IMChap 004

Chapter 04 - International Financial Reporting Standards: Part I
CHAPTER 4
INTERNATIONAL FINANCIAL REPORTING STANDARDS:
PART I
Chapter Outline
I.
The International Accounting Standards Board (IASB) had 28 International Accounting

Standards (IAS) and 13 International Financial Reporting Standards (IFRS) in force in
2013.
A. In 2002, the IASB and U.S. Financial Accounting Standards Board (FASB) agreed to
work together to reduce differences between IFRS and U.S. GAAP.
II.
There are several types of differences between IFRS and U.S. GAAP.
A. Definition differences. Differences in definitions can occur even though concepts are
similar.
Definition differences can lead to differences in recognition and/or
measurement.
B. Recognition differences. Differences in recognition criteria and/or guidance related to
(a) whether an item is recognized, (b) how it is recognized, and/or (c) when it is
recognized (timing difference).
C. Measurement differences. Differences in approach for determining the amount
recognized resulting from either (a) a difference in the method required, or (b) a
difference in the detailed guidance for applying a similar method.
D. Alternatives. One set of standards allows a choice between two or more alternative
methods; the other set of standards requires one specific method to be used.
E. Lack of requirements or guidance. IFRS do not cover an issue addressed by U.S.
GAAP, and vice versa.
F. Presentation differences. Differences in the presentation of items in the financial
statements.
G. Disclosure differences. Differences in information presented in the notes to financial
statements related to (a) whether a disclosure is required and/or (b) the manner in
which a disclosure is required to be made.
III.
A variety of differences exist between IFRS and U.S. GAAP with respect to the recognition
and measurement of assets.
A. Inventory IFRS require inventory to be reported on the balance sheet at the lower of
cost or net realizable value; U.S. GAAP requires the lower of cost or replacement cost,
with net realizable value as a ceiling and net realizable value less a normal profit
margin as the floor. U.S. GAAP allows the use of LIFO; IFRS do not.
B. Property, plant and equipment subsequent to acquisition, IFRS allow fixed assets to
be reported on the balance sheet using a cost model (historical cost less accumulated
depreciation and impairment losses) or a revaluation model (fair value at the balance
sheet date less accumulated depreciation and impairment losses); U.S. GAAP requires
the use of the cost model. Component depreciation must be applied under IFRS when
items of property, plant and equipment are comprise of significant parts; this is not the
case under U.S. GAAP
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Education.
C. Impairment of assets an asset is impaired under IFRS when its carrying amount
exceeds its recoverable amount, which is the greater of net selling price and value in
use. Value in use is calculated as the present value of future cash flows expected from
continued use of the asset and from its disposal. An asset is impaired under U.S.
GAAP when its carrying amount exceeds the undiscounted future cash flows expected
from the assets continued use and disposal.
1. Measurement of impairment loss the impairment loss under IFRS is the
difference between carrying amount and recoverable amount; under U.S. GAAP,
the impairment loss is the amount by which carrying amount exceeds fair value.
Recoverable amount and fair value are likely to be different.
2. Reversal of impairment loss if subsequent to recognizing an impairment loss, the
recoverable amount of an asset is determined to exceed its new carrying amount,
IFRS require the original impairment loss to be reversed; U.S. GAAP does not
allow the reversal of a previously recognized impairment loss.
D. Development costs when certain criteria are met, IFRS require development costs to
be capitalized as an asset and then amortized over their useful life; U.S. GAAP
requires development costs to be expensed as incurred. An exception exists in U.S.
GAAP for software development costs.
E. Borrowing costs similar to U.S. GAAP, IFRS requires borrowing costs to be
capitalized to the extent they are attributable to the acquisition, construction, or
production of a qualifying asset. Other borrowing costs are expensed as incurred.
However, the amount of borrowing costs to be capitalized differs between IFRS and
U.S. GAAP.
F. Leases under standards in effect at the time this book went to press both IFRS and
U.S. GAAP distinguished between operating and finance (capitalized) leases. U.S.
GAAP provides bright line tests to determine when a lease must be capitalized; IFRS
do not. Note: In 2013, the IASB and FASB jointly issued a revised Exposure Draft that
would substantially converge the accounting for leases. The ED provides no
information about a possible effective date if a new standard should become approved.
IV.
A number of IASB standards deal primarily with disclosure and presentation issues, and in
some cases requirements differ from U.S. GAAP.
A. In the statement of cash flows, IAS 7 allows interest and dividends received to be
classified as operating or investing, whereas these are always classified as operating
under U.S. GAAP. IAS 7 allows interest and dividends paid to be classified as
operating or financing, whereas interest paid is operating and dividends paid is
financing under U.S. GAAP.
B. IAS 10 requires financial statements to be adjusted for so-called adjusting events that
occur up to the point that the financial statements have been authorized for issuance.
U.S. GAAP uses the date the financial statements are issued or are available to be
issued as the cutoff date for adjusting events.
C. IAS 8 establishes a hierarchy of authoritative pronouncements to be considered in
selecting an accounting policy. The lowest level in the hierarchy would allow the use of
U.S.GAAP. Once selected, accounting policies must be applied consistently unless a
change is required by IFRS or would result in more relevant information being reported
in the financial statements.
D. IFRS 5 provides a more liberal definition of what qualifies as a discontinued operation
than does U.S. GAAP.
E. IAS 34 requires interim periods to be treated as discrete accounting periods, whereas
U.S. GAAP treats interim periods as an integral part of the full year.
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Answers to Questions
1. The types of differences that exist between IFRS and U.S. GAAP can be classified as:
Definition differences
Recognition differences
Measurement differences
Differences in allowed alternatives
Differences in (lack of) guidance
Presentation differences
Disclosure differences
2. In applying the lower of cost and market rule for inventories, IAS 2 defines market as net
realizable value (NRV) and U.S. GAAP defines market as replacement cost (with NRV as a
ceiling and NRV less normal profit margin as a floor). In addition, the rule generally is
applied on an item by item basis under IAS 2, whereas it may be applied on an item by item,
group of items, or total inventory basis under U.S. GAAP.
3. The estimated costs of dismantling and removing an asset must be included in the assets
cost upon initial recognition.
4. The two models allowed by IAS 16 are the cost model and the revaluation model. Under the
revaluation model, property, plant, and equipment is reported on the balance sheet at a
revalued amount, measured as fair value at the date of remeasurement, less accumulated
depreciation and any accumulated impairment losses.
5. Any item of property, plant, and equipment may be accounted for under the revaluation
model. However, all other items within that class of PPE must be revalued at the same time.
Revaluation must occur frequently enough that the difference between the revalued assets
carrying amount and fair value is not material.
6. The revaluation surplus is an element of other comprehensive income in stockholders
equity. The revaluation surplus is transferred to retained earnings as the revalued asset is
realized, either through its use or upon its disposal. The surplus is transferred to retained
earnings either: (1) as a lump sum when the asset is disposed of, or (2) each period, as the
difference between depreciation on the revalued amount and depreciation on the historical
cost. A third treatment for revaluation surplus is to allow it to stay in other comprehensive
income indefinitely.
7. When an item of property, plant, and equipment is comprised of significant parts that have
different useful lives, as is the case for an airplane, the asset must be split into components
and each component must be depreciated separately.
8. Under the fair value model for investment property, changes in fair value are recognized in
net income, whereas changes in fair value under the revaluation model are taken to other
comprehensive income.
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9. Under IAS 36, an impairment loss arises when an assets recoverable amount is less than
its carrying value, where recoverable amount is the greater of net selling price and value in
use. Value in use is determined as the expected future cash flows from use of the asset
discounted to present value. The amount of the loss is the difference between carrying
value and recoverable amount.
Under U.S. GAAP, an impairment loss arises when the expected future cash flows
(undiscounted) from the use of the asset are less than its carrying value. If impairment
exists, the amount of the loss is equal to the difference between carrying value and fair
value, which can be determined in different ways.
10. A previously impaired asset may be written back up only to what its carrying amount would
have been if the impairment had never been recognized.
11. The three types of intangible assets are: (1) purchased, (2) acquired in a business
combination, and (3) internally generated. (1) and (2) are classified as having a finite or
indefinite useful life; (3) can only be classified as finite-lived. Finite-lived intangibles are
amortized on a systematic basis over their useful lives. All intangibles are subject to
impairment testing. Indefinite-lived intangibles must be tested for impairment at least
annually.
12. Under IAS 36, expenditures giving rise to a potential intangible are classified as either
research or development expenditures. Research expenditures are expensed as incurred.
Development expenditures are recognized as an intangible asset when six criteria are met.
Under U.S. GAAP, research and development costs are expensed as incurred. The only
exception is for software development costs, which are recognized as an asset when certain
criteria have been met.
13. Indefinite-lived intangibles and goodwill are subject to impairment testing at least annually.
14. Goodwill is measured as the excess of (a) consideration transferred plus noncontrolling
interest over (b) the fair value of the acquired firms net assets. Two alternative methods are
available to measure noncontrolling interest; therefore, two different measures of goodwill
exist for a given business combination.
15. A gain on bargain purchase exists when (a) consideration transferred plus noncontrolling
interest is less than (b) the fair value of the acquired firms net assets. The difference
between (a) and (b) is sometimes referred to as negative goodwill.
16. Goodwill must be tested for impairment annually. Goodwill that can be allocated to a
specific cash-generating unit is tested for impairment using a bottom-up test. In this test, the
carrying value of the cash-generating unit, including goodwill, is compared with the
recoverable amount of the cash-generating unit. If the recoverable amount of a cashgenerating unit is less its carrying value, goodwill is deemed to be impaired and is written
down.
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17. IAS 23 (revised in 2007) requires borrowing costs to be capitalized to the extent they are
attributable to the acquisition, construction, or production of a qualifying asset; other
borrowing costs are expensed in the period in which they are incurred.
18. Borrowing costs are defined more broadly in IAS 23 than are interest costs in U.S. GAAP.
For example, foreign exchange gains and losses are treated as borrowing costs to the
extent they represent adjustments to interest costs. Another difference is that under IFRS
interest income earned on short-term investment of borrowed amounts is netted against
interest cost to determine the amount of borrowing cost to capitalize. There is no netting of
interest income and interest expense under U.S. GAAP.
19. IAS 17 describes five situations that would normally lead to a lease being classified as a
finance lease, but does not describe these as being absolute tests. (The standard provides
three additional situations that could lead to a lease being classified as a finance lease.) The
criteria implied in four of the situations are similar to the specific criteria in U.S. GAAP, but
the IAS 17 criteria provide less bright line guidance. IAS 17 indicates that a lease would
normally be capitalized when the lease term is for the major part of the leased assets life
U.S. GAAP specifically defines major part as 75%. IAS 17 also indicates that a lease
would normally be capitalized when the present value of minimum lease payments is equal
to substantially all the fair value of the leased asset U.S. GAAP specifically defines
substantially all as 90%. Determining whether a lease should be capitalized is an example
of the principles-based approach followed in IFRS versus the rules-based approach of U.S.
GAAP.
20. A difference in accounting for a sale-and-leaseback gain exists between IFRS and U.S.
GAAP when the lease is classified as an operating lease. Under U.S. GAAP, the gain must
be amortized over the life of the lease. Under IAS 17, the portion of the gain equal to the
difference between the fair value and the carrying amount of the leased asset is recognized
immediately. Any difference between the fair value of the asset and its selling price is
amortized over the life of the lease.
If the lease is classified as a finance lease, both IFRS and U.S. GAAP require the gain on
sale-and-leaseback to be amortized over the life of the lease.
21. U.S. GAAP requires interest paid and received and dividends received to be classified as
operating; dividends paid must be classified as financing. IAS 7 allows interest paid and
dividends paid to be classified either as operating or financing; interest received and
dividends received may be classified as either operating or investing.
22. IAS 10 establishes the date that financial statements are authorized for issuance as the cutoff date for recognition of events after the reporting period. U.S. GAAP uses the date that
financial statements are available for issuance as the cut-off date.
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23. IAS 8 establishes the following hierarchy of authoritative pronouncements to be followed in

selecting accounting policies to apply to a specific transaction or event:
1. IASB Standard or Interpretation that specifically applies to the transaction or event.
2. IASB Standard or Interpretation that deals with similar and related issues.
3. Definitions, recognition criteria, and measurement concepts in the IASB Framework.
4. Most recent pronouncements of other standard-setting bodies that use a similar
conceptual framework to develop accounting standards.
A change in accounting policy is allowed only if the change:
a. Is required by an IFRS, or
b. Results in the financial statements providing reliable and more relevant information.
Solutions to Exercises and Problems

1. B ($100,000 - $10,000) + $60,000 + $30,000 +$25,000 = $205,000
2. C lower of cost ($50,000) and net realizable value ($45,000) = $45,000
3. A
4. D Total
Motor
Inspection
Machine
$100,000
20,000 / 5 years = $4,000
10,000 / 4 years =
2,500
$70,000 / 20 years = 3,500
$10,000
5. D
6. B
7. D
8. B $80,000 + $4,000 +$8,000
9. C
10. A
11. B
12. A
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13. Optiplex Company Inventory (determination of cost)

Cost to complete the design of the generators
Purchase price for materials and parts
Less: Abnormal waste
Transportation cost to get materials and parts to manufacturing facility
Direct labor (10,000 labor hours at $12 per hour)
Variable overhead (10,000 labor hours at $2 per hour)
Fixed overhead (10,000 labor hours at $6 per hour
based on normal level of production)
Cost of inventory
$ 3,000
80,000
(5,000)
2,000
120,000
20,000
60,000
$280,000
Note:The fixed overhead application rate based on a normal level of production is used per
IAS 2.13. The actual level of production can be used if it approximates the normal level;
however, the actual level of production in Year 3 does not approximate the normal level.
Storage costs are excluded from the cost of inventory per IAS 2.16, which indicates that
storage costs are excluded from the cost of inventories unless they are necessary in the
production process before a further production stage.
14. Monroe Company Inventory (LCNRV valuation)
IFRS
Historical cost
Estimated selling price
17,000
Costs to complete and sell
2,000
Net realizable value

Inventory loss
U.S. GAAP
20,00 Historical cost
0
Replacement cost
Net realizable value
15,000 Normal profit margin
5,000 NRV - profit margin
Market
Inventory loss
a. (1) IFRS:
(2) U.S. GAAP:
Year 1
Year 2
Year 1
Year 2
Inventory loss
Cost of goods sold
Inventory loss
Cost of goods sold
20,000
14,00
0
15,00
0
20%
11,60
0
14,000
6,00
0
$5,000
$16,800
$6,000
$15,800
b. Year 1: IFRS result in $1,000 larger income before tax, assets, and stockholders equity.
Year 2: IFRS result in $1,000 smaller income before tax; assets and stockholders equity
are the same at the end of Year 2 under both IFRS and U.S. GAAP.
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15. Beech Corporation Inventory (LCNRV valuation)

IAS 2.29 indicates that inventories are usually written down to NRV item by item. Grouping
is acceptable when several criteria are met, including relating to the same product line.
Because these three products relate to three different product lines, grouping would not be
allowed.
Product
101
202
303
Item-by-item
total
Cost
$130
160
100
$390
Selling
price
12/31/Y1
$160
$140
$100
Selling
costs
(5%)
$8
$7
$5
NRV
12/31/Y1
$152
$133
$95
LCNRV
(item by item)
12/31/Y1
$130
133
95
$358
Cost
$390
LCNRV
358
Write-down $ 32
Inventory write-down expense
Inventory valuation allowance
$32
$32
Note: The use of the contra-account Inventory valuation allowance facilitates a possible
reversal of the write-down as is allowed under IAS 2.
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16. Beech Corporation Inventory (reversal of write-down)

IAS 2 indicates that an inventory write-down is reversed when, for example, inventory is still
on hand and its selling price has increased. The reversal is limited to the amount of the
original write-down. The new carrying amount should be the lower of original cost and
current NRV.
Product
101
202
303
Item-by-item total
Carrying
Amount
12/31/Y1
$130
133
95
$358
Cost
$130
$160
$100
$390
Selling
price
12/31/Y2
$190
$160
$130
Selling
costs
(5%)
$9.50
$8.00
$6.50
NRV
12/31/Y2
$180.50
$152.00
$123.50
LCNRV
12/31/Y2
$130.00
152.00
100.00
$382.00
Inventory should be reported on the 12/31/Y2 balance sheet at LCNRV of $382. The
carrying amount at 12/31/Y1 is $358, so inventory must be written up by $24.
Carrying amount
LCNRV
Reversal of write-down
$358
382
$ 24
Inventory valuation allowance

$24
Reversal of inventory write-down expense
$24
At 12/31/Y2, the inventory valuation allowance has a credit balance of $8; the difference
between the original cost of $390 and LCNRV of $382.
Note: If LCNRV at 12/31/Y2 had been greater than $390, inventory could have been written
back up only to the original cost of $390. In other words, the inventory valuation allowance
would be reduced to zero, but will never have a net debit balance.
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17. Steffen-Zweig Company Exchange of Assets

Because the exchange transaction lacks commercial substance, no gain would be
recognized. The acquired printing press is measured at the carrying value of the asset given
up ($24,000) less cash received ($3,000).
New printing press
Cash
Accumulated depreciation
Old printing presses
$ 21,000
3,000
16,000
$ 40,000
Note: According to IAS 16.25, an entity determines whether an exchange transaction has
commercial substance by considering the extent to which its future cash flows are
expected to change as a result of the transaction. An exchange transaction has
commercial substance if:
(a) the configuration (risk, timing and amount) of the cash flows of the asset received
differs from the configuration of the cash flows of the asset transferred; or
(b) the entity-specific value of the portion of the entitys operations affected by the
transaction changes as a result of the exchange; and
(c) the difference in (a) or (b) is significant relative to the fair value of the assets
exchanged.
This problem assumes that these conditions are not met.
18. Stevenson Corporation Property, Plant and Equipment (component depreciation)
IAS 16.44 states: an entity allocates the amount initially recognized in respect of an item of
property, plant and equipment to its significant parts and depreciates separately each such
part. This is referred to as component depreciation. Thus, the total cost of $500,000
must be allocated to carpeting, roof, HVAC system, and the rest of the building, and each
component is depreciated separately over its expected useful life.
Carpeting
Roof
HVAC system
Building
Total
Depreciable base
$ 10,000
15,000
30,000
445,000
$500,000
Useful Life
5 years
15 years
10 years
50 years
Depreciation
$ 2,000
1,000
3,000
8,900
$14,900
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19. Quick Company Property, Plant, and Equipment (impairment)

a. IAS 36 requires companies to assess annually whether there are any indicators that an
asset is impaired. If so, then an impairment loss calculation must be made. External
events, such as technological changes that adversely affect the value of an asset, can
be indicators of impairment. Quick Company must make an impairment loss calculation
at the end of Year 4 because an external event impairment indicator is present.
b.
December 31, Year 4
Cost
Accumulated depreciation ($10,000 x 4)
Carrying amount, 12/31/Y4
$100,000
40,000
$60,000
(a) Net selling price

(b) Value in use (PV of future cash flows)
Recoverable amount (higher of (a) and (b))
$50,000
$51,000
$51,000
The carrying amount exceeds the recoverable amount. Therefore, a $9,000 impairment loss
is recorded as follows:
Impairment loss
Equipment (or Accumulated depreciation)
$ 9,000
$ 9,000
The carrying amount of the equipment on the 12/31/Y4 balance sheet is $51,000.
Annual depreciation beginning in Year 5 will be $8,500 ($51,000 / 6 remaining years of life).
December 31, Year 5
Depreciation expense
$8,500
$8,500
The carrying amount of the equipment on the 12/31/Y5 balance sheet is $42,500 ($51,000
8,500).
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December 31, Year 6

$8,500
$8,500
The carrying amount of the equipment on the 12/31/Y6 balance sheet is $34,000 ($42,500
8,500), prior to any evaluation of whether the impairment has reversed.
Because the technological innovations related to the equipment are not as effective as
expected, there is an indicator that the equipment might no longer be impaired. The
company must compare the carrying amount of the equipment at 12/31/Y6 with its
recoverable amount.
Carrying amount, 12/31/Y6
$34,000
Recoverable amount, 12/31/Y6:

(a) Net selling price
(b) Value in use (PV of future cash flows)
$42,000
$44,000
$44,000
The recoverable amount exceeds the carrying amount, thus the equipment is no longer
impaired. The equipment is written-up and the impairment loss reversed, but only up to the
point where the resulting carrying amount is equal to what it would have been if no
impairment had been recorded. This is calculated as:
Cost
Accumulated depreciation ($10,000 x 6 years)
Carrying amount, 12/31/Y6 without impairment
$100,000
60,000
$40,000
In this case, the asset is written up from $34,000 to $40,000. The following journal entry is
recorded at December 31, Year 6:
Equipment (or Accumulated depreciation)
Reversal of impairment loss (gain)
$6,000
$6,000
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20. Godfrey Company Property, Plant and Equip (dismantling and inspection costs)
Calculation of Initial Cost, January 1, Year 2:
Building
Construction cost
Amount
$ 1,500,000
Present value of dismantling and removal costs

Total cost of the building
222,965
$ 1,722,965
Machinery and Equipment

Construction cost
$ 3,500,000
Present value of dismantling and removal costs

Total cost of the machinery and equipment
14,864
$ 3,514,864
Less: Cost of inspection and overhaul

Cost allocated to machinery and equipment
200,000
$ 3,314,864
Journal entry at January 1, Year 2:

Building
Machinery and equipment
Inspection and overhaul costs
Cash
$ 1,722,965
3,314,864
200,000
PV Factor
(10%)
1,500,000 0.14864
100,000 0.14864
$ 5,000,000
237,83
0
Provision for dismantling and removal
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Calculation of Depreciation Expense, Year 2

Building
Cost
Useful life
$1,722,965
20
$ 86,148
years
Machinery and Equipment

Allocated cost
Useful life
$3,314,864
20
$ 165,743
years
Inspection and Overhaul Costs

Allocated cost
$ 200,000
Useful life
5 years
40,000
291,891
$
291,891
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21. Jefferson Company Property, Plant and Equipment (measurement subsequent to

acquisition)
Cost, 1/2/Y1
Useful life
Annual depreciation
Book value, 12/31/Y2
$10,000,000
5 years
$2,000,000
$6,000,000
IFRS Allowed Alternative

Fair value, 1/2/Y3
Remaining useful life
Annual depreciation
$12,000,000
3 years
$4,000,000
a. Depreciation expense
Years 1 and 2
Years 3, 4, and 5
IFRS
$2,000,000
$4,000,000
U.S. GAAP
$2,000,000
$2,000,000
Income before tax is the same under IFRS and U.S. GAAP in Years 1 and 2. Income
before tax is $2,000,000 smaller under IFRS in Years 3, 4, and 5.
b.
Equipment (book value)
1
IFRS
Beginning
$10 mn
Revaluation
Depreciation expense (2 mn)
Ending
$8 mn
U.S. GAAP
Beginning
$10 mn
Depreciation expense (2 mn)
Ending
$8 mn
Stockholders equity
1
IFRS
Beginning
$0
Revaluation
Depreciation expense($2 mn)
Ending
($2 mn)
U.S. GAAP
Beginning
$0
Depreciation expense($2 mn)
Ending
($2 mn)
2
$8 mn
End of Year
3
$8 mn
$4 mn
(2 mn)
$6 mn
$6 mn
6 mn
(4 mn)
$8 mn
(4 mn)
$4 mn
(4 mn)
$0
$8 mn
(2 mn)
$6 mn
$6 mn
(2 mn)
$4 mn
$4 mn
(2 mn)
$2 mn
$2 mn
(2 mn)
$0
End of Year
3
($2 mn)
($4 mn)
$6 mn
($2 mn)
($4 mn)
($4 mn)
($2 mn)
($2 mn)
($6 mn)
($4 mn)
($6 mn)
($4 mn)
($10 mn)
($2 mn)
($2 mn)
($4 mn)
($6 mn)
($2 mn)
($8 mn)
($8 mn)
($2 mn)
($10 mn)
($4 mn)
($2 mn)
($6 mn)
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22. Madison Company Property, Plant and Equipment (impairment)

IFRS
Carrying amount
10,000,000
Net selling price
7,500,000
Discounted future cash flows 8,000,000
Value in use (larger amount)
8,000,000
Impairment loss
2,000,000
a.
(1) IFRS:
Year 1
U.S. GAAP
Carrying amount
Future cash flows
No impairment
Impairment loss
2,000,000
2,000,000
Years 2 - 6 Depreciation expense

(2) U.S. GAAP:
Years 1-6
10,000,000
10,000,000
0
1,600,000 (8,000,000/5 years)
2,000,000
b. Income before tax

IFRS
Impairment loss
Impact on income
(2,000,000) (1,600,000) (1,600,000) (1,600,000) (1,600,000) (1,600,000)
U.S. GAAP
Impact on income
(2,000,000) (2,000,000) (2,000,000) (2,000,000) (2,000,000) (2,000,000)
Diff. (IFRS-U.S. GAAP)
(2,000,000)
Year 1
Year 2
(2,000,000)
Year 3
0
Year 5
0
Year 6
0
(4,000,000) (1,600,000) (1,600,000) (1,600,000) (1,600,000) (1,600,000)
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
(2,000,000) (2,000,000) (2,000,000) (2,000,000) (2,000,000) (2,000,000)

400,000
Total Assets
IFRS
Year 1
Year 2
12,000,000
8,000,000
Carrying value (at 1/1)
(2,000,000) (1,600,000)
(2,000,000)
0
Impairment loss
8,000,000
6,400,000
U.S. GAAP
Year 1
Year 2
12,000,000 10,000,000
(2,000,000) (2,000,000)
10,000,000
8,000,000
Diff. (IFRS-U.S.GAAP)
Year 4
(2,000,000) (1,600,000)
400,000
400,000
400,000
400,000
Year 3
Year 4
Year 5
Year 6
6,400,000
4,800,000
3,200,000
1,600,000
(1,600,000) (1,600,000) (1,600,000) (1,600,000)

0
4,800,000
3,200,000
1,600,000
Year 3
Year 4
Year 5
Year 6
8,000,000
6,000,000
4,000,000
2,000,000
(2,000,000) (2,000,000) (2,000,000) (2,000,000)

6,000,000
4,000,000
2,000,000
(1,200,000)
(800,000)
(400,000)
4-16
Education.
Total Stockholders Equity (ignoring income taxes)

IFRS
Year 1
Year 2
Year 3
Year 4
0 (4,000,000) (5,600,000) (7,200,000)
Beginning balance
Depreciation expense (2,000,000) (1,600,000) (1,600,000) (1,600,000)
(2,000,000)
0
0
0
Impairment loss
(4,000,000)
(5,600,000)
(7,200,000)
(8,800,000)
Ending balance
U.S. GAAP
Beginning balance
Ending balance
Diff. (IFRS-U.S.GAAP)
Year 1
Year 2
0
Year 3
Year 4
(2,000,000) (4,000,000) (6,000,000)
Year 5
Year 6
(8,800,000)
(10,400,000)
(1,600,000)
(1,600,000)
(10,400,000)
(12,000,000)
Year 5
(8,000,000)
Year 6
(10,000,000)
(2,000,000) (2,000,000) (2,000,000) (2,000,000)
(2,000,000)
(2,000,000)
(2,000,000) (4,000,000) (6,000,000) (8,000,000)
(10,000,000)
(12,000,000)
(400,000)
(2,000,000) (1,600,000) (1,200,000)
(800,000)
23. Iptat International Property, Plant and Equipment (revaluation model)

a. Adjustment (a) relates to the depreciation of the revaluation amount on fixed assets.
Adjustment (a) results in an addition to net income because the additional depreciation
taken on the revaluation amount does not exist under U.S. GAAP. The addition to net
income pertains to the current year only. The addition to net income in the current year
plus the addition to net income in previous years is the cumulative effect on retained
earnings, which is the shareholders equity account affected by adjustment (a). The
addition to shareholders equity is greater than the addition to net income because of this
cumulative effect.
b. Adjustment (b) relates to the revaluation surplus (increase in shareholders equity) that is
recorded when fixed assets are revalued. This increase does not exist under U.S.
GAAP and shareholders equity must be reduced accordingly. In this case, the
shareholders equity account affected is Revaluation Surplus.
4-17
Education.
24. Lincoln Company Research and Development Costs

a. IFRS
Year 1
Research expense
Deferred development costs (asset)
$4 million
Amortization expense deferred development costs
U.S. GAAP
Research and development expense
$10 million
Year 2
$6 million
$800,000
--
b. IFRS result in $4 million larger income before tax in Year 1 and $800,000 smaller income
before tax in Years 2-6 compared to U.S. GAAP.
Ignoring income taxes, total assets and total stockholders equity are larger under IFRS by
the following amounts:
Year 1
Year 2
$4,000,000
$0
Year 3
$3,200,000
Year 4
$2,400,000
Year 5
$1,600,000
Year 6
$800,000
25. Xanxi Petrochemical Company Deferred development costs; Gain on sale and
leaseback
Under IFRS, Xanxi apparently has capitalized some development costs as an asset (IAS
38), which would not be acceptable under U.S. GAAP. Adjustment (a) adds back the current
years amortization expense on the deferred development costs that was deducted in
determining IFRS net income. This adjustment results in a larger amount of U.S. GAAP net
income. The addition to income flows through to retained earnings increasing shareholders
equity. The addition to net income pertains to the current year only. The addition to net
income in the current year plus the addition to net income in previous years is the
cumulative effect on retained earnings. The addition to shareholders equity is greater than
the addition to net income because of this cumulative effect.
If the lease in a sale-leaseback transaction is classified as an operating lease, IAS 17
requires the gain on such a transaction to be reported in income immediately, whereas U.S.
GAAP requires the gain to be amortized over the life of the lease. Adjustment (b) subtracts
the gain on sale/leaseback in the current year that was recognized in full under IFRS. The
amount of adjustment (b) is the difference between the entire gain recognized under IFRS
and the portion of the gain that would be recognized under U.S. GAAP (including
amortization of gains that might have been generated in earlier years). The same amount
should be subtracted from retained earnings reducing shareholders equity. From the fact
that adjustment (b) reduced shareholders equity by a larger amount than it reduces net
income, we can infer that Xanxi had one or more sale/leaseback gains in previous years.
4-18
Education.
26. Buch Corporation Property, Plant, and Equipment (impairment loss and subsequent
reversal of impairment loss)
Cost
Useful life
Residual value
Annual depreciation charge
Year 1
$100,000
10 years
$0
$10,000
Year 2
$100,000
(10,000)
$90,000
Year 3
$90,000
(10,000)
$80,000
$80,000
(10,000)
$70,000
Test for impairment at December 31, Year 3:

Carrying value
Net selling price ($70,000 - $7,000)
Value in use
Recoverable amount (greater of the two)
Impairment loss
$70,000
$63,000
$55,000
63,000
$ 7,000
The impairment loss of $7,000 would be recognized in income on December 31, Year 3 with
an offsetting reduction in the assets carrying value. As a result, the asset will be reported at
on the December 31, Year 3 balance sheet at a carrying value of $63,000. This amount will
be depreciated over the remaining useful life of 7 years on a straight-line basis.
Impairment loss
Year 1
$100,000
(10,000)
Year 2
$90,000
(10,000)
Year 3
$80,000
(10,000)
Year 4
$63,000
(9,000)
Year 5
$54,000
(9,000)
$90,000
$80,000
(7,000)
$63,000
$54,000
$45,000
Review for reversal of impairment loss at December 31, Year 5:

Carrying value
$45,000
Net selling price ($50,000 - $7,000)
$43,000
Value in use
$53,000
Recoverable amount (greater of the two)
53,000
Impairment loss
$
0
4-19
Education.
IAS 36 requires an impairment loss to be reversed if the recoverable amount of an asset is

determined to exceed its new carrying amount, but only if there are changes in the
estimates used to determine the original impairment loss or there is a change in the basis
for determining the recoverable amount (from value in use to net selling price or vice versa).
Because recoverable amount has changed from net selling price at the end of Year 3 to
value in use at the end of Year 5, and the recoverable amount is greater than the carrying
value at the end of Year 5, the impairment loss recognized in Year 3 should be reversed.
However, the carrying value of the asset after reversal of the impairment loss should not
exceed what it would have been if no impairment loss had been recognized. The carrying
value of Machine Z at December 31, Year 5 would have been $50,000 if no impairment loss
had been recognized in Year 3 ($100,000 original cost less $10,000 annual depreciation for
five years). Thus, an increase in the carrying value of the asset of $5,000 should be
recognized at December 31, Year 5 with a reversal of impairment loss in an equal amount.
The assets carrying value on the December 31, Year 5 balance sheet will be $50,000
($45,000 + $5,000). This amount will be depreciated over the remaining useful life of 5
years on a straight-line basis.
Summary of amounts to be reported on the balance sheet and income statement in Years 1
5:
Year 1
Year 2
Year 3
Year 4
Year 5
$100,000 $90,000
$80,000
$63,000 $54,000
Income Statement
(10,000) (10,000)
(10,000)
(9,000)
(9,000)
Impairment loss
(7,000)
Reversal of impairment loss
5,000
$90,000 $80,000
$63,000
$54,000 $50,000
Income statement effect
(10,000)
(10,000)
(17,000)
(9,000)
(4,000)
4-20
Education.
27. Holzer Company Property, Plant, and Equipment (capitalization of borrowing costs
and measurement of asset subsequent to acquisition using two alternative models)
IAS 16 Cost Model
Carry asset on the balance sheet at cost less accumulated depreciation and any
accumulated impairment losses.
Capitalize borrowing costs borrowing costs attributable to the construction of qualifying
assets.
Annual interest ($900,000 x 10%)
Interest to be capitalized in Year 1 ($500,000* x 10%)
Interest expense in Year 1
$90,000
50,000
$40,000
* Expenditures of $1,000,000 were made evenly throughout the year, so the average
accumulated expenditures during the year are $500,000 ($1,000,000 / 2).
Cost of building:
Construction costs
Capitalized interest
Total initial cost of building
$1,000,000
50,000
$1,050,000
Annual depreciation (beginning in Year 2) ($1,050,000 / 40 years)

Income Statement
Balance Sheet
Building (at 1/1)
Depreciation
Building (at 12/31)
$26,250
Year 1
Year 2
Year 3
Year 4
Year 5
$0
$26,250
$26,250
$26,250
$26,250
$0 $1,050,000 $1,023,750
(26,250)
(26,250)
$1,050,000 $1,023,750
$997,500
$997,500
(26,250)
$971,250
$971,250
(26,250)
$945,000
IAS 16 Revaluation Model

Carry asset on the balance sheet at revalued amount equal to fair value less any
subsequent accumulated depreciation and any accumulated impairment losses.
Capitalize borrowing costs attributable to the construction of qualifying assets.
Annual interest ($900,000 x 10%)
Interest to be capitalized in Year 1 ($500,000 x 10%)
Interest expense in Year 1
Cost of building:
Construction costs
Capitalized interest
Total initial cost of building
$90,000
50,000
$40,000
$1,000,000
50,000
$1,050,000
Annual depreciation (beginning in Year 2) ($1,050,000 / 40 years)
$26,250
4-21
Education.
Income Statement
Subtotal
Loss on revaluation
Reversal of revaluation loss
Total expense (income)
Year 1
Year 2
Year 3
Year 4
Year 5
$0
$0
$26,250
$26,250
$26,250
$26,250
27,500
$25,5262
$25,526
$25,526
$25,526
$0
$26,250
$43,750
$25,526
(27,500)
$(1,974)
$970,000
(25,526)
$944,474
$944,474
(25,526)
$918,948
$944,474
27,5003
3,5523
$950,000
Balance Sheet
Building (at 1/1)
$0 $1,050,000 $1,023,750
Depreciation
(26,250)
(26,250)
Building (at 12/31)
$1,050,000 $1,023,750
$997,500
Loss on revaluation
(27,500)1
Reversal of revaluation loss
Revaluation surplus
Building (at 12/31)
$1,050,000 $1,023,750 $970,000
1
2
3
At December 31,Year 3, the fair value of the building is determined to be $970,000. The
carrying value of the building is decreased by $27,500, with a loss on revaluation
recognized in Year 3 net income.
Depreciation in Year 4 is $25,526 ($970,000 / 38 remaining years).
At December 31,Year 5, the fair value of the building is determined to be $950,000. The
carrying value of the building is increased by $31,052. A reversal of revaluation loss of
$27,500 is recognized in income and $3,552 ($31,052 27,500) is recorded as revaluation
surplus in shareholders equity.
4-22
Education.
28. Quantacc Company Reconciliation to U.S. GAAP

Year 5
Net income under IFRS
Adjustments:
Reversal of depreciation on revaluation of fixed assets
Reversal of amortization of deferred development costs
Reversal of gain on sale and leaseback
Amortization of gain on sale and leaseback
Net income (loss) under U.S. GAAP
December 31, Year 5
Stockholders equity under IFRS
Adjustments:
Reversal of revaluation of fixed assets
Reversal of accumulated depreciation on revaluation of fixed assets
Reversal of deferred development costs
Reversal of accumulated amortization on deferred development costs
Reversal of gain on sale and leaseback
Accumulated amortization of gain on sale and leaseback
Stockholders equity under U.S. GAAP
$100,000
3,500
16,000
(150,000)
7,500
$ (23,000)
$500,000
(35,000)
10,500
(80,000)
16,000
(150,000)
7,500
$ 269,000
4-23
Education.
29. Stratosphere Company Property, Plant, and Equipment (revaluation model)

Amounts in parentheses represent credits.
Date
January 1, Year 1
December 31, Year 1
December 31, Year 2
December 31, Year 2
Balance
December 31, Year 3
Balance
Sale, Jan 2, Year 4
Balance
Cost
4,000,000
4,000,000
4,000,000
(220,000)
3,780,000
3,780,000
3,780,000
(3,780,000)
$
Accumulated
depreciation
(200,000)
(200,000)
400,000
0
(210,000)*
(210,000)
210,000
$
Carrying Revaluation
Amount
Surplus
4,000,000
3,800,000
3,600,000
180,000
(180,000)
3,780,000
(180,000)
3,570,000
10,000
3,570,000
(170,000)
(3,570,000)
170,000
$
$
Income
Retained
Earnings
200,000
200,000
200,000
200,000
210,000
70,000
70,000
400,000
200,000
600,000
(100,000)
500,000
* Calculated as $3,780,000 divided by remaining life of 18 years.

Note: The net impact on retained earnings over the life of the equipment is negative
$500,000 (debit), which is the difference between the purchase price of $4,000,000 and the
selling price of $3,500,000.
Journal entries to account for the building under the revaluation model
January 1, Year 1
Building
Cash
4,000,000
4,000,000
December 31, Year 1

200,000
December 31, Year 2

200,000
Building
Revaluation surplus
December 31, Year 3
Revaluation surplus
Retained earnings
200,000
200,000
400,000
220,000
180,000
210,000
210,000
10,000
10,000
4-24
Education.
January 2, Year 4
Cash
Loss on sale
Building
Revaluation surplus (OCI)
Retained earnings
3,500,000
210,000
70,000
3,780,000
170,000
170,000
Note: if the asset hadnt been revalued, the carrying amount of the building would have been
$3,400,000 (cost of $4,000,000 less $200,000 depreciation x3 years) at the date of sale. If
the building was sold for $3,500,000, there would have been a gain of $100,000.
Since the building was revalued, the depreciation expense over the three years was
$610,000 ($200,000 in Year 1 and Year 2 and $210,000 in Year 3). Revaluation surplus was
reduced by $10,000 during this period with the credit applied directly to retained earnings.
Therefore, after reversing the remaining revaluation surplus of $170,000 to retained
earnings, the resulting loss is $70,000.
4-25
Education.
30. Reforce Company Intangible Assets (determination of cost)

Cost
$ 25,000
Market research costs, Year 1

Research costs, Year 1
Research costs, 1st Quarter, Year 2
Legal fees to register patent, April, Year 2
Development costs for initial prototype, 2nd Quarter, Year 2
Testing of initial prototype, June, Year 2
Management time to develop business plan, 2nd Quarter, Year 2
Cost of revisions and second prototype, 3rd Quarter, Year 2
Legal fees to defend patent, October, Year 2
Production costs, 4th Quarter, Year 2
Marketing campaign, 4th Quarter, Year 2
100,000
70,000
25,000
500,000
50,000
15,000
175,000
50,000
400,000
80,000
Intangible
Asset
No
No
No
Yes
No
No
No
Yes
Yes
No
No
The legal fees to register and defend the patent are capitalized as an intangible asset
(Patent, $75,000).
Development costs incurred after both (a) technical feasibility has been established and (b)
a business plan has been developed are capitalized (Deferred Development Costs,
$175,000).
Production costs will be capitalized as Inventory; not as an intangible asset.
Note: Under U.S. GAAP, only the costs associated with obtaining and defending the patent
would be recognized as an asset.
31. Philosopher Stone Intangible Assets (web site development costs)
Because Philosopher Stones intranet will only be used to share information about company
personnel, demonstrating future economic benefits might be difficult. SIC 32 talks about a
company using a web site to generate revenue, which is not the purpose of the intranet in
this case. Even if future economic benefits can be demonstrated, only the costs incurred
beyond the planning stage are eligible for capitalization. In addition, SIC 32 indicates that
the estimated useful life of a web site should be short, meaning that whatever amount of
costs are capitalized they will be amortized over a short period of time.
4-26
Education.
32. Bartholomew Corporation Goodwill (impairment)

Calculation of Recognized Noncontrolling Interest
Fair value of net assets (excluding goodwill)
Noncontrolling interest %
Noncontrolling interest
$5,000,000
20%
$1,000,000
Calculation of Unrecognized Noncontrolling Interest

Implied fair value of 100% of Samson Company
$5,000,000 / 80% = $6,875,000
20%
Fair value of noncontrolling interest
$1,375,000
Recognized noncontrolling interest
1,000,000
Unrecognized noncontrolling interest
$ 375,000
Calculation of Goodwill
Consideration transferred
Plus: Noncontrolling interest (recognized)
Subtotal
Less: Fair value of net assets (excluding goodwill)
Goodwill
$5,500,000
1,000,000
$6,500,000
,5,000,000
$1,500,000
The summary journal entry to recognize the acquisition of Samsons shares would be:
Samsons net assets
$5,000,000
Goodwill
1,500,000
Cash
$5,500,000
1,000,000
Impairment Test, End of Year 1
Carrying amount
Net assets
$5,000,000
Goodwill
$1,500,000
Total
$6,500,000

Adjusted carrying amount
0
$5,000,000
375,000
$1,875,000
375,000
$6,875,000
Determination of recoverable amount:

Fair value less costs to sell (a)
$5,000,000 - $200,000 =
Present value of future cash flows (b)
Impairment loss (adjusted carrying amount less recoverable amount)
$4,800,000
4,750,000
4,800,000
$2,075,000
Allocation of impairment loss

Goodwill
Samsons net assets
Total
$1,875,000
200,000
$2,075,000
The allocation of impairment loss to goodwill is shared between the controlling and
noncontrolling interest. Thus, $1,500,000 (80%) is allocated to the parents investment in
Samson Company; the remaining $375,000 (20%) is attributed to the noncontrolling interest
but is not recognized. Bartholomew will reflect Goodwill of zero on its December 31, Year 1
balance sheet, and Samsons net assets will be included in the consolidated amounts at a
total of $4,800,000 ($5,000,000 $200,000).
4-27
Education.
33. Rocker Division Goodwill (impairment)

Part A.
Calculation of impairment loss, 12/31/Y5:
Carrying amount
Recoverable amount
Impairment loss
$2,775
1,560
$1,215
The impairment loss is allocated first to goodwill, until it is reduced to zero. The remaining
$215 of loss is allocated to the other assets on the basis of relative carrying amounts:
Property, plant, and equipment $1,375 / $1,775 x $215 = $167
Other intangibles
$400 / $1,775 x $215 = $ 48
Carrying amount,
12/31/Y4
Amortization
expense, Year 5
Subtotal
Impairment loss
Carrying amount,
12/31/Y5
Goodwill
Property, Plant,
and Equipment
Other
Intangibles
Total
$1,000
$1,500
$500
$3,000
0
$1,000
(1,000)
(125)
$1,375
(167)
(100)
$400
(48)
(225)
$ 2,775
(1,215)
$1,208
$352
$1,560
Part B.
Amortization expense is calculated for Year 6 using the revised carrying amounts and
estimated remaining useful lives of 11 years and 4 years, respectively:
Property, plant, and equipment
Other intangibles
$1,208 / 11 years = $110

$352 / 4 years = $48
The improvement in export laws results in a potential impairment recovery of $470 = $1,930
$1,560. However, carrying amounts may only be written-up to the original cost less
accumulated amortization (that would have occurred without the impairment loss).
4-28
Education.
Carrying amount of PPE is limited to historical cost $1,500 less depreciation of $250 (2
years at $125) = $1,250; carrying amount of Other Intangibles is limited to historical cost of
$500 less amortization of $200 (2 years at $100) = $300; the carrying amount for total
assets at 12/31/Y6 is limited to $1,550 ($1,250 + $300). Therefore, recovery of impairment
loss is $148 ($1,550 - $1,402), which will be prorated to PPE and Other Intangibles based
on relative carrying amounts. No recovery of impairment on goodwill is allowed.
Property, plant, and equipment
Other intangibles
$1,098 / $1,402 x $148 = $116

$304 / $1,402 x $148 = $ 32
Property, Plant,
and Equipment
Other
Intangibles
Total
$1,208
$352
$1,560
(110)
$1,098
(48)
$304
(158)
$1,402
116
32
148
$1,214
$336
$1,550
Goodwill
Carrying amount,
12/31/Year 5
Amortization
expense, Year 6
Subtotal
Impairment
loss/recovery
Carrying amount,
12/31/Year 6
$
$
4-29
Education.
34. Complete Company Goodwill (measurement and impairment)

Part A.
Alternative 1 Noncontrolling Interest Measured at Proportionate Share of Fair Value
of Acquired Firms Net Assets
Calculation of Noncontrolling Interest
Fair value of net assets (excluding goodwill) ($2,000,000 - $500,000)
$1,500,000
40%
$600,000
Plus: Noncontrolling interest
Subtotal
Goodwill
$1,200,000
600,000
$1,800,000
1,500,000
$ 300,000
Alternative 2 Noncontrolling Interest Measured at Fair Value

Implied fair value of 100% of Partial Company
Subtotal
Goodwill
$1,200,000 / 60% = $2,000,000

40%
$800,000
$1,200,000
800,000
$2,000,000
1,500,000
$ 500,000
Goodwill of $500,000 is comprised of $300,000 purchased by Complete plus $200,000

attributed to the Noncontrolling interest ($500,000 - $300,000).
4-30
Education.
Part B.
Alternative 1 Noncontrolling Interest Measured at Proportionate Share of Fair Value
of Acquired Firms Net Assets Excluding Goodwill
Fair value of net assets (excluding goodwill) ($2,000,000 - $500,000)
$1,500,000
20%
$300,000
Subtotal
Gain on bargain purchase
$1,100,000
300,000
$1,400,000
1,500,000
$(100,000)
In this case, Complete would recognize a gain from a bargain purchase in net income in the
year in which the acquisition takes place.
Alternative 2 Noncontrolling Interest Measured at Fair Value
Implied fair value of 100% of Partial Company
Subtotal
Gain on bargain purchase
$1,100,000 / 80% = $1,375,000

20%
$275,000
$1,100,000
275,000
$1,375,000
1,500,000
$(125,000)
Note: IFRS 3.34 indicates that the gain on bargain purchase is attributable to acquirer.
Therefore, it does not appear that any of the gain would be allocated to the noncontrolling
interest.
4-31
Education.
Part C.
Assume that Complete Company adopted Alternative 1 in Part A to account for
noncontrolling interest
Impairment loss is determined as follows:
Carrying amount
Partial Co.
Net assets
$1,500,000
Partial Co.
Goodwill
$300,000
Total
$1,800,000

Adjusted carrying amount
0
$1,500,000
200,000
$500,000
200,000
$2,000,000
Determination of recoverable amount:

Fair value less costs to sell (a)
$1,900,000 - $20,000 = $1,880,000
Present value of future cash flows (b)
1,860,000
1,880,000
Impairment loss (adjusted carrying amount less recoverable amount)
$ 120,000
Allocation of impairment loss:
All of the impairment loss is allocated to goodwill. Because Partial Company is a CGU, the
impairment loss is shared between the controlling and noncontrolling interest. Thus,
$72,000 (60%) is allocated to the parents investment in Partial Company; the remaining
$48,000 (40%) is attributed to the noncontrolling interest but is not recognized.
Carrying amount
Partial Co.
Net assets
$1,500,000
Partial Co.
Goodwill
$300,000
Total
$1,800,000
Impairment loss
Carrying amount after impairment loss
0
$1,500,000
72,000
$228,000
72,000
$1,728,000
Impairment loss
Goodwill
$72,000
$72,000
Year 1 Income Statement

Impairment loss
$72,000
End of Year 1 Consolidated Balance Sheet (amounts related to Partial Company)

Net assets
$1,500,000
Goodwill
228,000
(600,000)
4-32
Education.
35. Thurstone Company Borrowing Costs (capitalization)

Interest cost (300,000 x 4% = 12,000 x $2.10 exchange rate on 3/31/Y1)
Less: Income earned on temporary investment (5,000 x $2.10)
Net interest cost
Plus: Exchange rate loss (300,000 x ($2.10 - $2.00))
Total borrowing cost to be capitalized at 3/31/Y1
$25,200
(10,500)
$14,700
30,000
$44,700
36. Atlanta Tours Company Leases (classification)

Finance Lease Criteria
Ownership is transferred to the lessee by
the end of the lease term.
The lease contains a bargain purchase
option.
The lease term is a major part of the
estimated economic life of the leased
property.
The PV of MLP is substantially all of the fair
value of the leased property.
The leased assets are of such a specialized
nature such that only the lessee can use
them without major modifications being
made.
The lessee bears the lessors losses if the

lessee cancels the lease.
The lessee absorbs the gains or losses from
fluctuations in the fair value of the residual
value of the asset.
The lessee may extend the lease for a
secondary period at a rent substantially
below the market rent.
Criterion met?
No.
There is no indication that title transfers to
the lessee.
No.
$4,000 purchase option > $3,500 estimated
residual value
Perhaps.
5 years / 8 years = 62.5%; might be judged
as major part
Perhaps.
$8,930* / $10,000 = 89.3%; might be judged
as substantially all
Perhaps.
Duck Boats Inc. probably would need to
remove the wood carving to be able to sell or
lease the vehicle to another customer. It is
unclear whether this would be considered a
major modification.
No.
The lease is non-cancelable
No.
No.
The lease may not be extended.
* Calculation of PV of MLP
Present value factor for annuity due, 5 payments, 6% = 4.4651: $2,000 x 4.4651 = $8,930
It is unclear whether Atlanta Tours Company should classify this lease as a finance lease or as
an operating lease; ultimately, it will be up to managements judgment. Collectively, the three
criteria that perhaps have been met might lead to a decision that finance lease classification is
appropriate. This exercise demonstrates the judgment needed to apply IAS 17.
Note: Under U.S. GAAP this lease definitely would not be capitalized, because it does not meet
any of the capital lease criteria.
4-33
Education.
37. Fields Company Sale-and-Leaseback (recognition of gain)

Part A.
Because the leaseback is an operating lease and the sales price approximates fair value,
Fields would record a sale and recognize a gain of $100,000 ($500,000 selling price $400,000 carrying amount).
Part B.
Because the leaseback is an operating lease and the sales price of $500,000 is greater than
the fair value of $470,000, $30,000 would be deferred and amortized at the rate of $10,000
per year ($30,000 / 3 years) over the three-year term of the lease. The remaining gain of
$70,000 ($470,000 fair value - $400,000 carrying amount) would be recognized immediately
in net income.
Part C.
Because this is a finance lease and there is no indication of impairment, Fields would defer
the gain of $100,000 ($500,000 selling price - $400,000 carrying amount) and amortize it
over the term of the lease at the rate of $5,000 per year ($100,000 / 20 years).
38. Bridgets Bakery Operating Lease
Total consideration for rent over the lease term is $292,500 ($2,500 for 117 months). This
consideration must be recognized on a straight-line basis (unless another systematic basis
is more representative of the time pattern of the lessees benefit from using the leased
asset) over the entire lease period of 10 years (120 months), resulting in a monthly lease
expense of $2,437.50 ($292,500 / 120 months).
Monthly journal entry for each of the first three months of the lease:
Lease expense
Deferred rent payable
$2,437.50
$2,437.50
Deferred rent payable has a balance of $7,312.50 at the end of three months. This balance
is amortized over the remaining 117 months at the rate of $62.50 per month ($7,312.50 / 117
months).
Journal entry in months 4 through 120:
Lease expense
Deferred rent payable
Cash
$2,437.50
62.50
$2,500.00
Note: SIC-15 Operating Leases-Incentives directly relates to this situation.
4-34
Education.
39. Acceptable Treatments

IFRS
Acceptable under
U.S. GAAP Both
A company takes out a loan to finance the
construction of a building that will be used by the

company. The interest on the loan is capitalized
as part of the cost of the building.
Inventory is reported on the balance sheet using
the last-in, first-out (LIFO) cost flow assumption.
The gain on a sale and leaseback transaction
classified as an operating lease is deferred and
amortized over the lease term.
A company writes a fixed asset down to its
recoverable amount and recognizes an
impairment loss in Year 1. In a subsequent
year, the recoverable amount is determined to
exceed the assets carrying amount, and the
previously recognized impairment loss is
reversed.
A company pays less than the fair value of net
assets in the acquisition of another company.
The acquirer recognizes the difference as a gain
on purchase of another company.
A company enters into an eight-year lease on
equipment that is expected to have a useful life
of ten years. The lease is accounted for as an
operating lease.
An intangible asset with an active market that
was purchased two years ago is carried on the
balance sheet at fair value.
In preparing interim financial statements, interim
periods are treated as discrete reporting periods
rather than as an integral part of the full year.
Research and development costs are
capitalized when certain criteria are met.
Interest paid on borrowings is classified as an
operating activity in the statement of cash flows.
Neither
X
X
X1
X
X
X2
X
This would be acceptable under IAS 17 if 80% of the life of the lease is not viewed as the
major part of the lease.
Neither IFRS nor U.S. GAAP allows capitalization of research costs.
4-35
Education.
CASE 4-1 Bessrawl Corporation

Reconciliation from U.S. GAAP to IFRS
2014
$1,000,0
00
Income under U.S. GAAP

Adjustments:
Reversal of writedown of inventory to replacement cost
Additional depreciation on revaluation of equipment
10,000
(25,000)
Impairment loss on intangible asset (brand)
(5,000)
Recognition of deferred development costs
80,000
Reversal of amortization of deferred gain on sale and leaseback

Income under IFRS
(30,000)
$1,030,000
2014
$8,000,0
00
Stockholders equity under U.S. GAAP

Adjustments:
Reversal of writedown of inventory to replacement cost
10,000
Original revaluation surplus on equipment
600,000
Accumulated depreciation on revaluation of equipment
(25,000)
Impairment loss on intangible assets (brand)
(5,000)
Recognition of deferred development costs
80,000
Recognition of gain on sale and leaseback in 2012
150,000
Accumulated amortization of deferred gain on sale and leaseback (2009-2011)
(90,000)
Stockholders equity under IFRS
$8,720,000
Explanation of Adjustments
Inventory. Under U.S. GAAP, the company reports inventory on the balance sheet at the lower
of cost or market, where market is defined as replacement cost ($180,000), with net realizable
value ($190,000) as a ceiling and net realizable value less a normal profit ($152,00) as a floor.
In this case, inventory was written down to replacement cost and reported on the December 31,
2014 balance sheet at $180,000. A $70,000 loss was included in 2014 income.
In accordance with IAS 2, the company would report inventory on the balance sheet at the lower
of cost ($250,000) and net realizable value ($190,000). Inventory would have been reported on
the December 31, 2014 balance sheet at net realizable value of $190,000 and a loss on
writedown of inventory of $60,000 would have been reflected in net income.
4-36
Education.
IFRS income would be $10,000 larger than U.S. GAAP net income. IFRS retained earnings
would be larger by the same amount.
Equipment. Under U.S. GAAP, the company reports depreciation expense of $100,000
[($2,750,000 $250,000) / 25 years] in 2013 and in 2014.
Under IAS 16s revaluation model, depreciation expense on equipment in 2013 was $100,000,
resulting in a book value at the end of 2013 of $2,650,000. The equipment then would be
revalued upward at the beginning of 2014 to its fair value of $3,250,000.
The appropriate journal entry to recognize the revaluation would be:
Equipment
Revaluation Surplus (a stockholders equity account)
$600,000
$600,000
In 2014, depreciation expense would be $125,000 [($3,250,000 - $250,000)/24 years].

The additional depreciation under IFRS causes IFRS-based income in 2014 to be $25,000
smaller than U.S. GAAP income. IFRS-based stockholders equity is $575,000 larger than U.S.
GAAP stockholders equity. This is equal to the amount of the revaluation surplus ($600,000)
less the additional depreciation in 2014 under IFRS ($25,000), which reduced retained earnings.
Intangible Assets. Under U.S. GAAP, an asset is impaired when its carrying amount exceeds
the undiscounted future cash flows expected to arise from continued use of the asset. The
brand acquired in 2011 has a carrying amount of $40,000 and future expected cash flows are
$42,000, so it is not impaired under U.S. GAAP.
Under IAS 36, an asset is impaired when its carrying amount exceeds its recoverable amount,
which is the greater of net selling price and value in use. The brands recoverable amount is
$35,000; the greater of net selling price of $35,000 and value in use (present value of future
cash flows) of $34,000. As a result, an impairment loss of $5,000 would be recognized under
IFRS.
IFRS income and retained earnings would be $5,000 less than U.S. GAAP income and retained
earnings.
Research and Development Costs. Under U.S. GAAP, research and development expense in
the amount of $200,000 would be recognized in determining 2014 income.
Under IAS 38, $120,000 (60% x $200,000) of research and development costs would be
expensed in 2014, and $80,000 (40% x $200,000) of development costs would be capitalized as
an intangible asset (deferred development costs).
IFRS-based income in 2014 would be $80,000 larger than U.S. GAAP income. Because the
new product has not yet been brought to market, there is no amortization of the deferred
development costs under IFRS in 2014.
Sale and Leaseback. Under U.S. GAAP, the gain on the sale and leaseback (operating lease)
is recognized in income over the life of the lease. With a lease term of five years, $30,000 of
the gain would be recognized in 2014. $30,000 also would have been recognized in 2012 and
2014, resulting in a cumulative amount of retained earnings at year-end 2014 of $90,000.
4-37
Education.
Under IAS 17, the entire gain on the sale and leaseback of $150,000 would have been
recognized in income in 2012. This resulted in an increase in retained earnings of $150,000 in
that year. No gain would be recognized in 2014. IFRS income in 2014 would be $30,000
smaller than U.S. GAAP income, but stockholders equity at December 31, 2014 under IFRS
would be $60,000 larger than under U.S. GAAP.
4-38
Education.

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Chapter 04 - International Financial Reporting Standards: Part I

The International Accounting Standards Board (IASB) had 28 International Accounting

Chapter 04 - International Financial Reporting Standards: Part I

Chapter 04 - International Financial Reporting Standards: Part I

Chapter 04 - International Financial Reporting Standards: Part I

Chapter 04 - International Financial Reporting Standards: Part I

Chapter 04 - International Financial Reporting Standards: Part I

23. IAS 8 establishes the following hierarchy of authoritative pronouncements to be followed in

Solutions to Exercises and Problems

Chapter 04 - International Financial Reporting Standards: Part I

13. Optiplex Company Inventory (determination of cost)

Costs to complete and sell

Net realizable value

Chapter 04 - International Financial Reporting Standards: Part I

15. Beech Corporation Inventory (LCNRV valuation)

Chapter 04 - International Financial Reporting Standards: Part I

16. Beech Corporation Inventory (reversal of write-down)

Inventory valuation allowance

Chapter 04 - International Financial Reporting Standards: Part I

17. Steffen-Zweig Company Exchange of Assets

Chapter 04 - International Financial Reporting Standards: Part I

19. Quick Company Property, Plant, and Equipment (impairment)

(a) Net selling price

Chapter 04 - International Financial Reporting Standards: Part I

December 31, Year 6

Recoverable amount, 12/31/Y6:

Chapter 04 - International Financial Reporting Standards: Part I

Present value of dismantling and removal costs

Machinery and Equipment

Present value of dismantling and removal costs

Less: Cost of inspection and overhaul

Journal entry at January 1, Year 2:

Provision for dismantling and removal

Chapter 04 - International Financial Reporting Standards: Part I

Calculation of Depreciation Expense, Year 2

Machinery and Equipment

Inspection and Overhaul Costs

Chapter 04 - International Financial Reporting Standards: Part I

21. Jefferson Company Property, Plant and Equipment (measurement subsequent to

IFRS Allowed Alternative

Chapter 04 - International Financial Reporting Standards: Part I

22. Madison Company Property, Plant and Equipment (impairment)

Years 2 - 6 Depreciation expense

1,600,000 (8,000,000/5 years)

b. Income before tax

(2,000,000) (1,600,000) (1,600,000) (1,600,000) (1,600,000) (1,600,000)

(2,000,000) (2,000,000) (2,000,000) (2,000,000) (2,000,000) (2,000,000)

Diff. (IFRS-U.S. GAAP)

(4,000,000) (1,600,000) (1,600,000) (1,600,000) (1,600,000) (1,600,000)

(2,000,000) (2,000,000) (2,000,000) (2,000,000) (2,000,000) (2,000,000)

(1,600,000) (1,600,000) (1,600,000) (1,600,000)

(2,000,000) (2,000,000) (2,000,000) (2,000,000)

Chapter 04 - International Financial Reporting Standards: Part I

Total Stockholders Equity (ignoring income taxes)

(2,000,000) (4,000,000) (6,000,000)

(2,000,000) (2,000,000) (2,000,000) (2,000,000)

(2,000,000) (4,000,000) (6,000,000) (8,000,000)

(2,000,000) (1,600,000) (1,200,000)

23. Iptat International Property, Plant and Equipment (revaluation model)