IFRS Chapters 10 & 11

Question 1

How should an asset aquired through a government grant be recorded?

Answer 1

1. Cost or
2. Fair Value (most companies use fair value to establish value on the books)

Question 2

What approach should be used when recording the government grant?

Answer 2

Income approach (required by GAAP and IFRS)

Question 3

Explain the two methods of the Income Approach (IFRS).

Answer 3

• Deferred Grant Revenue: systematically allocate over the assets life
• Reduce Carrying Value: reduce CV of asset by the amount of the grant. Depreciation is therefore reduced over the life of the asset.

Question 4

Explain how the Income Approach is handled under GAAP.

Answer 4

Revenue is recognized and the asset is reported at fair value.

Question 5

When are costs recognized subsequent to acquisition?

Answer 5

When future economic benefit increases in

• useful life,
• quantity of produced product, or
• quality of product produced

Question 6

What are the major types of expenditures that should be capitalized?

Answer 6

ADDITIONS. Increase or extension of existing assets.

IMPROVEMENTS AND REPLACEMENTS. Substitution of an improved asset for an existing one.

REARRANGEMENT AND REORGANIZATION. Movement of assets from one location to another.

REPAIRS. Expenditures that maintain assets in condition for operation.

Question 7

Are companies required to use component depreciation?

Answer 7

IFRS: YES

GAAP: NO (permitted to, but rarely used)

Question 8

Explain the 2-Step Model for impairment of long-lived tangible assets with GAAP.

Answer 8

US GAAP relies on a recoverability test to determine whether impairment has occurred. If the sum of expected future cash flows (undiscounted) is less than the carrying amount of the asset, the asset is considered impaired.

The impairment loss should be measured as the difference between the carrying amount of the asset and its fair value / PV of future cash flows.

Question 9

When is a long-lived asset impaired under IFRS?

Answer 9

when its recoverable amount is less than its carrying amount

Question 10

Define recoverable amount

Answer 10

the higher of fair value less costs to sell or value-in-use

Question 11

Define fair value less costs to sell

Answer 11

means what the asset could be sold for after deducting costs of disposal

Question 12

Define value-in-use

Answer 12

the present value of cash flows expected from the future use and eventual sale of the asset at the end of its useful life

Question 13

If either the fair value less costs to sell or value-in-use is higher than the carrying amount, is there an impairment?

Answer 13

No

Question 14

If both the fair value less costs to sell and value-in-use are lower than the carrying amount

Answer 14

Yes

Question 15

What happens if a company intends to dispose of the impaired asset, instead of holding it for use?

Answer 15

In this case, the impaired asset is recorded at the lower-of-cost-or-net realizable value (fair value less costs to sell)

Question 16

Explain how to handle impairment of assets to be disposed of?

Answer 16

Report the impaired asset at the lower-of-cost-or-net realizable value (fair value less costs to sell).

No depreciation or amortization is taken on assets held for disposal during the period they are held.

Can write up or down an asset held for disposal in future periods, as long as the carrying amount after the write up never exceeds the carrying amount of the asset before the impairment.

Question 17

With a revaluation increase, where does that generally go?

Answer 17

Equity.

Question 18

A revaluation decrease is reported how?

Answer 18

As an expense (impairment loss), unless it offsets previously recorded revaluation increases. If the revaluation increase offsets a revaluation decrease that went to expense, then the increase is reported in income

Question 19

Under no circumstances can the Accumulated Other Comprehensive Income account related to revaluations have a ________ _______

Answer 19

negative balance.