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Flashcards in IFRS Deck (78):
1

Beirn Company uses IFRS reporting.  During the current year, the company discovered it had overstated sales in the prior year.  How should Beirn handle this issue?

  1. Spread the adjustment over current and future periods.
  2. Adjust current sales for the entire adjustment.
  3. Spread the adjustment over future periods.
  4. Restate the prior year financial statements presented for comparative purposes.

Restate the prior year financial statements presented for comparative purposes.

International Financial Reporting Standards (IFRS) 
Accounting for error correction is similar to US GAAP.  A prior period error includes arithmetic mistakes, mistakes in applying accounting policies, and mistakes in recognition, measurement, presentation, or disclosures in the financial statements.  IFRS requires the entity to correct the error by restating the comparative amounts for prior periods.  If the error occurred before the earliest period presented, then the opening balances of assets, liabilities, and equity should be restated for the earliest period presented.  Similar to US GAAP, if it is impracticable to determine the periodic effects of the error, comparative information is restated from the earliest date practicable.

2

Which of the following statements about the differences between U.S. GAAP and IFRS in determining whether or not to consolidate an entity is/are correct?

  • I. IFRS guidelines for determining the eligibility of an entity to be consolidated are more principles-based than are U.S. GAAP guidelines.
  • II. In assessing an investor's level of ownership of an investee, both U.S. GAAP and IFRS consider outstanding securities that are exercisable or convertible into voting shares.
  • III. Under both U.S. GAAP and IFRS, there are circumstances under which a majority-owned subsidiary does not have to be consolidated.

A.  I only.

B.  I and II only.

C.  I and III only.

D.  I, II, and III.

I and III ONLY.

Statement I and Statement III are correct; Statement II is not correct. Under IFRS, the guidelines for determining whether or not to consolidate an entity are more principles-based than are U.S. GAAP (Statement I). Under IFRS, the basic guideline is that an entity must be consolidated when another entity has the ability to govern the financial and operating policies of the entity to obtain benefits from it. U.S. GAAP has a specific two-tiered assessment process that must be followed to determine whether or not an entity should be consolidated. Under both U.S. GAAP and IFRS, there are circumstances under which a majority-owned subsidiary does not have to be consolidated (Statement III). U.S. GAAP does not require consolidation of a majority-owned subsidiary when the investor cannot exercise control of the subsidiary. IFRS does not require consolidation of a majority-owned subsidiary under certain conditions when the parent will be consolidated with a higher-level parent.

3

Under IFRS, which one of the following instruments is most likely to be treated in its entirety as a financial liability?

  1. Convertible debt.
  2. Convertible preferred stock.
  3. Redeemable preferred stock.
  4. Common stock with a preemptive right.

Redeemable preferred stock.

Under IFRS, redeemable preferred stock would likely be treated in its entirety as a financial liability because the stock can be redeemed (repurchased) by the issuing corporation at its discretion. Since the preferred shares can be redeemed at the discretion of the issuing corporation, it is not treated as equity, but rather as a liability.

4

In measuring an impairment loss for a financial asset under U.S. GAAP and under IFRS, the carrying value of the financial asset would be compared to:

  • Under U.S. GAAP
  • Under IFRS

  • Under U.S. GAAP - FAIR VALUE
  • Under IFRS - RECOVERABLE AMOUNT

Under U.S. GAAP, an impairment loss on a financial asset is measured as the difference between the carrying value and the fair value of the asset; under IFRS, an impairment loss on a financial asset is measured as the difference between the carrying value and the recoverable amount of the asset.

5

Which of the following is a category of financial assets under IFRS for which there is not a comparable category under U.S. GAAP?

  1. Instruments held available-for-sale.
  2. Loans and receivables.
  3. Instruments held to maturity.
  4. Instruments for which changes in value are reported in profit/loss.

Loans and receivables.

U.S. GAAP does not have a category of financial assets for loans and receivables; IFRS does have such a category.

6

Under IFRS which of the following would not be recognized as part of a business combination.

  1. Contingent asset.
  2. Contingent liability.
  3. Goodwill.
  4. Fair value of the consideration transferred.

Contingent asset.

Under IFRS, contingent assets are not recognized. Under U.S. GAAP, contingent assets are recognized if the item meets the criteria of the definition of an asset.

7

Which of the following is allowable for financial reporting under IFRS?

  1. LIFO
  2. Completed contract method
  3. Extraordinary items
  4. Lower of cost or net realizable value.

Lower of cost or net realizable value.

IFRS allows the lower of cost or net realizable value to be used to value inventory.

8

Since 2008, the SEC has permitted foreign private issuers to file their financial statements using:

  1. U.S. GAAP.
  2. FASB Standards.
  3. IFRS as adopted by the European Union.
  4. IFRS as issued by the IASB.

IFRS as issued by the IASB.

Foreign private issuers in the U.S. markets can file their financial statements using IFRS issued by the IASB since 2008.

9

IASB's due process procedures includes the following steps.

  • I. Analyze comments to the Exposure Draft;
  • II. Issue the Exposure Draft;
  • III. Prepare the Discussion Paper;
  • IV. Add the item to the Working Agenda;
  • V. Discuss the issue;
  • VI. Issue the IFRS;
  • and VII. Publish the Discussion Paper.

What is the correct ordering of the steps?

  1. IV, II, III, V, VII, I, VI
  2. IV, V, II, III, VII, I, VI.
  3. IV, III, VII, V, II, I, VI.
  4. IV, V, III, VII, II, I, VI.

IV, V, III, VII, II, I, VI.

The correct ordering is:

  1. Add the item to the Working Agenda (IV),
  2. Discuss the issue (V),
  3. Prepare the Discussion Paper (III),
  4. Publish the discussion paper (VII)
  5. Issue the Exposure Draft (II)
  6. Analyze comments to the Exposure Draft and (I)
  7. Issue the IFRS (VI)

Per the IASB Due Process Handbook

10

IAS 8, Accounting Policies, Changes in Accounting Estimates, and Errors includes the IFRS hierarchy. What is the second-level, or the level after the initial level, addressing the requirements and guidance in IFRS?

  1. The definitions, recognition criteria, and measurement concepts for assets, liabilities, comprehensive income, revenue, expenses, and gains and losses in the Framework.
  2. The definitions, recognition criteria, and measurement concepts for assets, liabilities, revenue, and expenses in the Framework.
  3. Pronouncements of other standard-setting bodies, other accounting literature, and accepted industry practices.
  4. Pronouncements of other standard setting bodies using a similar conceptual framework, other accounting literature, and accepted industry practices.

The definitions, recognition criteria, and measurement concepts for assets, liabilities, revenue, and expenses in the Framework.

The IFRS hierarchy, as presented in IAS 8, includes first, the requirements in IFRS dealings with similar or related issues; second, the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework; and lastly, the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to develop accounting standards, other accounting literature, and accepted industry practices, to the extent that these do not conflict with IFRS or the Framework. IAS 8, para. 12.

11

According to the IFRS for Small and Medium-sized Entities (IFRS for SMEs), the intended user is an SME. Which of the following, if any, is (are) included in the definition of that user?

  • An entity that does not have public accountability.
  • An entity that publishes general purpose financial statements for external users.  

BOTH.

The IASB uses a broad definition of an SME. Rather than restrict it by revenue or number of employees, as other organizations, such as the World Bank and U.S. government, have done; the Board simply states that the entity does not have public accountability and that the entity publishes general purpose financial statements for external users, such as owners who are not involved in managing the business, existing and potential creditors, and credit rating agencies. IFRS for SME, para. 1.2.

12

According to the IASB Framework, the two criteria required for incorporating items into the income statement or statement of financial position are that

  1. It meets the definition of relevance and reliability.
  2. It satisfies the criteria of capital maintenance.
  3. It meets the definition of an element and can be measured reliably.
  4. It meets the requirements of comparability and consistency.

It meets the definition of an element and can be measured reliably.

In order for an item to be recognized in the financial statements, IFRS requires that it meet the definition of an element and can be measured reliably.

13

Under IFRS, an entity that acquires an intangible asset may use the revaluation model for subsequent measurement only if:

  1. The useful life of the intangible asset can be reliably determined.
  2. An active market exists for the intangible asset.
  3. The cost of the intangible asset can be measured reliably.
  4. The intangible asset is a monetary asset.

An active market exists for the intangible asset.

An active market will provide a relevant and reliable reference to the assets value. Therefore, just like with PPE, revaluation to fair value is permitted. IAS 38 defines an active market as one that the items traded in the market are homogeneous, there are willing buyers and sellers, and prices are available to the public.

14

Describe the goodwill impairment test for IFRS.

Under IFRS goodwill impairment is measured in a one-step process. The carrying value of the Cash Generating Unit (CGU) is compared to the recoverable amount. If the CV > recoverable amount the goodwill is impaired. The impairment loss is the recoverable amount - the CV. In this case $32,000 - $45,000 = ($13,000) loss.

For GAAP = Reporting Unit

15

After an impairment loss is recognized, the adjusted carrying amount of the intangible asset shall be its new accounting basis. Under IFRS, which of the following statements about subsequent reversal of a previously recognized impairment loss is correct?

  1. It is prohibited.
  2. It is allowed when events and circumstances change.
  3. It is allowed only if the intangible asset is recorded at fair value.
  4. The recovery amount can exceed the carrying value at the time of the initial impairment.

It is allowed when events and circumstances change.

Under IFRS impairment losses associated with identifiable intangibles are recoverable. Impairment losses associated with goodwill are NOT recoverable.

16

Under IFRS, which of the following is a criterion, other than goodwill, that must be met in order for an item to be recognized as an intangible asset?

  1. The item's fair value can be measured reliably.
  2. The item is part of the entity's activities aimed at gaining new scientific or technical knowledge.
  3. The item is expected to be used in the production or supply of goods or services.
  4. The item is identifiable and lacks physical substance.

The item is identifiable and lacks physical substance.

IAS 38 defines an intangible asset as a nonmonetary asset without physical substance that is identifiable. Identifiable means that the asset is 1) separable or capable of being separated or divided from the entity and can be sold or transferred and 2) arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity. This definition is essentially the same as under U.S. GAAP.

17

Choose the correct statement regarding accounting methods for revenue recognition on long-term contracts, for international and US accounting standards.

  1. Only US standards require recognition of an overall loss in the year it becomes known.
  2. Both sets of standards allow the completed contract method when the percentage of completion method is not appropriate.
  3. International standards require the cost recovery method when the percentage of completion method is not appropriate.
  4. The percentage of completion method is allowed only under US standards.

International standards require the cost recovery method when the percentage of completion method is not appropriate.

Contrary to US GAAP, international standards require a modified version of completed contract—the cost recovery method, when the percentage of completion method is not allowed.

18

Which of the following are acceptable methods for reporting comprehensive income under IFRS?

  •  I.One comprehensive income statement.
  •  II.Two statements: an income statement and a comprehensive income statement.
  •  III.In the statement of owners’ equity.
  1. I only.
  2. I and II only.
  3. I and III only.
  4. I, II, and III.

I and II only.

IFRS provides that comprehensive income may be presented in either one statement or in two statements. (US GAAP allows the presentation in all three ways.)

19

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

  1. A description of the internal controls put in place to prevent the occurrence of the error in the future periods.
  2. The impact of the correction on basic and diluted earnings per share for each period presented.
  3. The nature of the error.
  4. The amount of the correction at the beginning of the earliest period presented.

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

Under IFRS, material prior period error correction disclosures are similar to U.S. GAAP: disclosure that the previously issued financial statements were restated, a description of the error, a line item effect of the error and any per share amounts, the gross and net effects from applicable income taxes, the effects on retained earnings or other components of equity or net assets as of the earliest period presented. Internal control changes are not required to be disclosed.

20

During year 1, a hurricane destroyed Barston’s factory and the company incurred a $2,000,000 loss.  Barston is located in a geographic area where hurricanes have not occurred in over 100 years. Barston plans to rebuild the plant within the next 18 months.  If Barston prepares its financial statements in accordance with IFRS, how should the loss be disclosed?

  1. Expense or loss from hurricane.
  2. Cost of goods sold.
  3. Extraordinary loss net of tax.
  4. Discontinued operation net of tax.

Expense or loss from hurricane.

IFRS does not distinguish losses from expenses, and the loss would be recorded in the expense section of the income statement.

21

Warren Corporation prepares its financial statements in accordance with IFRS.  Which of the following may never be disclosed on Warren’s income statement?

  1. Gain or loss.
  2. Tax expense.
  3. Gain or loss from extraordinary items.
  4. Gain or loss from discontinued operations.

Gain or loss from extraordinary items.

A gain or loss from extraordinary items is not allowed on an income statement prepared using IFRS.

The Income Statement. IAS 1 requires that at a minimum, the following items should be included on an income statement:

  1. Revenue (referred to as income)
  2. Finance costs (interest expense)
  3. Share of profits and losses of associates and joint ventures accounted for using equity
  4. method
  5. Tax expense
  6. Discontinued operations
  7. Profit or loss
  8. Noncontrolling interest in profit and loss
  9. Net profit (loss) attributable to equity holders in the parent

A significant difference between US GAAP and IFRS is that IFRS does not permit the classification of items as “extraordinary items” on the income statement.  Any gains or losses should be reported as income or expense.  In addition, operating expenses may be classified either by nature or by function.  Classification by nature is based on the character of the expense, such as salaries and wages, raw materials used, interest expense, tax expense, and depreciation of assets.  Classification by function is based on the purpose of the expenditure such as manufacturing, distribution, or administration.  If the entity classifies expenses by function, cost of sales must be stated separately from other expenses.  (Note that in US GAAP, expenses are classified by function, cost of goods sold, operating expenses, etc.). For IFRS, finance costs (interest expense) must be identified separately regardless of which classification scheme is used.

22

Under IFRS, interest and dividends received may be reported on the statement of cash flows as

  1. Operating activities only.
  2. Investing activities only.
  3. Either operating or investing activities.
  4. Neither operating nor investing activities.

Either operating or investing activities.

under IFRS, interest and dividends received may be reported on the statement of cash flows as either operating or investing activities. Although an entity has reporting discretion, it must be reported consistently.

23

Smith Company reports under IFRS.  A note payable is classified as current in Smith’s statement of financial position.  Under what conditions can the note payable be classified as noncurrent instead of current?

  1. If Smith has the intent and ability to reclassify the note before the issuance of the financial statements.
  2. If Smith has the intent and ability to reclassify the note before the statement of financial position date.
  3. If Smith has executed an agreement to refinance the note as long-term, before the statement of financial position date.
  4. If Smith has executed an agreement to refinance the note as long-term, before issuance of the financial statements.

If Smith has executed an agreement to refinance the note as long-term, before the statement of financial position date.

in order to reclassify a liability from current to noncurrent, an agreement to refinance the liability as long-term must be executed before the statement of financial position date.

24

Nutmeg Corporation prepares its financial statements in accordance with IFRS.  Which of the following items is required disclosure on the income statement?

  1. Revenues, cost of goods sold, and advertising expense.
  2. Operating expenses, nonoperating expenses, and extraordinary items.
  3. Finance costs, tax expense, and income.
  4. Gross profit, operating profits, and net profits.

Finance costs, tax expense, and income.

The income statement may be prepared by presenting expenses either by nature or by function. The minimum required disclosures on the income statement include income, finance costs, share of profits and losses using the equity method, tax expense, discontinued operations, profit or loss, noncontrolling interests in profits and losses, and the net profit (loss) attributable to equity holders of the parent.

25

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

  • Cost 10.00
  • Current replacement cost 5.50
  • Net realizable value 6.00
  • Net realizable value less normal profit margin 5.20

In accordance with IFRS, what is the per-unit carrying value of inventory in the manufacturer's statement of financial position?

  1. 5.20
  2. 5.50
  3. 6.00
  4. 10.00

6.00

IFRS requires that inventory be reported at the lower of cost or net realizable value. Net realizable value is defined by IAS 2 as "the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimate costs necessary to make the sale." In this question, NRV is lower than cost, therefore the inventory should be reported at NRV of 6.00.

26

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 normal profit margin $85,000
  • Fair value $95,000

Under IFRS, what amount should the company report as inventory on its Balance Sheet?

  1. $70,000
  2. $85,000
  3. $90,000
  4. $95,000

$90,000

Since historical cost is greater than any of the other values, the question is to what value should the inventory be marked down? This answer is correct because it is the net realizable value and the IFRS requires the lower of cost or net realizable value.

27

Which of the following is considered investment property when preparing financial statements using IFRS?

  1. Building used in the business.
  2. Building under construction.
  3. Building held for sale in the normal course of business.
  4. Building held for lease under an operating lease.

Building held for lease under an operating lease.

A building held for lease under an operating lease qualifies as investment property. Investment property is defined as property held to earn rents, to earn capital appreciation, or both.

28

What is the major difference between GAAP and IFRS concerning Cash and Cash Equivalents?

U.S. GAAP = overdrafts must be shown as liabilities

IFRS = overdrafts can be netted against cash.

29

Under IFRS, a cash generating unit (CGU) is:

  1. The smallest business segment.
  2. Any grouping of assets that generates cash flows.
  3. Any group of assets that are reported separately to management.
  4. The smallest group of assets that generates independent cash flows from continuing use.

The smallest group of assets that generates independent cash flows from continuing use.

A CGU is the smallest group of assets that can be identified that generates cash flows independently of the cash flows from other assets.

30

A firm is applying international accounting standards to its defined-benefit pension plan. At the end of the current year, the actuary informs the firm that the plan has experienced an actuarial gain of $2mn. The average remaining service period of plan participants is ten years. Therefore,

  1. Defined-benefit obligation does not reflect the decrease of $2mn immediately.
  2. Pension expense will be reduced by $200,000 the following year.
  3. Other comprehensive income is immediately increased.
  4. The unrecognized net gain or loss account is immediately debited.

Other comprehensive income is immediately increased.

OCI is increased through the increase in pension gains/losses—OCI.

31

At the end of the current year, after all adjusting and closing entries had been made, a firm applying international accounting standards to its defined benefit pension plan reports the following:

  • Defined-benefit obligation, $4mn
  • Plan assets at fair value, $3mn
  • Unrecognized net pension gain, $120,000
  • Unrecognized prior service cost, $80,000
  • Pension expense, $2.2mn

What amount of (net) defined benefit liability is the firm reporting in its balance sheet?

  1. $960,000
  2. $1mn
  3. $3.24mn
  4. $1.04mn

$1.04mn

The net defined-benefit liability is the difference between DBO and plan assets, adjusted for the contra (adjunct) account balances: $4mn - $3mn + $120,000 - $80,000 = $1.04mn. The unrecognized net pension gain is an adjunct to the defined-benefit liability account and the unrecognized prior service cost is contra.

GAAP is just DBO - Plan Assets at FV

32

A firm is applying international accounting standards to its defined-benefit pension plan. The firm has chosen to recognize its pension gains and losses in other comprehensive income. As a result,

  1. A valuation account will be debited.
  2. A valuation account will be credited.
  3. The firm's earnings will not be affected.
  4. The gain will be amortized as a gradual reduction in pension expense.

The firm's earnings will not be affected.

Under this option, pension gains and losses are treated as accumulated other comprehensive income. They are not subsequently transferred to earnings. Another option is available under international standards. Under that option, pension expense (and therefore earnings) would be affected.

Alternatively, under a different option available under international standards for pension gains and losses, pension gains and losses are gradually amortized to pension expense (increase pension expense).

33

Choose the correct statement regarding the treatment of prior service cost (PSC) for defined benefit plans under international accounting.

  1. Firms have an option to record PSC directly into other comprehensive income or in earnings.
  2. The entire PSC amount, at present value, is recognized immediately in pension expense.
  3. The entire PSC amount, at present value, is recognized immediately in other comprehensive income, as per U.S. standards.
  4. The vested portion of PSC, at present value, is recognized immediately in pension expense.

The vested portion of PSC, at present value, is recognized immediately in pension expense.

The vested portion of PSC is immediately recognized in pension expense, and therefore earnings. The unvested portion is gradually recognized, under delayed recognition, in pension expense.

34

Under IFRS, how is the discount rate for pensions determined?

  1. It is determined by the market yield at the end of the reporting period for high-quality corporate bonds having a similar term or maturity.
  2. It is equal to the settlement rate.
  3. It is equal to the return on assets rate.
  4. It is determined by the firm’s weighted-average interest rate.

It is determined by the market yield at the end of the reporting period for high-quality corporate bonds having a similar term or maturity.

The discount rate to be used for pension accounting is determined by the market yield at the end of the reporting period for high-quality corporate bonds having a similar term or maturity.

35

Which of the following concepts is not part of the definition of a derivative under IFRS?

  1. The instrument has one or more underlyings.
  2. The instrument requires little or no initial net investment.
  3. The instrument permits net settlement.
  4. The instrument has a notional amount.

The instrument has a notional amount.

The definition of a derivative under IFRS does not include the concept of notional amount.

36

Which of the following statements, if either, concerning differences between U.S. GAAP and IFRS in accounting for hedges is/are correct?

  • I. IFRS permits hedging a forecasted business combination that is subject to foreign exchange risk; U.S. GAAP does not permit hedging in that case.
  • II. IFRS permits hedging part of the life of a hedged item; U.S. GAAP does not permit hedging of part of the life of a hedged item.

BOTH.

Both Statement I and Statement II are correct. IFRS permits (1) hedging a forecasted business combination that is subject to foreign exchange risk, and (2) hedging part of the life of a hedged item. U.S. GAAP does not permit hedging in either case.

37

Which of the following conditions must be met for derecognition of a transferred financial asset to occur under IFRS?

  • I. The financial asset has been transferred outside the consolidated group of the transferor.
  • II. The transferor has transferred substantially all of the risks and rewards of ownership of the financial asset.
  • III. The contractual rights to the financial assets cash flows cannot be retained by the transferor, but must be transferred to the transferee.

I and II Only.

IFRS has a two-step process in determining whether derecognition results from a transfer of assets. Both I and II are required to be met for derecognition to occur.

38

Under IFRS, which is true concerning servicing rights?

  1. Servicing rights are a new separate asset, distinct from the transferred financial asset.
  2. Servicing rights are financial assets that can be measured at amortized cost or fair value.
  3. There is specific guidance for servicing rights, as financial assets, under IFRS.
  4. Servicing rights retained in the transfer of a financial asset are considered to be a retained interest in the transferred asset, not a new separate asset, with value allocated as a portion of the carrying value of the entire financial asset before transfer.

Servicing rights retained in the transfer of a financial asset are considered to be a retained interest in the transferred asset, not a new separate asset, with value allocated as a portion of the carrying value of the entire financial asset before transfer.

Under IFRS, servicing rights retained in the transfer of a financial asset are considered to be a retained interest in the transferred asset, not a new separate asset, with value allocated as a portion of the carrying value of the entire financial asset before transfer.

39

Choose the correct statement regarding international accounting standards and U.S. standards as they relate to contingent liabilities and similar items.

  1. All provisions under international accounting standards are contingent liabilities under U.S. standards.
  2. Both sets of standards require discounting of estimated liabilities.
  3. A possible obligation that requires a future event for confirmation is treated as a contingent liability under both sets of standards.
  4. Both sets of standards are essentially the same with regard to recognition of contingent assets.

A possible obligation that requires a future event for confirmation is treated as a contingent liability under both sets of standards.

This is the one situation where both sets of standards agree with respect to classifying contingent liabilities. For international accounting standards, there are other situations calling for the reporting of a contingent liability.

40

Choose the correct statement about international accounting standards as they relate to contingent liabilities and similar items.

  1. A provision that has a reasonably possible chance of requiring the outflow of benefits is treated as a contingent liability.
  2. Provisions are recognized only when there is greater than a 90% probability of an outflow of benefits occurring.
  3. A recognized provision is a contingent liability.
  4. A provision for which it is probable that an outflow of benefits will be required is recognized, even if it is not of estimable amount.

A provision that has a reasonably possible chance of requiring the outflow of benefits is treated as a contingent liability.

A provision is a present obligation. This is one of the ways a liability can be treated as a contingent liability under international standards. If the provision involved a probable outflow, then it would be recognized, but would not be a contingent liability.

41

Which of the following is not a contingent liability under international accounting standards?

  1. A provision with a 60% chance of requiring an outflow of benefits, amount is estimable.
  2. A provision with a 40% chance of requiring an outflow of benefits, amount is estimable.
  3. A provision with a 90% chance of requiring an outflow of benefits, amount not estimable.
  4. A possible obligation.

A provision with a 60% chance of requiring an outflow of benefits, amount is estimable.

A probable (< 50%) outflow of benefits is implied, and the amount is estimable. This is a recognized liability for international accounting standards, not a contingent liability.

42

Which of the following is a recognized liability for both international accounting standards and U.S. standards?

  1. Regular warranty liability, 60% probability of occurring.
  2. Obligation to provide rebates to customers, 90% probability of occurring.
  3. Possible loss due to lawsuit, 60% probability of occurring.
  4. Possible loss due to lawsuit, 40% probability of occurring.

Obligation to provide rebates to customers, 90% probability of occurring.

For international accounting standards, this is a recognized provision. For U.S. standards, it is a recognized contingent liability.

43

A firm considers its regular warranty liability to be an existing liability of uncertain amount. At year-end, the firm estimates that the amount required to extinguish its warranty liability in the future is in the range of $20 to $60 million, with no amount more likely than any other. Under the two sets of standards, what amount will be recognized?

  • International   
  • U.S.

  • International $40 million
  • U.S. $20 million

International accounting standards recognize the midpoint, whereas U.S. standards recognize the low point.

44

In a barter transaction where advertising services provided are exchanged for advertising services received, under which of the following situations can the advertising provider recognize revenue for the services performed? Assume the accounting is under IFRS guidelines.

  1. When the advertising services in the exchange are similar
  2. When the fair value of the advertising services received can be reliably measured
  3. When there is a nonbarter transaction for similar advertising services that can be reliably measured with the same counterparty
  4. When there is a nonbarter transaction for similar advertising services that can be reliably measured with a different counterparty

When there is a nonbarter transaction for similar advertising services that can be reliably measured with a different counterparty

The fair value of the advertising services provided can be reliably measured by reference to a nonbarter transaction for similar advertising with a different counterparty (SIC Interpretation 31, para 5).

45

Under IFRS reporting, a prior period error includes all of the following except for:

  1. Changing accounting policies.
  2. Incorrect application of accounting policies.
  3. Disclosure mistakes.
  4. Measurement mistakes.

Changing accounting policies.

Under IFRS reporting, changes in accounting policies are not considered prior period errors. Prior period errors include arithmetic mistakes; accounting policy application mistakes; and recognition, measurement, presentation, and disclosure mistakes.

International Financial Reporting Standards (IFRS) 

Accounting for error correction is similar to US GAAP.  A prior period error includes arithmetic mistakes, mistakes in applying accounting policies, and mistakes in recognition, measurement, presentation or disclosures in the financial statements.  IFRS requires the entity to correct the error by restating the comparative amounts for prior periods.  If the error occurred before the earliest period presented, then the opening balances of assets, liabilities, and equity should be restated for the earliest period presented.  Similar to US GAAP, if it is impracticable to determine the periodic effects of the error, comparative information is restated from the earliest date practicable.

46

Beirn Company uses IFRS reporting.  During the current year, the company discovered it had overstated sales in the prior year.  How should Beirn handle this issue?

  1. Spread the adjustment over current and future periods.
  2. Adjust current sales for the entire adjustment.
  3. Spread the adjustment over future periods.
  4. Restate the prior year financial statements presented for comparative purposes.

Restate the prior year financial statements presented for comparative purposes.

Accounting for error correction is similar to US GAAP.  A prior period error includes arithmetic mistakes, mistakes in applying accounting policies, and mistakes in recognition, measurement, presentation, or disclosures in the financial statements.  IFRS requires the entity to correct the error by restating the comparative amounts for prior periods.  If the error occurred before the earliest period presented, then the opening balances of assets, liabilities, and equity should be restated for the earliest period presented.  Similar to US GAAP, if it is impracticable to determine the periodic effects of the error, comparative information is restated from the earliest date practicable.

47

Which statement is true with respect to push-down accounting?

  • IFRS permits the use of push-down accounting.
  • IFRS does not permit the use of push-down accounting.
  • SEC accounting does not permit the use of push-down accounting.
  • Both SEC accounting and IFRS permit the use of push-down accounting.

IFRS does not permit the use of push-down accounting.

  1. IFRS requires business combinations to be accounted for using the acquisition method.  Although the accounting for business combinations is similar for US GAAP and IFRS, it is different in several respects.
  2. Under US GAAP noncontrolling interest is recorded at its fair value.   IFRS, on the other hand, allows noncontrolling interest to be valued at either fair value or the proportionate share of the value of the identifiable net assets of the acquiree.

48

Which statement is true with respect to noncontrolling interest?

  1. US GAAP records noncontrolling interest at the proportionate share of the value of identifiable net assets of the acquiree.
  2. IFRS only records noncontrolling interest at the proportionate share of the value of identifiable net assets of the acquiree.
  3. Both US GAAP and IFRS record noncontrolling interest at the proportionate share of the value of identifiable net assets of the acquiree.
  4. IFRS permits recording noncontrolling interests at either fair value or the proportionate share of the value of identifiable net assets of the acquiree.

IFRS permits recording noncontrolling interests at either fair value or the proportionate share of the value of identifiable net assets of the acquiree.

IFRS permits recording noncontrolling interests at either fair value or the proportionate share of the value of identifiable net assets of the acquiree.

49

Under IFRS, a parent may exclude a subsidiary from consolidation if all of the following conditions exist, except:

  1. It is wholly or partially owned and its other owners do not object to nonconsolidation.
  2. It reports only one class of stock in its balance sheet.
  3. Its parent prepares consolidated financial statements that comply with IFRS.
  4. It does not have any debt or equity instruments publicly traded.

It reports only one class of stock in its balance sheet.

Because it is not one of the three conditions required to exclude a subsidiary from consolidation. The three required conditions are:

  1. it is wholly or partially owned and its other owners do not object to nonconsolidation;
  2. it does not have any debt or equity instruments publicly traded; and
  3. its parent prepares consolidated financial statements that comply with IFRS.

50

Gaffney uses IFRS to prepare its financial statements. During year 4, Gaffney voluntarily changes its accounting method because the new method will provide more reliable and relevant information. Gaffney can estimate the effects of the change. How should Gaffney treat the change in accounting principle?

  1. On a prospective basis.
  2. On a retrospective basis.
  3. By restating the financial statements.
  4. By a cumulative adjustment on the income statement.

On a retrospective basis.

IFRS requires changes in accounting principles to be reported by giving retrospective application to the earliest period presented.

The rules for accounting changes are also similar to US GAAP. Accounting changes may occur only when a change is required by an IFRS, or there is a voluntary change in accounting methods. In the case of a new IFRS pronouncement, the transition rules in the new IFRS statement should be followed.  A voluntary change in accounting method may only be made if it provides reliable and more relevant information about the transactions, entity’s financial position, performance, or cash flows.  A voluntary change in accounting method is given retrospective application by applying the policy as if the new policy had always been applied. Retrospective application provides that the opening balance of equity is adjusted for the earliest period presented, and that other amounts are disclosed for each prior period as if the new accounting policy had always been applied.  If it is impracticable to determine the effects of the change, then the change may be applied on a prospective basis. Disclosures include the title of the IFRS requiring the change, the nature of the change, the amount of the adjustments to each financial statement line item, and effects on earnings per share.

51

Nortex Company reports under IFRS.  At December 31, 20X1, Nortex classified a note payable as a current liability.  Under what conditions could Nortex reclassify the note payable from current to noncurrent?

  1. If Nortex has the intent and ability to reclassify the note before the issuance of the financial statements.
  2. If Nortex has the intent and ability to reclassify the note before the statement of financial position date.
  3. If Nortex has executed an agreement to refinance the note before issuance of the financial statements.
  4. If Nortex has executed an agreement to refinance the note before the statement of financial position date.

If Nortex has executed an agreement to refinance the note before the statement of financial position date.

Under IFRS, an entity must have an executed agreement to reclassify the note before the statement of financial position date in order to treat the note as anything other than current.

52

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

  • Cost $10.00
  • Current replacement cost $5.50
  • Net realizable value $6.00
  • Net realizable value less normal profit margin $5.20

In accordance with IFRS, what is the per-unit carrying value of inventory in the manufacturer's statement of financial position?

  1. $5.20
  2. $5.50
  3. $6.00
  4. $10.00

$6.00

Under IFRS, inventory is valued at lower of cost or net realizable value. This answer is correct because net realizable value ($6) is less than cost ($10).

53

The following costs pertain to Den Co.’s purchase of inventory:

  • 700 units of product A $3,750
  • Freight-in $175
  • Cost of materials and labor incurred to bring product A to saleable condition $900
  • Insurance cost during transit of purchased goods $100
  • Total $4,925

What amount should Den record as the cost of inventory as a result of this purchase?

  1. $3,925
  2. $4,650
  3. $4,825
  4. $4,925

$4,925

Inventory costs include all costs necessary to prepare goods for sale. For a merchandising concern, these costs include the purchase price of the goods, freight-in, insurance, warehousing, and any costs necessary to get the goods to the point of sale (except interest on loans obtained to purchase the goods). Therefore, the correct answer is that inventory costs are equal to $4,925 ($3,750 + $175 + $900 + $100).

54

The following data were available from Mith Co.’s records on December 31, year 2:

  • Finished goods inventory, 1/1/Y2 $120,000
  • Finished goods inventory, 12/31/Y2 $110,000
  • Cost of goods manufactured $520,000
  • Loss on sale of plant equipment $50,000

The cost of goods sold for year 2 was

  1. $510,000
  2. $520,000
  3. $530,000
  4. $580,000

$530,000

Inventory costs include all costs necessary to prepare goods for sale. For a merchandising concern, these costs include the purchase price of the goods, freight-in, insurance, warehousing, and any costs necessary to get the goods to the point of sale (except interest on loans obtained to purchase the goods). Therefore, the correct answer is that inventory costs are equal to $4,925 ($3,750 + $175 + $900 + $100).

55

Which of the following is true about biological assets under IFRS?

  • Biological assets are only found in Biotech companies.
  • Biological assets must be valued at cost.
  • Biological assets are living animals or plants and must be disclosed as a separate item on the balance sheet.
  • Biological assets do not generally have future economic benefits.

Biological assets are living animals or plants and must be disclosed as a separate item on the balance sheet.

Biological assets (agricultural assets) are living animals or plants and must be disclosed as a separate item on the balance sheet.  Biological assets are recognized when a future economic bene­fit is probable, the entity controls the asset as a result of past events, and the cost or fair value can be measured reliably.  Agricultural produce should be measured as fair value less costs to sell at harvest.

56

Parker Corporation prepares its financial statements in accordance with IFRS. Parker uses the revaluation model for reporting plant, property, and equipment. Parker paid $400,000 for equipment on January 5, year 1. The equipment is valued at $410,000 on December 31, year 1. The $10,000 gain should be included in

  1. A revaluation surplus account in other comprehensive income.
  2. Gain from revaluation on the income statement.
  3. Income for the period.
  4. An extraordinary gain on the income statement.

A revaluation surplus account in other comprehensive income.

When the revaluation method is used for reporting plant, property, and equipment under IFRS, any gain or loss is recorded in a revaluation surplus account which is classified as other comprehensive income.

57

Paisley Corporation presents its financial statements in accordance with IFRS. What valuation model should Paisley use to value its plant, property, and equipment?

  1. The cost model or the fair value model.
  2. The cost model or the revaluation model.
  3. The cost model or the fair value through profit or loss model.
  4. The revaluation model or the fair value model.

The cost model or the revaluation model.

Plant, property, and equipment (PPE) are tangible items which are expected to be used during more than one period, and used in the production or supply of goods or services, for rental to others, or for administrative purposes. Plant, property, and equipment are recorded at cost.  Cost includes the purchase price net of discounts and rebates, the expenditures to bring the asset to its required location and condition, delivery and handling, site preparation, installation, assembly costs, professional fees, and the estimate of the cost of obligations required for the asset’s disposal (decommissioning or site restoration).  Similar to US GAAP, costs of self-constructed assets include material, labor, and interest costs.

After an asset is initially recognized at cost, it is subsequently measured using either the cost model (CM) or the revaluation model (RM).  Long-lived assets are divided into classes, and a decision is made for each class on which valuation method is applied.  Note that a different valuation model can be used for different classes of assets but not individual assets within a class. Examples of classes of assets include land, equipment, motor vehicles, land and buildings, ships, aircraft, and furniture and fixtures.

The cost model (CM) provides that the asset is carried at cost less an accumulated depreciation and less any accumulated impairment loss.  The depreciation method chosen should reflect the pattern of economic benefits expected to be consumed. The straight-line, declining balance, and units of production methods are acceptable depreciation methods.  A change in depreciation method is considered a change in accounting estimate and is accounted for on a prospective basis.

Under the revaluation model (RM), the carrying amount of the asset is the fair value at the date of revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment loss.  The revaluation model (RM) should be applied to assets whose value can be reliably measured.  There is no rule regarding the frequency or date of revaluation; therefore, annual revaluations are not required.   However, when revaluation is performed it must be performed for the entire class of assets. Revaluation to fair value usually involves obtaining appraisals.  When a class of assets is revalued, the asset account is written up or down, and the adjustment is recorded to the revaluation surplus account which is reported in other comprehensive income for the period.  If the revaluation model is used, accumulated depreciation can be adjusted proportionately, or the accumulated depreciation account can be eliminated and the asset shown net. When an asset is disposed of, a gain or loss is recognized and reported on the income statement.  Any balance in the revaluation surplus account is transferred directly to retained earnings (not to profit or loss).

58

Which of the following is considered investment property when preparing financial statements using IFRS?

  1. Building used in the business.
  2. Building under construction.
  3. Building held for sale in the normal course of business.
  4. Building held for lease under an operating lease.

Building held for lease under an operating lease.

A building held for lease under an operating lease qualifies as investment property. Investment property is defined as property held to earn rents, to earn capital appreciation, or both.

59

Under IFRS, if the intangible asset’s carrying value is greater than its recoverable amount it is considered to be im­paired.  The recoverable amount is

  1. Its historical cost.
  2. Its fair value less cost of disposal.
  3. The greater of its net selling price or its value in use.
  4. Its replacement cost.

The greater of its net selling price or its value in use.

Recoverable amount is defined as the greater of net selling price (fair value less costs of disposal) or value in use.

Intangible assets with finite lives are tested for impairment when the asset’s carrying value is more than its recoverable amount.  However, if an intangible asset has an indefinite life, a test for impairment must be made annually.

  1. If an intangible asset’s carrying value is more than its recoverable amount, the asset is considered impaired.
  • The recoverable amount is the greater of the net selling price (fair value less costs of disposal) or its value in use.
  • The value in use is determined by estimating the future cash flows expected from the continued use of the asset and its disposal.
  1. Impairments of intangible assets carried at historical cost are recognized as charges against the current period profit or loss.
  2. If the revaluation method was used for long-lived assets, any increase in value was recorded in a revalu­ation account in other comprehensive income.  Therefore, the impairment adjustment is used to reverse any previous revaluation adjustment.  Once the revaluation account is reduced to zero, the impairment is then charged to expense of the period.

60

Frank Corporation has investment property that is held to earn rental income.  Frank prepares its financial statements in accordance with IFRS.  Frank uses the fair value model for reporting the investment property.  Which of the following is true?

  1. Changes in fair value are reported as deferred revenue for the period.
  2. Changes in fair value are reported as other comprehensive income for the period.
  3. Changes in fair value are reported as an extraordinary gain on the income statement.
  4. Changes in fair value are reported as profit or loss in the current period.

Changes in fair value are reported as profit or loss in the current period.

IFRS provides that the fair value model requires that investment property be measured at fair value, and any changes in fair value are recognized in profit or loss of the period.

61

IFRS allows plant, property, and equipment to be valued using the cost model or the revaluation model.  Which statement is true about the revaluation model for valuing plant, property, and equipment?

  1. Revaluation of assets must be made on the last day of the fiscal year.
  2. Revaluation of assets must be made on the same date each year.
  3. Revaluation of assets must be made every two years.
  4. There is no rule for the frequency or date of revaluation.

There is no rule for the frequency or date of revaluation.

 

62

Strand, Inc. provides an incentive compensation plan under which its president receives a bonus equal to 10% of the corporation’s income in excess of $200,000 before income tax but after deduction of the bonus. If income before income tax and bonus is $640,000 and the tax rate is 40%, the amount of the bonus would be

  1. $40,000
  2. $44,000
  3. $58,180
  4. $64,000

$40,000

The bonus is equal to 10% of income in excess of $200,000 after deducting the bonus.  The solutions approach is to set up and solve an equation.

  • B = .10 ($640,000 − $200,000 − B)
  • B = .10 ($440,000 − B)
  • B = $44,000 − .10B
  • 1.10 B = $44,000
  • B = $44,000 / 1.10 = $40,000

Note that the tax rate (40%) is not used.  The bonus is based on income before, not after, taxes.

63

64

Hope Corporation prepares its financial statements in accordance with IFRS. Hope intends to refinance a $500,000 note payable due on March 1, year 2. The company expects the note to be refinanced for a period of five years. Under what circumstances can Hope report the note payable as a noncurrent liability on its December 31, year 1 statement of financial position?

  1. If Hope has the intent and ability to refinance before December 31, year 1.
  2. If Hope has executed an agreement to refinance prior to the issuance of the financial statements on March 31, year 2.
  3. If Hope has the intent and ability to refinance before the issuance of the financial statements on March 31, year 2.
  4. If Hope has executed an agreement to refinance by December 31, year 1.

If Hope has executed an agreement to refinance by December 31, year 1.

IFRS requires that Hope have executed an agreement to refinance at the balance sheet date in order to classify the debt as a noncurrent liability. Inasmuch as no agreement existed at the balance sheet date, the note payable must be classified as a current liability.

65

On May 1, year 2, Winston Corporation received notification of legal action against the firm. Winston’s attorneys determine that it is probable the company will lose the suit, and the loss is estimated at $5,000,000. Winston’s accountants believe this amount is material and should be disclosed. Winston prepares its financial statements in accordance with IFRS. How should the estimated loss be disclosed in Winston’s financial statements at December 31, year 2?

  1. As a loss recorded in other comprehensive income.
  2. As a provision for loss reported in the balance sheet and a loss on the income statement.
  3. As a contingent liability reported in the balance sheet and a loss on the income statement.
  4. In the footnotes to the financial statements as a contingency.

As a provision for loss reported in the balance sheet and a loss on the income statement.

IFRS defines a provision as a liability that is uncertain in timing or amount. Provisions are made for estimated liabilities and recorded as a loss in earnings for the period if the outcome is probable and measurable.

66

Under IFRS, which statement about borrowing costs is true?

  • I.Borrowing costs must always be capitalized.
  • II.Borrowing costs can never be capitalized.
  • III.Borrowing costs must be capitalized if they meet certain criteria.
  • IV.Borrowing costs must be expensed if they do not meet certain criteria.
  1. I only.
  2. III only.
  3. I and II.
  4. III and IV.

III and IV.

Borrowing costs must be capitalized if they meet certain criteria. Borrowing costs that do not meet the rules for capitalization are expensed in the current period.

67

Under IFRS, all of the following are acceptable method of accounting for treasury stock except:

  1. Par value method.
  2. Cost method.
  3. Constructive retirement method.
  4. Fair value method.

Fair value method. - a firm cannot mark-to-market its own stock!

The fair value method is not an acceptable method of accounting for treasury stock. The three acceptable methods are the par value method, the cost method, and the constructive retirement method.

68

On May 1, Year 1, Reynolds purchased 5,000 shares of common stock of Haywood Corp. for $250,000 and classified the investment as available-for-sale securities. On December 31, Year 1, the Haywood stock had a fair value of $257,000. Reynolds Corp. prepares its financial statements in accordance with IFRS. Reynolds elects to use fair value through profit or loss to record its investments in available-for-sale securities. How is the gain on the investment in Haywood stock reported in Reynolds’s Year 1 financial statements?

  1. As a $7,000 gain in other comprehensive income.
  2. No gain or loss is reported in Year 1.
  3. As a $7,000 prior-period adjustment to retained earnings.
  4. As a $7,000 gain in current earnings of the period.

As a $7,000 gain in current earnings of the period.

IFRS requires that if an asset is classified as fair value through profit or loss, it is remeasured to fair value and any profit or loss is recorded in the period. Therefore, Reynolds should recognize a $7,000 gain in current earnings of the period.

69

Under IFRS, financial instruments should be classified as

  • Tradable
  • Fair value through profit or loss

  • Tradable - NO
  • Fair value through profit or loss - YES

IFRS classifies instruments as fair value through profit or loss (FVTPL). Held for trading is a category of FVTPL, but tradable is not.

70

Under IFRS, all of the following are types of hedges except for:

  1. Foreign currency hedge.
  2. Cash flow hedge.
  3. Fair value hedge.
  4. Hedge of net investment.

Foreign currency hedge.

Although a foreign currency hedge is a type of hedge under US GAAP, it is not, under IFRS. The three types of hedge classification under IFRS are cash flow hedge, fair value hedge, and hedge of net investment.

71

Stevie Company owns shares of stock in Rod Inc.  Stevie received a $5,000 cash dividend.  If Stevie reports under IFRS, the dividend received can be classified as

  1. Only an operating activity.
  2. Only as an investing activity.
  3. Either an operating activity or investing activity.
  4. Either an operating activity or financing activity

Either an operating activity or investing activity.

Under IFRS, dividends received may be classified as an operating activity or an investing activity.

72

Abbey Corporation prepares its financial statements in accordance with IFRS.  Abbey acquired equipment by signing a $100,000 note payable with the seller of the equipment.  How should this transaction be reported on the statement of cash flows?

  1. As an outflow of cash from investing activities and an inflow of cash from financing activities.
  2. As an inflow of cash from financing activities and an outflow of cash from operating activities.
  3. At the bottom of the statement of cash flows as a significant noncash transaction.
  4. In the notes to the financial statements as a significant noncash transaction.

In the notes to the financial statements as a significant noncash transaction.

This transaction did not involve an exchange of cash; therefore, it is not included on the statement of cash flows. IFRS requires that significant noncash transactions be reported in the notes to the financial statements.

73

Darinda Corporation has a cash advance from the bank for an overdraft of $5,000 on its checking account. Darinda prepares its financial statements in accordance with IFRS.  The cash advances from the bank  due to the overdraft should be reported on the statement of cash flows as

  1. Operating activities.
  2. Investing activities.
  3. Financing activities.
  4. Other significant noncash activities.

Operating activities.

IFRS requires cash advances and loans from bank overdrafts to be classified as operating activities.

74

Which of the following methods is used in IFRS to account for defined benefit pension plans?

  1. Projected-unit-credit method.
  2. Benefit-years-of-service method.
  3. Accumulated benefits method.
  4. Vested years of service method.

Projected-unit-credit method.

IFRS requires the use of the projected-unit-credit method to calculate the present value of the defined benefit obligation (PV-DBO).

75

76

Under IFRS, how is the discount rate for pensions determined?

  1. It is determined by the market yield at the end of the reporting period for high-quality corporate bonds having a similar term or maturity.
  2. It is equal to the settlement rate.
  3. It is equal to the return on assets rate.
  4. It is determined by the firm’s weighted-average interest rate.

It is determined by the market yield at the end of the reporting period for high-quality corporate bonds having a similar term or maturity.

The discount rate to be used for pension accounting is determined by the market yield at the end of the reporting period for high-quality corporate bonds having a similar term or maturity.

77

Erdman Corp. signs a lease to rent equipment for ten years. The lease payments of $20,000 per year are due on January 2 each year. At the end of the lease term, Erdman may purchase the equipment for $500. The equipment is estimated to have a useful life of 10 years. Erdman prepares its financial statements in accordance with IFRS. Erdman should classify this lease as a(n):

  1. Operating lease.
  2. Capital lease.
  3. Sales-type lease.
  4. Finance lease.

Finance lease.

IFRS requires a lease to be classified as a finance lease if substantially all the risks or benefits of ownership have been transferred to the lessee. Because the lease contains a bargain purchase option and the lease is for the entire life of the asset, all the risks and benefits have been transferred. Therefore, the lease meets the criteria for a finance lease.

IFRS provides that a lease is a finance lease if substantially all of the risks or benefits of ownership have been transferred to the lessee.  If any one of the four criteria is met, the lease is considered a finance lease.

  1. The lease transfers ownership to the lessee by the end of the lease term or the lease contains a bargain purchase option, and it is reasonably certain that the option will be exercised.
  2. The lease term is for the major part of the economic life of the asset (title may or may not pass to the lessee).
  3. The present value of the minimum lease payments at the inception of the lease is at least equal to substantially all of the fair value of the leased asset.
  4. The leased assets are of a specialized nature such that only the lessee can use them without modifications.

78

Galway Corp. prepares its financial statements in accordance with IFRS. Which of the following is true regarding reporting Galway’s deferred income taxes in its year 4 financial statements?

  1. Deferred tax assets are always netted with deferred tax liabilities to arrive at one amount presented on the balance sheet.
  2. Deferred taxes of one jurisdiction are offset against another jurisdiction in the netting process.
  3. Deferred tax assets and liabilities may only be classified as noncurrent.
  4. Deferred tax assets and liabilities are classified as current and noncurrent based on their expiration dates.

Deferred tax assets and liabilities may only be classified as noncurrent.

IFRS does not permit deferred tax assets or liabilities to be classified as current. Therefore, deferred tax assets and liabilities are reported in the noncurrent section of the statement of financial position.