

Which of the following is not a way for a country to use IFRS?

A) Require foreign companies listed on that country's stock exchange to use IFRS for consolidated financial statements.
B) Allow foreign companies listed on that country's stock exchange to use IFRS .
C) Allow that country's companies listed on its stock exchange to use IFRS.
D) Adopt IFRS as that country's national GAAP.
E) All of the above are ways a country can use IFRS.

Question 12

Convergence of accounting standards would not occur by:

A) FASB adopting an existing IASB standard.
B) IASB adopting an existing FASB standard.
C) IASB issuing a new standard.
D) IASB and FASB jointly developing a new standard.
E) IASB and FASB each issuing a similar but not identical standard.

Question 13

Which of the following are not key FASB initiatives to further converge IFRS and U.S. GAAP?

A) Short-term convergence projects.
B) Joint projects sharing FASB and IASB staff resources.
C) Having the IASB Chairman in-residence at the FASB office.
D) Monitoring ongoing IASB projects.
E) Researching differences between U.S. GAAP and IFRS.

Question 14

Which of the following is not an IFRS pronouncement originally issued by the IASB?

A) Business Combinations.
B) First-Time Adoption of IFRS.
C) Financial Instruments: Disclosures.
D) Agriculture.
E) Operating Segments.

Question 15

Which of the following is not a factor influencing a country's financial reporting practices?

A) Providers of financing.
B) Inflation.
C) Legal system.
D) Gross National Product.
E) Political and economic ties.

Question 16

The types of differences that exist between IFRS and U.S. GAAP would not generally include:

A) Presentation differences.
B) Measurement differences.
C) Disclosure differences.
D) Comparability differences.
E) Recognition differences.

Question 17

In countries where there is less pressure for public accountability and information disclosure:

A) information needs can be satisfied by requesting information from internal company sources.
B) public offerings of stock shares are the primary source of financing for companies.
C) accounting information is prepared to meet the needs of taxing authorities.
D) accounting standards emphasize accounting for high inflation situations.
E) the accounting focus is on recent market economy reforms.

Question 18

A U.S. company has many foreign subsidiaries and wants to convert its consolidated financial statements from U.S. GAAP to IFRS. Which of the following items is not one of the likely accounting issues to resolve for the opening IFRS balance sheet?

A) Inventory valuation.
B) Capitalizing development costs.
C) Classifying deferred taxes as current or noncurrent.
D) Acquisition value for a subsidiary.
E) Liability for restructuring charges.

Question 19

In the United States, foreign companies filing annual reports with the SEC that are not prepared in accordance with U.S. GAAP must:

A) present financial statements that comply with international GAAP.
B) conform with U.S. GAAP or present a reconciliation to U.S. GAAP.
C) have a demonstrated need for capital to be used for operations in the U.S.
D) use the U.S. dollar as their reporting currency.
E) use IFRS, or use foreign GAAP and provide a reconciliation to U.S. GAAP.

Question 20

Which of the following are not authoritative pronouncements of International Financial Reporting Standards (IFRSs)?
1) International Financial Reporting Standards issued by the IASB
2) International Accounting Standards issued by the IASC and adopted by the IASB
3) Intrepretations originated by the International Financial Reporting Interpretations Committee (IFRIC)
4) U.S. Generally Accepted Accounting Principles

A) 4 only.
B) 3 and 4.
C) 1, 3, and 4.
D) 2, 3, and 4.
E) 1, 2, 3, and 4.

Question 21

The following information pertains to inventory held by a company at December 31, 2011. $$\begin{array} { | l | r | } \hline \text { Historical cost } & \$ 25,000 \\\hline \text { Replacement cost } & \$ 20,000 \\\hline \text { Net realizable value } & \$ 21,000 \\\hline \text { Normal profit Margin } & 20 \% \\\hline\end{array}$$

-What amount of inventory should be reported under U.S. GAAP?

A) $25,000.
B) $21,000.
C) $20,000.
D) $16,800.
E) $16,000. Under US GAAP The inventory is reported at the lower of cost or market where market is defined as replacement cost subject to ceiling and floor limitations.

Question 22

A company acquired a new piece of equipment on January 1, 2009 at a cost of $200,000. The equipment is expected to have a useful life of 10 years, a residual value of $20,000 and is depreciated on a straight-line basis. On January 1, 2011, the equipment was appraised and determined to have a fair value of $190,000 and a residual value of $25,000 and a remaining useful life of 10 years.
At what amount should the equipment be reported on the December 31, 2011 balance sheet under the IFRS cost model?

A) $160,000
B) $150,000
C) $146,000
D) $140,000
E) $116,000 Under the IFRS cost model the equipment would be reported at depreciated historical cost. (200,000-20,000)/10 years or $18,000 per year. After 3 years the book value is (200,000-54,000) or $146,000.

Question 23

A company acquired a new piece of equipment on January 1, 2009 at a cost of $200,000. The equipment is expected to have a useful life of 10 years, a residual value of $20,000 and is depreciated on a straight-line basis. On January 1, 2011, the equipment was appraised and determined to have a fair value of $190,000 and a residual value of $25,000 and a remaining useful life of 10 years.
At what amount should the equipment be reported on the December 31, 2011 balance sheet under U.S. GAAP?

A) $160,000
B) $150,000
C) $146,000
D) $140,000
E) $116,000 Under U.S. GAAP the company would report equipment at its book value. Straight-line depreciation is (200,000-20,000)/10 years or $18,000 per year. After 3 years the book value is (200,000-54,000) or $146,000.

Question 24

The following information pertains to inventory held by a company at December 31, 2011. $$\begin{array} { | l | r | } \hline \text { Historical cost } & \$ 25,000 \\\hline \text { Replacement cost } & \$ 20,000 \\\hline \text { Net realizable value } & \$ 21,000 \\\hline \text { Normal profit Margin } & 20 \% \\\hline\end{array}$$

-What is the amount of inventory loss shown on the income statement under IFRS?

A) $1,000.
B) $2,000.
C) $4,000.
D) $5,000.
E) $6,000. The amount of loss is the writedown of inventory from $25,000 to $21,000 = $4,000.

Question 25

The following information pertains to inventory held by a company on December 31, 2011. $$\begin{array} { l r } \text { Historical cost } & \$ 30,000 \\\text { Replacement cost } & \$ 20,000 \\\text { Net realizable value } & \$ 27,000 \\\text { Normal profit margin } & 20 \%\end{array}$$

-What is the amount of inventory loss shown on the income statement under U.S. GAAP?

A) $0.
B) $3,000.
C) $14,000.
D) $10,000.
E) $8,400. The amount of loss is the writedown of inventory from $30,000 to $21,600 = $8,400.

Question 26

A company incurs research and development costs of $200,000 in 2011 of which $50,000 of these costs relate to development activities because certain criteria have been met which suggest that an intangible asset has been created.
As a result of research and development costs, what is the difference in income between reporting using U.S. GAAP and IFRS in 2011?

A) U.S. GAAP income is $50,000 higher.
B) U.S. GAAP income is $50,000 lower.
C) IFRS income is $50,000 lower.
D) IFRS income is $150,000 lower.
E) IFRS income is $150,000 higher. Because $50,000 is capitalized under IAS 38, income under IFRS is higher than U.S. GAAP.

Question 27

The following information pertains to inventory held by a company at December 31, 2011. $$\begin{array} { | l | r | } \hline \text { Historical cost } & \$ 25,000 \\\hline \text { Replacement cost } & \$ 20,000 \\\hline \text { Net realizable value } & \$ 21,000 \\\hline \text { Normal profit Margin } & 20 \% \\\hline\end{array}$$

-As a result of inventory loss, what is the difference in income between reporting using U.S. GAAP and IFRS?

A) U.S. GAAP income is $1,000 higher.
B) U.S. GAAP income is $2,000 lower.
C) IFRS income is $1,000 higher.
D) IFRS income is $1,000 lower.
E) IFRS income is $5,000 higher. U.S. GAAP loss is $5,000 and IFRS loss is $4,000 which results in IFRS income being $1,000 higher.

Question 28

The following information pertains to inventory held by a company at December 31, 2011. $$\begin{array} { | l | r | } \hline \text { Historical cost } & \$ 25,000 \\\hline \text { Replacement cost } & \$ 20,000 \\\hline \text { Net realizable value } & \$ 21,000 \\\hline \text { Normal profit Margin } & 20 \% \\\hline\end{array}$$

-What amount of inventory should be reported under IFRS?

A) $25,000
B) $21,000
C) $20,000
D) $4,000
E) $5,000 According to IFRS, inventory will be reported at lower of cost or net realizable value.

Question 29

A company sells a building to a bank in 2011 at a gain of $100,000 and immediately leases the building back for period of five years. The lease is accounted for as an operating lease. The building was originally purchased for $200,000 and currently had a book value of $50,000 at the date of the sale.
What amount should be recognized in 2011 as a gain on the sale using U.S. GAAP?

A) $20,000.
B) $50,000.
C) $100,000.
D) $150,000.
E) $200,000. Under U.S. GAAP the gain is recognized over the life of the lease. The gain for 2011 is 100,000/5= 20,000.

Question 30

The following information pertains to inventory held by a company on December 31, 2011. $$\begin{array} { l r } \text { Historical cost } & \$ 30,000 \\\text { Replacement cost } & \$ 20,000 \\\text { Net realizable value } & \$ 27,000 \\\text { Normal profit margin } & 20 \%\end{array}$$

-What amount of inventory should be reported under IFRS?

A) $25,000.
B) $27,000.
C) $30,000.
D) $5,000.
E) $2,000. According to IFRS, inventory will be reported at lower of cost or net realizable value.

Question 31

The IASB and FASB are working on several joint projects. What is the purpose of the Revenue Recognition Project?

A) to provide guidance on the application of the acquisition method.
B) to enhance the usefulness of information in assessing the financial performance of the reporting enterprise.
C) to develop a common comprehensive standard on revenue recognition.
D) to develop a common conceptual framework that both boards can use as a basis for future standard-setting.
E) to agree upon financial statement titles that will have no differentiation after translation to various languages.

Question 32

A company incurs research and development costs of $200,000 in 2011 of which $50,000 of these costs relate to development activities because certain criteria have been met which suggest that an intangible asset has been created.
What amount should be recognized as research and development expense in 2011 using IFRS?

A) $50,000.
B) $150,000.
C) $200,000.
D) $0.
E) $250,000. Under IAS 38, $150,000 would be expensed and $50,000 of development costs would be capitalized as an intangible asset.

Question 33

Which topic was not covered by FASB under the short-term convergence project?

A) Inventory costs.
B) Asset exchanges.
C) Liability transfers.
D) Accounting changes.
E) Earnings-per-share.

Question 34

A company incurs research and development costs of $200,000 in 2011 of which $50,000 of these costs relate to development activities because certain criteria have been met which suggest that an intangible asset has been created.
What amount should be recognized as research and development expense in 2011 using U.S. GAAP?

A) $50,000.
B) $150,000.
C) $200,000.
D) $0.
E) $250,000. Under U.S. GAAP all R&D is expensed.

Question 35

A company acquired a new piece of equipment on January 1, 2009 at a cost of $200,000. The equipment is expected to have a useful life of 10 years, a residual value of $20,000 and is depreciated on a straight-line basis. On January 1, 2011, the equipment was appraised and determined to have a fair value of $190,000 and a residual value of $25,000 and a remaining useful life of 10 years.
At what amount should the equipment be reported on the December 31, 2011 balance sheet under the IFRS revaluation model?

A) $190,000
B) $173,500
C) $165,000
D) $136,000
E) $110,000 Under the IFRS IAS 16 revaluation model, on January 1, 2011 the equipment would be revalued to $190,000 fair value. The new depreciation would be (190,000-25,000)/10 years or $16,500 per year. The equipment would be reported at $190,000-$16,500 = $173,500.

Question 36

The following information pertains to inventory held by a company on December 31, 2011. $$\begin{array} { l r } \text { Historical cost } & \$ 30,000 \\\text { Replacement cost } & \$ 20,000 \\\text { Net realizable value } & \$ 27,000 \\\text { Normal profit margin } & 20 \%\end{array}$$

-As a result of inventory loss, what is the difference in income between reporting using U.S. GAAP and IFRS?

A) U.S. GAAP income is $3,000 higher.
B) U.S. GAAP income is $10,000 lower.
C) IFRS income is $8,400 higher.
D) IFRS income is $3,000 lower.
E) IFRS income is $5,400 higher. U.S. GAAP loss is $8,400 and IFRS loss is $3,000 resulting in IFRS income being $5,400 higher.

Question 37

The following information pertains to inventory held by a company at December 31, 2011. $$\begin{array} { | l | r | } \hline \text { Historical cost } & \$ 25,000 \\\hline \text { Replacement cost } & \$ 20,000 \\\hline \text { Net realizable value } & \$ 21,000 \\\hline \text { Normal profit Margin } & 20 \% \\\hline\end{array}$$

-What is the amount of inventory loss shown on the income statement under U.S. GAAP?

A) $1,000.
B) $2,000.
C) $4,000.
D) $5,000.
E) $8,200. The amount of loss is the writedown of inventory from $25,000 to $20,000 or $5,000.

Question 38

The following information pertains to inventory held by a company on December 31, 2011. $$\begin{array} { l r } \text { Historical cost } & \$ 30,000 \\\text { Replacement cost } & \$ 20,000 \\\text { Net realizable value } & \$ 27,000 \\\text { Normal profit margin } & 20 \%\end{array}$$

-What amount of inventory should be reported under U.S. GAAP?

A) $16,000.
B) $27,000.
C) $30,000.
D) $21,600.
E) $20,000. Under U.S. GAAP the inventory is reported at the lower of cost or market where market is defined as replacement cost subject to ceiling and floor limitations.

Question 39

The IASB and FASB are working on several joint projects. What is the purpose of the Financial Statement Presentation Project?

A) to provide guidance on the application of the acquisition method.
B) to enhance the usefulness of information in assessing the financial performance of the reporting enterprise.
C) to develop a common comprehensive standard on revenue recognition.
D) to develop a common conceptual framework that both boards can use as a basis for future standard-setting.
E) to agree upon financial statement titles that will have no differentiation after translation to various languages.

Question 40

The following information pertains to inventory held by a company on December 31, 2011. $$\begin{array} { l r } \text { Historical cost } & \$ 30,000 \\\text { Replacement cost } & \$ 20,000 \\\text { Net realizable value } & \$ 27,000 \\\text { Normal profit margin } & 20 \%\end{array}$$

-What is the amount of inventory loss shown on the income statement under IFRS?

A) $0.
B) $3,000.
C) $14,000.
D) $10,000.
E) $8,400. The amount of loss is the writedown of inventory from $30,000 to $27,000 or $3,000.

Question 41

What is the IOSCO?

Question 42

The major providers of financing in some countries are stockholders, while other countries predominantly use banks as the main financing source. What difference does it make to accounting disclosures in comparing a company from one of each of those countries?

Question 43

What are the four different ways IFRS can be used by a country?

Question 44

What are recognition differences in international reporting and what would be an example of a difference?

Question 45

A company sells a building to a bank in 2011 at a gain of $100,000 and immediately leases the building back for period of five years. The lease is accounted for as an operating lease. The building was originally purchased for $200,000 and currently had a book value of $50,000 at the date of the sale.
What amount should be recognized as a gain in 2011 using IFRS?

A) $20,000.
B) $50,000.
C) $100,000.
D) $150,000.
E) $200,000. Under IRFS the entire gain is recognized in 2011.

Question 46

What were the major objectives of the Treaty of Rome?

Question 47

Why does each country have its own unique set of financial reporting practices?

Question 48

What are measurement differences in international reporting and what would be an example of a difference?

Question 49

How did the early International Accounting Standards (IAS) obtain support from a sufficient number of board members?

Question 50

Principal Company is a U.S.-based company that prepares its consolidated financial statements in accordance with U.S. GAAP. Principal reported net income of $ 2,600,000 in 2011 and stockholders' equity of $12,000,000 at December 31, 2011. Principal wants to determine the reporting impact of switching to IFRS. The following three items would create differences in financial reporting:
1) At December 31, 2011, inventory had a historical cost of $850,000, a replacement cost of $700,000, and a net realizable value of $800,000. The normal profit margin was 10%.
2) Principal acquired a building at the beginning of 2009 at a cost of $5,000,000. The building has an estimated useful life of 20 years, an estimated residual value of $1,000,000, and is being depreciated on a straight-line basis. On January 1, 2011, the building has a fair value of $5,500,000. There is no change in the estimated useful life or residual value. In a switch to IFRS, Principal would use the revaluation model in IAS 16 to determine the carrying value of property, plant, and equipment subsequent to acquisition.
3) In 2011, Principal incurred $800,000 of research and development for a new product, of which 35% relates to development activities subsequent to the point at which criteria indicating the creation of an intangible asset had been met. As of the end of 2011, development of the new product had not been completed.
Required:
1) Prepare a schedule reconciling net income under U.S. GAAP to net income under IFRS for the year ended December 31, 2011.
2) Prepare a schedule reconciling stockholders' equity under U.S. GAAP to stockholders' equity under IFRS at December 31, 2011.

Question 51

What problems are caused by diverse accounting practices?

Question 52

A company sells a building to a bank in 2011 at a gain of $100,000 and immediately leases the building back for period of five years. The lease is accounted for as an operating lease. The building was originally purchased for $200,000 and currently had a book value of $50,000 at the date of the sale.
As a result of the sale and leaseback transaction in 2011, what is the difference between income using U.S. GAAP and IFRS in 2011?

A) U.S. GAAP income is $80,000 higher.
B) U.S. GAAP income is $100,000 higher.
C) IFRS income is $50,000 lower.
D) IFRS income is $100,000 lower.
E) IFRS income is $80,000 higher. Because the entire gain is recognized immediately under IFRS, income is higher than U.S. GAAP.

Question 53

Which two EU directives have helped harmonize accounting standards?

Question 54

What are the two major types of legal systems used around the world?

Question 55

What is meant by harmonization of accounting standards?

Question 56

What are the six key FASB initiatives to further convergence?

Question 57

What are the three authoritative pronouncements that make up the International Financial Reporting Standards (IFRS)?

Question 58

A company sells a building to a bank in 2011 at a gain of $100,000 and immediately leases the building back for period of five years. The lease is accounted for as an operating lease. The building was originally purchased for $200,000 and currently had a book value of $50,000 at the date of the sale.
Assume the seller of the building is a U.S. company that is preparing to convert from U.S. GAAP to IFRS. At December 31, 2012, with regard to the sale and leaseback accounting, what amount would reconcile stockholders' equity from U.S. GAAP to IFRS at December 31, 2012?

A) Increase $40,000.
B) Decrease $40,000.
C) Decrease $60,000.
D) Increase $60,000.
E) No amount would be necessary for reconciliation. U.S. GAAP has recognized $20,000 en each of two years to total $40,000 and reconciliation would need $60,000 more to attain the $100,000 amount that would be recognized to date under IFRS.

Question 59

A company sells a building to a bank in 2011 at a gain of $100,000 and immediately leases the building back for period of five years. The lease is accounted for as an operating lease. The building was originally purchased for $200,000 and currently had a book value of $50,000 at the date of the sale.
As a result of the sale and leaseback transaction in 2011, what is the difference between income using U.S. GAAP and IFRS in 2012?

A) $0.
B) U.S. GAAP income is $20,000 higher.
C) IFRS income is $80,000 lower.
D) IFRS income is $60,000 lower.
E) IFRS income is $80,000 higher. Because the entire gain is recognized immediately under IFRS, income is higher than U.S. GAAP. In 2012, there is no IFRS recognition and there is one year amortized revenue recognition for U.S. GAAP.

Question 60

What accounting topics were covered under the FASB short-term convergence project?