Test Your Knowledge of IFRS

This test is from the Journal of Accountancy

More than 100 countries around the world, including all major U.S. trading partners, now use or have committed to adopting IFRS. Nearly as many use international auditing and assurance standards and international ethics standards developed by independent standard-setting boards under the International Federation of Accountants. To ensure that CPAs have a basic competence in these standards, the AICPA Board of Examiners has decided to test them in three of the four sections of the exam beginning in 2011.

Although the board does not disclose specific weightings at the topic level, it has made clear that it expects exam takers to exhibit adequate competence in international standards in much the same way that they should exhibit competence in U.S. GAAP and GAAS.

The board’s decision to include international standards is not contingent on action by the SEC to require or allow U.S. public companies to report under IFRS, according to senior AICPA exam staff. Rather, it reflects the reality of the interconnectedness of world economies and its impact on organizations operating in the U.S.

Below are sample IFRS questions disclosed by the board in February.

1. Under IFRS, changes in accounting policies are
A. Permitted if the change will result in a more reliable and more relevant presentation of the financial statements.
B. Permitted if the entity encounters new transactions, events, or conditions that are substantively different from existing or previous transactions.
C. Required on material transactions, if the entity had previously accounted for similar, though immaterial, transactions under an unacceptable accounting method.
D. Required if an alternate accounting policy gives rise to a material change in assets, liabilities, or the current-year net income.

2. Under IFRS, an entity that acquires an intangible asset may use the revaluation model for subsequent measurement only if
A. The useful life of the intangible asset can be reliably determined. B. An active market exists for the intangible asset.
C. The cost of the intangible asset can be measured reliably.
D. The intangible asset is a monetary asset.

3. 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?
A. The item’s fair value can be measured reliably.
B. The item is part of the entity’s activities aimed at gaining new scientific or technical knowledge.
C. The item is expected to be used in the production or supply of goods or services.
D. The item is identifiable and lacks physical substance.

4. An entity purchases a trademark and incurs the following costs in connection with the trademark:

One-time trademark purchase price
$100,000
One-time trademark purchase price
5,000
Nonrefundable VAT taxes
7,000
Training sales personnel on the use of the new trademark
24,000
Research expenditures associated with the purchase of the new trademark
10,500
Salaries of the administrative personnel
12,000

Applying IFRS and assuming that the trademark meets all of the applicable initial asset recognition criteria, the entity should recognize an asset in the amount of
A. $100,000
B. $115,500
C. $146,500
D. $158,500

5. Under IFRS, when an entity chooses the revaluation model as its accounting policy for measuring property, plant and equipment, which of the following statements is correct?
A. When an asset is revalued, the entire class of property, plant and equipment to which that asset belongs must be revalued.
B. When an asset is revalued, individual assets within a class of property, plant and equipment to which that asset belongs can be revalued.
C. Revaluations of property, plant and equipment must be made at least every three years.
D. Increases in an asset’s carrying value as a result of the first revaluation must be recognized as a component of profit or loss.

6. Upon first-time adoption of IFRS, an entity may elect to use fair value as deemed cost for
A. Biological assets related to agricultural activity for which there is no active market.
B. Intangible assets for which there is no active market.
C. Any individual item of property, plant and equipment.
D. Financial liabilities that are not held for trading.

7. Under IFRS, which of the following is the first step within the hierarchy of guidance to which management refers, and whose applicability it considers, when selecting accounting policies?
A. Consider the most recent pronouncements of other standard- setting bodies to the extent they do not conflict with the IFRS or the IASB Framework.
B. Apply a standard from IFRS if it specifically relates to the transaction, other event, or condition.
C. Consider the applicability of the definitions, recognition criteria, and measurement concepts in the IASB Framework.
D. Apply the requirements in IFRS dealing with similar and related issues.

8. On January 1, year 1, an entity acquires for $100,000 a new piece of machinery with an estimated useful life of 10 years. The machine has a drum that must be replaced every five years and costs $20,000 to replace. Continued operation of the machine requires an inspection every four years after purchase; the inspection cost is $8,000. The company uses the straight-line method of depreciation. Under IFRS, what is the depreciation expense for year 1?
A. $10,000
B. $10,800
C. $12,000
D. $13,200

9. On July 1, year 2, a company decided to adopt IFRS. The company’s first IFRS reporting period is as of and for the year ended December 31, year 2. The company will present one year of comparative information. What is the company’s date of transition to IFRS?
A. January 1, year 1.
B. January 1, year 2.
C. July 1, year 2.
D. December 31, year 2.

10. A company determined the following values for its inventory as of the end of its fiscal year:

Historical cost
$100,000
Current replacement cost
70,000
Net realizable value
90,000
Net realizable value less a normal profit margin
85,000
Fair value
95,000

Under IFRS, what amount should the company report as inventory on its balance sheet?
A. $70,000
B. $85,000
C. $90,000
D. $95,000

Answers: 1) A; 2) B; 3) D; 4) B; 5) A; 6) C; 7) B; 8) D; 9) A;10) C

SEC's Kroeker: Slower Covergence between GAAP, IFRS Possible

While FASB and the IASB work to complete an unprecedented 11 standards over the next 14 months, SEC Chief Accountant James Kroeker told the Journal of Accountancy this week that he would support the boards’ cutting the number of projects due in June 2011, provided there was good rationale for a delay.

“June 30, 2011, is an arbitrary deadline and it’s not one that’s been put in place by the SEC or by our road map,” said Kroeker. Citing FIN 46(R) as an example of an accelerated project that later needed to be reworked, Kroeker said that what’s most important is to ensure through the exposure process that the final standards are a “long term, sustainable solution.”

Kroeker made his comments in a JofA exclusive interview at the Pace University Lubin Forum on Contemporary Accounting Issues held Tuesday in New York.

Financial instruments and lease accounting are the two projects Kroeker suggested should remain atop the boards’ priority list. Others, such as financial statement presentation, could be completed through a more gradual process, he said.

Asked specifically about revenue recognition, Kroeker said that while he could see room for improvement to the industry-specific approach in U.S. GAAP, he didn’t see revenue recognition as the highest priority right now.

Kroeker said that although he doesn’t see convergence as the only potential path for IFRS to become sufficiently developed and consistent in application for use as the single set of accounting standards in the U.S. reporting system, convergence is “critical for these projects.”

When asked about the SEC staff’s IFRS work plan, unveiled in February, Kroeker emphasized that the SEC staff will be providing public updates on its progress, with the first report due out by October. He said that rather than setting “go or no-go” thresholds, the work plan’s intent is to compile a body of knowledge from which the SEC staff can make sound recommendations to the commission.

FASB, IASB Convergence Progress Report

The IASB and the FASB published a report detailing their progress toward convergence of U.S. GAAP andIFRS.

The two boards sped up their work on convergence last fall with the goal of making significant progress by June 2011. Instead of meeting every four months, the two boards have held 10 joint meetings totaling more than 100 hours of discussions since the fall agreement.

As of March 31, 2010, FASB and the IASB report that they have met substantially all of the milestone targets they had set for the first quarter of 2010. They are on track to publish exposure drafts this year for five major projects that would improve and achieve substantial convergence of U.S. GAAP and IFRS, including consolidations, revenue recognition, financial instruments with the characteristics of equity, and financial statement presentation.

However, on two major projects, financial instruments and insurance contracts, the two boards admitted they are at loggerheads and have reached different conclusions on some important technical issues. The boards also agreed in late March to look at lease accounting, which is a messy topic and which could affect the timing of convergence.

The revised schedule includes publication of about ten exposure drafts in the first half of 2010. Final standards are expected by 2011 for revenue recognition. leasing, insurance, debt vs equity, consolidations, and financial statement presentation.

Corrupt Regime Reform Through Accounting?

Proposed accounting rules included in a discussion paper on extractive industries may force mining and oil companies to publish how much spend in foreign countries, including payments to corrupt regimes.

The International Accounting Standards Board (IASB) yesterday released a discussion paper which may force companies involved in extractive industries to break down their costs and revenue on a country-by-country basis, and publish the figures in their financial statements.

The paper suggests investors and capital providers may want to know about the risks to reputation and income of working in resource-rich and sometimes corrupt nations.

Required disclosures are the significant components of the total benefit streams to governmentand its agencies on a country-by-country basis. At a minimum, this would include separate disclosure of:

• royalties and taxes paid in cash

• royalties and taxes paid in kind (measured in cash equivalents)

• dividends

• bonuses

• licence and concession fees.

The IASB expects that investors would want to know these amounts to assess what is at risk in each country. another benefit might be that excessive payments could disclose hidden payments otherwise considered ilegal.

The IASB must justify new accounting rules by how useful they will be for investors, capital providers and other market participants.

At the moment, multi-national mining and oil companies aggregate their costs and revenue data which makes it difficult to distil how much they pay individual governments. Breaking the data down to a “country-by-country” basis could expose corruption and provide useful market information, according to the IASB’s discussion paper.

“Generally speaking, the greater the level of corruption, the greater the investor’s concern about the integrity of the government and its commitment to honour existing terms and conditions relating to an entity’s operations in that country,” the discussion paper states.

“The disclosure of payments made to governments provides information that would be used by at least some capital providers in making their investment decisions, either by using the information to make their own assessments of investment risks and reputational risk or by providing better information to other risk analysts that advise the capital providers on investment and reputational risks.”

New Thoughts on Goodwill Impairment Testing

New thoughts on goodwill impairment testing by Marie Leone of CFO.com

Over two-thirds (68%) of U.S. public companies in the United States wrote down goodwill by taking impairment charges in 2008. Total charges were $260 billion according to a report issued by financial advisory firm Duff & Phelps and the Financial Executives Research Foundation. The report examined 2008 financial statements of nearly 6,000 publicly held companies.

As 2009 results are being filed it appears that goodwill write-downs have declined., says Greg Franceschi, who heads up the global financial reporting practice for Duff & Phelps. Since the worst of the financial crisis ended, company market values have increased and accordingly there are fewer goodwill write-offs.

However a new accounting wrinkle has surfaced related to goodwill impairments. At issue is whether companies should determine the fair value of a reporting unit — and thereby the value of the related goodwill — based on either the unit's equity value or its enterprise value. (In general, enterprise value is the sum of the fair value of debt and equity.)

The question was sparked by a December speech given by Evan Sussholz, an accounting fellow in the Office of the Chief Accountant at the Securities and Exchange Commission. In his speech, Sussholz suggested that in certain situations, using an enterprise-value measurement may provide a more economically accurate picture of the reporting unit. His suggestion left preparers and auditors clamoring for a clarification, as companies have historically applied the equity-value approach to impairment testing, says PricewaterhouseCoopers partner Larry Dodyk.

In response, the Financial Accounting Standards Board and the American Institute of Certified Public Accountants have launched efforts to figure out whether additional guidance on the subject is needed. FASB's emerging issues task force is slated to start discussing potential guidance during the second half of the year, while the AICPA is currently working on completing a practice aid, which is a sort of unofficial manual that discusses best practices and concepts that auditors and preparers may want to apply.

Under U.S. GAAP, companies must perform a goodwill impairment test at least once a year to determine if the current value of an acquired reporting unit is worth more or less than its original price. The test is a two-step process in which the company must first compare the fair value of a reporting unit with its original price — the amount the company carries on its books. If the book value exceeds the fair value, then the asset is impaired and a second step is required to measure the amount of the impairment. If the book value is lower than the unit's fair value, then the asset passes the test and nothing more is required.

The confusion over whether to use equity value or enterprise value stems from the seemingly straightforward first step of the test, because the accounting rule is unclear. Sussholz said that originally, the SEC didn't believe the selection of one approach over the other would affect the test outcome. However, since taking a closer look at the practical implications, SEC staffers have acknowledged one unanticipated situation that is a potential problem: when the book value of a reporting unit measured at the equity level is negative.

Intuitively, it might seem that a negative book value would mean a reporting unit is on the verge of bankruptcy, but that may not be the case. Dodyk explains that a single reporting-unit company, for example, may have negative shareholders' equity as a result of unrecognized assets (such as intangibles) that have significant value but don't figure into the equity equation. Heavy borrowing for a leveraged buyout could also send shareholders' equity into negative territory.

Consider what happens in an equity-value impairment test when a reporting unit's book value is negative. By definition, the fair value of common equity cannot be less than zero, because the equity is essentially a call on the company's operations. That means the fair value of a reporting unit measured at the equity level would always be greater than a negative book value, and therefore always pass step one of the impairment test. That would be the case even if significant goodwill exists and the underlying operations of the reporting unit "may be deteriorating," asserted Sussholz.

On the other hand, says Franceschi, testing for impairment at the enterprise level would include the reporting unit's debt burden, providing what Sussholz claimed was a more accurate picture of the company's financial health. To be sure, his speech opened up the possibility that another testing approach may be permitted or required.

Franceschi doesn't believe the additional guidance will cause a significant increase or decrease in goodwill write-offs. But it may require companies to rethink valuation models and approaches, especially if the guidance recommends that companies use more judgment when determining a reporting unit's fair value. "For valuation issues, you can never have something that says, 'This is the way to do it, and the only way to do it,'" he says. "There may be multiple approaches one needs to consider."

Another concern with tinkering with Topic 350 is that it may spark other changes. "Once you open the rules to the goodwill impairment test, you never know where it is going to go," says Dodyk.