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Appendix A: International Financial Reporting Standards
True / False
1. The state of economic development can affect accounting standards.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-01 - LO: A-01
KEYWORDS:
Bloom's: Remembering
2. Japan has a greater number of differences than the U.S. between the amount of income reported to stockholders and that
reported to the taxing authorities.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-01 - LO: A-01
KEYWORDS:
Bloom's: Remembering
3. No single explanation can be given for the divergence of accounting standards.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-01 - LO: A-01
KEYWORDS:
Bloom's: Remembering
4. In countries, like Japan and much of Europe, fewer differences between the amount of income reported to stockholders
and that reported to the taxing authorities exist than in the U.S.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-01 - LO: A-01
KEYWORDS:
Bloom's: Remembering
5. According to the text, in economies like those that made up the former Soviet Union, accounting standards are
relatively less complex due to the fact that they are just beginning to be developed.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-01 - LO: A-01
KEYWORDS:
Bloom's: Remembering
6. Ultimately, it will be the responsibility of the FASB in the U.S. to decide if the advantages of IFRS’s outweigh the
disadvantages.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.A-02 - LO: A-02
KEYWORDS:
Bloom's: Understanding
7. A single set of accounting standards could help a U.S. company save time and money in the acquisition of a German
company.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-02 - LO: A-02
KEYWORDS:
Bloom's: Understanding
8. IFRS is now mandatory in all member states of the economic and political organization known as the European Union.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-03 - LO: A-03
KEYWORDS:
Bloom's: Remembering
9. Companies in Mexico had to begin using IFRS by 2020.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-03 - LO: A-03
KEYWORDS:
Bloom's: Remembering
10. The U.S. accounting standards are more principle-based than IFRS.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-04 - LO: A-04
KEYWORDS:
Bloom's: Understanding
11. While U.S. GAAP requires a complete set of financial statements, including a balance sheet, statement of
stockholders’ equity, income statement, and statement of cash flows, IFRS does not.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-04 - LO: A-04
KEYWORDS:
Bloom's: Remembering
12. U.S. GAAP requires companies to present a balance sheet with classifications for current and long-term liabilities,
while IFRS does not.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-04 - LO: A-04
KEYWORDS:
Bloom's: Remembering
13. Both U.S. GAAP and IFRS apply the lower-of-cost-or market rule in a similar manner to inventory.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-04 - LO: A-04
KEYWORDS:
Bloom's: Remembering
14. Both U.S. GAAP and IFRS classify gains and losses that are both unusual in nature and infrequent in occurrence as
extraordinary and present them in a separate section of the income statement.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-04 - LO: A-04
KEYWORDS:
Bloom's: Remembering
15. Regarding the valuation of operating assets, IFRS allows companies to use fair value.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-04 - LO: A-04
KEYWORDS:
Bloom's: Remembering
16. Under IFRS, if inventory is written down to a new lower market value, this cannot be reversed in later periods.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-04 - LO: A-04
KEYWORDS:
Bloom's: Remembering
17. Essentially, the entire statement of financial position is inverted compared to what is commonly seen in the United
States.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-05 - LO: A-05
KEYWORDS:
Bloom's: Remembering
18. There is a standard format in various countries for the statement of financial position.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-05 - LO: A-05
KEYWORDS:
Bloom's: Remembering
Multiple Choice
19. All of the following statements are true about inflation except:
a.
U.S. companies no longer present financial information adjusted for the effects of inflation.
b.
In recent years, inflation has been more rampant in Latin America and South America than the rest of the
world.
c.
The FASB developed rules for companies in the United States to use to adjust for inflation.
d.
The U.S. and Germany adjust their financial statements for inflation.
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-01 - LO: A-01
KEYWORDS:
Bloom's: Applying
20. Which of the following statements is true regarding common law?
a.
In common law countries, there are generally more statutes written into the laws.
b.
In common law countries, there is less reliance on interpretation by the courts.
c.
Because more details are written into U.S. law, FASB has shorter and more general accounting standards than
most countries.
d.
The common law system has its roots in the United Kingdom.
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-01 - LO: A-01
KEYWORDS:
Bloom's: Remembering
21. Which of the following countries do not use a common law system?
a.
The United States
b.
Germany
c.
The United Kingdom
d.
Both a and c are correct.
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-01 - LO: A-01
KEYWORDS:
Bloom's: Remembering
22. All of the following are among the most important reasons why accounting standards differ around the world except:
a.
differences in the state of economic development
b.
differences in taxation
c.
differences in inflation
d.
differences in code law in all countries around the world
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-01 - LO: A-01
KEYWORDS:
Bloom's: Evaluating
23. All of the following are advantages available to companies if a single set of accounting standards were used except:
a.
A single set of worldwide accounting standards would have no effect on accounting fee costs.
b.
A single set of standards would make it much easier to decide whether to acquire a foreign company.
c.
A single set of worldwide accounting standards would facilitate comparisons for investment purposes.
d.
A single set of worldwide accounting standards would make it easier to access foreign capital markets
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-02 - LO: A-02
KEYWORDS:
Bloom's: Understanding
24. Which of the following is a commonly cited disadvantage of having a new unified set of accounting standards?
a.
Acquiring foreign companies would become a more confusing proposition.
b.
Corporations may find themselves more susceptible to lawsuits due to the principles-based system.
c.
Time and money would not be saved in accessing capital markets abroad.
d.
The SEC would be dissolved if international accounting standards were adopted.
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-02 - LO: A-02
KEYWORDS:
Bloom's: Remembering
25. Which organization would have the ultimate responsibility of deciding if the advantages outweigh the disadvantages
in the adoption of IFRS accounting standards in the U.S.?
a.
FASB
b.
SEC
c.
IASB
d.
AICPA
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-02 - LO: A-02
KEYWORDS:
Bloom's: Analyzing
26. The benefits of a single set of accounting standards used around the world would include all of the following except:
a.
They would eventually save companies considerable money in accounting fees.
b.
They would prevent competitors from acquiring each other.
c.
They would allow easier comparisons by analysts and investors.
d.
They would facilitate access to foreign capital markets.
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-02 - LO: A-02
KEYWORDS:
Bloom's: Understanding
27. The group with primary responsibility for development of a single set of accounting standards around the world is the
a.
FASB
b.
SEC
c.
IFRS
d.
IASB
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-03 - LO: A-03
KEYWORDS:
Bloom's: Remembering
28. During what year did the IASB and FASB reaffirm their commitment to achieving convergence of accounting
standards in the U.S.?
a.
2009
b.
2007
c.
2002
d.
2008
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-03 - LO: A-03
KEYWORDS:
Bloom's: Remembering
29. The International Accounting Standards Committee was established in 1973 to develop worldwide standards. Which
group replaced it in 2001?
a.
FASB
b.
IFRS
c.
IIA
d.
IASB
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-03 - LO: A-03
KEYWORDS:
Bloom's: Remembering
30. What is the name of the formalized commitment of the IASB and the FASB to converge U.S. and international
accounting standards?
a.
The Sarbanes-Oxley Act
b.
The Norwalk Agreement
c.
The IFRS Foundation
d.
The Conceptual Framework
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-03 - LO: A-03
KEYWORDS:
Bloom's: Remembering
31. On the reporting of liabilities where a range of values exists as a possible outcome, IFRS requires which of the
following points to be recorded as a provision, if the outcome is probable?
a.
Low end of the range.
b.
High end of the range.
c.
Midpoint of the range.
d.
IFRS presents no specific guidance as to this point.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.A-04 - LO: A-04
KEYWORDS:
Bloom's: Remembering
32. Which of the following inventory costing methods is prohibited under IFRS?
a.
FIFO
b.
Weighted-average
c.
LIFO
d.
Perpetual
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.A-04 - LO: A-04
KEYWORDS:
Bloom's: Remembering
33. When comparing U.S. GAAP and IFRS, regarding the level of details in the standards and the level of disclosure
required, which of the following is correct?
U.S. GAAP IFRS
a.
Detail: More
Detail: Less
Disclosure: More
Disclosure: Less
b.
Detail: More
Detail: Less
Disclosure: Less
Disclosure: More
c.
Detail: Less
Detail: More
Disclosure: Less
Disclosure: More
d.
Detail: Less
Detail: More
Disclosure: More
Disclosure: Less
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.A-04 - LO: A-04
KEYWORDS:
Bloom's: Understanding
34. When analyzing foreign statements, all of the following are accurate positions of non-current liabilities listings
except:
a.
After total equity
b.
Before current liabilities
c.
After share capital
d.
After current liabilities
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-05 - LO: A-05
KEYWORDS:
Bloom's: Analyzing
35. Significant differences exist in terms on financial statements around the world. For example, another name for what
we know as Capital Stock in the U.S. is:
a.
Share Capital
b.
Capital Reserves
c.
Provisions for other Risks
d.
Deferred Income
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-05 - LO: A-05
KEYWORDS:
Bloom's: Applying
36. Significant differences exist in terms on financial statements around the world. For example, another name for what
we know as Additional Paid-In Capital in the U.S. is:
a.
Share Capital
b.
Capital Reserves
c.
Provisions for Other Risks
d.
Deferred Income
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-05 - LO: A-05
KEYWORDS:
Bloom's: Applying
37. Significant differences exist in terms on financial statements around the world. For example, another name for what
we know as Contingent Liabilities in the U.S. is:
a.
Share Capital
b.
Capital Reserves
c.
Provisions for Other Risks
d.
Deferred Income
ANSWER:
c
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-05 - LO: A-05
KEYWORDS:
Bloom's: Applying
38. What is the name for the balance sheet under international accounting standards?
a.
Assets and Equity Attributable to Shareholders
b.
Statement of Financial Position
c.
Statement of Balance
d.
The Equitable Claims Statement
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-05 - LO: A-05
KEYWORDS:
Bloom's: Remembering
39. Which of the following presents the proper ordering of assets, liabilities and equities on the statement of financial
position used by some countries that is different from the U.S.?
a.
current assets, long-term assets, current liabilities
b.
inventories, trade-receivables, cash
c.
assets, liabilities, equities
d.
current liabilities, long-term liabilities, equities
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-05 - LO: A-05
KEYWORDS:
Bloom's: Understanding
40. Which of the following is a true statement about the terms used on the balance sheet?
a.
U.S. GAAP requires a standard set of terms on the balance sheet.
b.
IFRS requires a standard set of terms on the balance sheet.
c.
Terminology is consistent across all countries.
d.
Neither IFRS nor U.S. GAAP requires a standard set of terms on the balance sheet.
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-05 - LO: A-05
KEYWORDS:
Bloom's: Understanding
41. All of the following statements are true regarding international legal systems except:
a.
The common law system has its roots in the United Kingdom.
b.
In common law countries, there are generally fewer statutes written into the laws.
c.
In code law countries, there is more reliance on interpretations by the courts than in common law countries.
d.
Divergence in accounting standards is linked to differences in legal systems around the world.
ANSWER:
c
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-01 - LO: A-01
KEYWORDS:
Bloom's: Evaluating
42. In which of the following countries do significant differences exist between accounting income and taxable income?
a.
Japan
b.
The United States
c.
Germany
d.
France
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-01 - LO: A-01
KEYWORDS:
Bloom's: Evaluating
43. Which of the following statements regarding inflation and accounting is false?
a.
The SEC requires U.S. companies to present supplemental financial information adjusted for the effects of
inflation.
b.
Instability of the measuring unit that is the currency occurs in countries with rampant inflation.
c.
In some in Latin American and South American countries, companies have been required to
adjust their financial statements to take into account the effects of inflation.
d.
The FASB developed rules for companies in the United States to use to adjust for inflation.
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-01 - LO: A-01
KEYWORDS:
Bloom's: Evaluating
44. Which of the following statements is false regarding the reasons for differing accounting systems around the world?
a.
Countries that have strong political and economic ties often share similar accounting
practices.
b.
Canada and Mexico, two former British colonies, can trace their accounting roots to those found in the United
Kingdom.
c.
The state of economic development typically mirrors the development stage of accounting rules in countries.
d.
In some less-developed countries of the world, where the forces of capitalism are less prevalent, accounting
standards have developed at a much slower pace than they have in more advanced economies.
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-01 - LO: A-01
KEYWORDS:
Bloom's: Evaluating
45. When did the SEC drop its long-standing rule that required foreign companies that filed financial statements with it to
adjust those statements to conform with U.S. GAAP and allow them to use IFRS?
a.
2001
b.
2007
c.
2009
d.
2016
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-03 - LO: A-03
KEYWORDS:
Bloom's: Remembering
46. Which of the following statements is true regarding extraordinary items on the income statement?
a.
U.S. GAAP prohibits the presentation of extraordinary items on the income statement.
b.
IFRS prohibits the presentation of extraordinary items on the income statement.
c.
U.S. GAAP allows extraordinary gains and losses on the balance sheet.
d.
IFRS allows the classification of gains and losses on the income statement as
extraordinary as long as long as they are both unusual in nature and infrequent in occurrence.
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-05 - LO: A-05
KEYWORDS:
Bloom's: Remembering
47. Which of the following statements is false regarding U.S. GAAP versus IFRS financial statement presentation?
a.
U.S. GAAP does not require the presentation of a classified balance sheet.
b.
IFRS requires the classification of assets and liabilities as current and noncurrent.
c.
If a range of values is available for reporting an outcome in a loss contingency, U.S. GAAP requires a
company to report the high end of the range as a probable outcome.
d.
If a range of values is available for reporting an outcome in a loss contingency, IFRS requires a company to
record the mid-point of the range as a probable outcome.
ANSWER:
c
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-05 - LO: A-05
KEYWORDS:
Bloom's: Remembering
48. Which of the following statements is true regarding the treatment of leases on the financial statements?
a.
U.S. GAAP prohibits the presentation of leases on the financial statements since they are off-balance sheet
transactions.
b.
U.S. GAAP criteria for lease capitalization are less strict than IFRS.
c.
The criteria concerning whether a lease is a capital lease are very different for IFRS and U.S. GAAP.
d.
The criteria required for lease capitalization under IFRS are considered more like guidelines rather than strict
rules.
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-05 - LO: A-05
KEYWORDS:
Bloom's: Remembering
Appendix A: International Financial Reporting Standards
Subjective Short Answer
49. McDonald Corp. owns a building with an original cost of $2,000,000 and accumulated depreciation at the balance
sheet date of $300,000. Based on a recent appraisal, the fair value of the building is $1,800,000.
Required:
1. At what amount will the building be reported on the year-end balance sheet if McDonald follows U.S. GAAP?
2. Does McDonald have a choice in the amount to report for the building if instead it follows IFRS? What are those
choices?
ANSWER:
1. $2,000,000 – $300,000 = $1,700,000.
2. Under IFRS, McDonald has a choice to present the building at either historical cost less
accumulated depreciation ($2,000,000 – $300,000 = $1,700,000) or fair value of $1,800,000.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.A-04 - LO: A-04
KEYWORDS:
Bloom's: Analyzing
50. During the most recent year, Grace paid $109,000 in interest to its lenders and $78,000 in dividends to its
stockholders.
Required:
1. In which category of the statement of cash flows (operating, investing, or financing) should each of these amounts be
shown if Grace follows U.S. GAAP? If more than one category is acceptable, indicate what the choices are.
2. In which category of the statement of cash flows (operating, investing, or financing) should each of these amounts be
shown if Grace follows IFRS? If more than one category is acceptable, indicate what the choices are.
ANSWER:
1. Under U.S. GAAP, the interest paid of $109,000 must be classified as an operating
activity, and the dividends paid of $78,000 must be classified as a financing activity.
2. Under IFRS, the interest paid of $109,000 may be classified as either an operating activity
or a financing activity. Dividends paid of $78,000 may be also be classified as either an
operating activity or a financing activity.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.A-04 - LO: A-04
KEYWORDS:
Bloom's: Analyzing
51. The cost of Fulton’s inventory at the end of the year was $145,000. Due to obsolescence, the cost to replace the
inventory was only $90,000. Net realizable value—what the inventory could be sold for—is $102,000.
Required:
Determine the amount Fulton should report on its year-end balance sheet for inventory assuming the company follows (a)
U.S. GAAP and (b) IFRS.
ANSWER:
The amount to be reported on the year-end balance sheet for inventory assuming:
(a) U.S. GAAP: $90,000
(b) IFRS: $102,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.A-04 - LO: A-04
KEYWORDS:
Bloom's: Analyzing
Essay
52. Explain the two primary legal systems used around the world and what these differences have to do with accounting
standards.
ANSWER:
The two primary legal systems used around the world are the common law system and the
code law system. The common law system has its roots in the United Kingdom and, because
of historical ties, is also the system used in the United States. In common law countries, there
are generally fewer statutes written into the laws and thus more reliance on interpretation by
the courts. In code law countries, such as Germany, there are more detailed rules written into
the statutes.
Accounting standards are generally more detailed in common law countries such as the
United States because less-detailed laws are written in the statutes provided by the
government. In code law countries, more detailed rules are written directly into the statutes.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-01 - LO: A-01
KEYWORDS:
Bloom's: Applying
53. Discuss at least four reasons that accounting standards currently differ between countries.
ANSWER:
Accounting standards currently differ between countries for a variety of reasons, including
differences in legal systems, how similar or different the rules are for determining accounting
income and taxable income, primary means for financing businesses, the significance of
inflation in the country, the extent to which a country has political and economic ties to
another country, and the state of economic development.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.A-01 - LO: A-01
KEYWORDS:
Bloom's: Applying
54. How would you describe the current role of the IASB in setting accounting standards?
ANSWER:
The IASB is the leader in the development of international accounting standards. The group
both issues new pronouncements and works closely with accounting bodies in other
countries, such as the FASB in the United States, towards the convergence of standards.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-03 - LO: A-03
KEYWORDS:
Bloom's: Applying
55. Explain the meaning of the terms contingent liabilities and provisions as they relate to U.S. GAAP and IFRS?
ANSWER:
Under U.S. GAAP, a contingent liability is accrued and presented on the balance sheet if it is
probable and the amount can be reasonably estimated. IFRS reserves the term contingent
liabilities for those items that are not recorded on the balance sheet. Those liabilities that are
probable and are recorded are called provisions.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-04 - LO: A-04
KEYWORDS:
Bloom's: Understanding
56. Summarize some of the common differences between U.S. GAAP and IFRS.
ANSWER:
U.S. GAAP
IFRS
Type of Standards
Rule Based
Principle Based
Number of Standards
More
Fewer
Level of detail in
standards
More detailed
Less detailed
Level of disclosure
required
Less
More
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.A-04 - LO: A-04
KEYWORDS:
Bloom's: Applying
57. How does the application of the lower-of-cost-or-market rule differ between U.S. GAAP and IFRS?
ANSWER:
Both U.S. GAAP and IFRS require use of the lower-of-cost-or-market rule to value
inventories. However, the two sets of standards differ in two respects. First, U.S. GAAP
defines market value as replacement cost, subject to a maximum and minimum amount. In
contrast, IFRS uses net realizable value as the measure of the market value of inventory, and
no upper or lower limits are imposed. Second, under U.S. GAAP, if inventory is written
down to a new, lower market value, this amount becomes the basis for that inventory. Future
write-downs of the inventory use this new amount to compare with market value. However,
under IFRS, write-downs of inventory can be reversed in later periods. That is, a gain is
recognized when the value of the inventory goes back up.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.A-04 - LO: A-04
KEYWORDS:
Bloom's: Applying
58. Explain some of the differences in accounting for operating assets that exist between U.S. GAAP and IFRS.
ANSWER:
Both IFRS and U.S. GAAP require companies to report an amount for goodwill and record a
write down of the goodwill if the asset has been ‘‘impaired.’’ However, the methods of
evaluating impairment differ between the two sets of standards. The treatment of research
and development (R&D) costs also differs. U.S. GAAP requires all internally generated
research and development costs to be treated as an expense. IFRS requires research costs to
be recognized as an expense but does allow certain development costs to be accounted for as
an asset.
Perhaps the most significant difference in the accounting for operating assets concerns the
use of fair values. Generally, both sets of standards require operating assets to be carried at
their historical cost. However, IFRS allows companies to revalue the assets at fair value
(either up or down from historical cost) if reliable measures are available. U.S. GAAP does
not allow companies to revalue to fair value except in cases where an impairment of an asset
has occurred and the asset must be written down to a lower value.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.A-04 - LO: A-04
KEYWORDS:
Bloom's: Applying
