Chapter 09 – Additional Financial Reporting Issues
Answers to Questions
1. Historical cost accounting causes assets to be significantly understated in a country
experiencing high inflation. Understated assets, such as inventory and fixed assets, leads
to understated expenses, such as cost of goods sold and depreciation, which in turn leads
to overstated income and stockholders’ equity.
2. Non-monetary assets and non-monetary liabilities are restated for changes in the general
purchasing power of the monetary unit. Most non-monetary items are carried at historical
cost. In these cases, the restated cost is determined by applying to the historical cost the
3. Monetary assets (cash and receivables) give rise to purchasing power losses and monetary
4. Historical costs of nonmonetary assets (inventory, fixed assets, intangibles) are replaced
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Chapter 09 – Additional Financial Reporting Issues
5. Current cost accounting generally results in a larger amount of nonmonetary assets, as well
6. IAS 15, “Information Reflecting the Effects of Changing Prices,” required supplementary
disclosure of the following items reflecting the effects of changing prices:
1. the amount of adjustment to depreciation expense,
2. the amount of adjustment to cost of sales,
7. IAS 27, “Consolidated Financial Statements and Accounting for Investments in
8. The concept of a group relates to a business combination in which one company obtains
9. IAS 27 states that control exists when the investor owns more than 50 of the stock of
another company. However, control also can exist for an investor owning less than 50% of
the stock of another company when the investor has power:
10. Because of their extensive cross-ownership of companies, identifying the legal ownership
11. IAS 27 requires a parent to consolidate all subsidiaries, foreign and domestic, unless (a)
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Chapter 09 – Additional Financial Reporting Issues
12. IFRS 8 defines an operating segment as a component of a company that (a) engages in
activities from which it earns revenues and incurs expenses, (b) is regularly reviewed by the
13. Only three substantive differences exist in the segment reporting required by IFRS and U.S.
GAAP:
14. IFRS and U.S. GAAP require enterprise-wide disclosures related to:
A. Products and services – if operating segments are not organized along these lines.
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Chapter 09 – Additional Financial Reporting Issues
15. Neither IFRS nor U.S. GAAP provides a quantitative threshold for determining the materiality
Solutions to Exercises and Problems
1. Sorocaba Company
December 31, Year 1
Original Restated
Purchase Historical Restatement Historical
Date Item Cost Ratio Cost
1/15/Y1 Machine X $ 20,000 140/100 $ 28,000
December 31, Year 2
Original Restated
Purchase Historical Restatement Historical
Date Item Cost Ratio Cost
3/20/Y1 Machine Y $ 55,000 180/110 $ 90,000
Alternatively, the restated historical cost at December 31, Year 2 could be determined as
follows:
December 31, Year 2
Restated Restated
Historical Historical
Purchase Cost Restatement Cost
Date Item (12/31/Y1) Ratio (12/31/Y2)
3/20/Y1 Machine Y $ 70,000 180/140 $ 90,000
2. Antalya Company
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Chapter 09 – Additional Financial Reporting Issues
3. Doner Company
Calculation of Purchasing Power Loss
Net monetary assets, 1/1/Y1 $5,000 x 150/100 = $ 7,500
4. Petrodat Company
Subsidiary in Mexico
GPI
a.
Balance Sheet, 1/1/Y1 Historical Restatement Restated to
Cost Factor 12/31/Y1 GPP
Machinery and equipment 1,000,000.00 110/100 1,100,000.00
Income Statement, Year 1
Historical Restatement Restated to
Cost Factor 12/31/Y1 GPP
Revenues 400,000.00 110/105 419,047.62
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Calculation of Purchasing Power Loss
Net monetary assets, 1/1 0.00 110/100 0.00
4. (continued)
Balance Sheet, 12/31/Y1 Historical Restatement Restated to
Cost Factor 12/31/Y1 GPP
Cash 250,000.00 none 250,000.00
Calculation of Average Stockholders’ Equity
January 1, Year 1 (restated) 1,100,000.00
b. Calculation of profit margin and return on equity on an inflation-adjusted basis
Profit margin 30,000.00 7.16%
4. (continued)
Subsidiary in Venezuela
GPI
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a.
Balance Sheet, 1/1/Y1 Historical Restatement Restated to
Cost Factor 12/31/Y1 GPP
Machinery and equipment 150,000,000.00 120/100 180,000,000.00
Income Statement, Year 1
Historical Restatement Restated to
Cost Factor 12/31/Y1 GPP
Revenues 60,000,000.00 120/110 65,454,545.45
Calculation of Purchasing Power Loss
Net monetary assets, 1/1 0.00 120/100 0.00
4. (continued)
Balance Sheet, 12/31/Y1 Historical Restatement Restated to
Cost Factor 12/31/Y1 GPP
Cash 37,500,000.00 none 37,500,000.00
Machinery and equipment 150,000,000.00 120/100 180,000,000.00
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Calculation of Average Stockholders’ Equity
January 1, Year 1 (restated) 180,000,000.00
b. Calculation of profit margin and return on equity on an inflation-adjusted basis
Profit margin 1,500,000.00 2.29%
c. Both subsidiaries had the same profit margin and return on equity when these ratios were
calculated from unadjusted historical cost information. After adjusting for inflation, the
Mexican subsidiary appears to be substantially more profitable than the Venezuelan
subsidiary. 5. Auroral Company
Name of
Company
% Voting
Rights IFRS U.S. GAAP
Accurcast 100% Full consolidation Full consolidation
Bonello 45% Equity method – unless there is
evidence that Auroral exercises
effective control
Equity method
Cromos 30% Equity method Equity method
Fidelis 100% Do not consolidate – fair value
method
Do not consolidate – fair
value method
Jenna 100% Full consolidation Full consolidation
Marek 40% Full consolidation Equity method
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Chapter 09 – Additional Financial Reporting Issues
6. Sandestino Company
Financial statements restated to properly reflect the Investment in Grand Sand using the equity
method:
Sandestino Company
Income Statement
Year 1
Revenues $800,000
Expenses (450,000)
Sandestino Company
Balance Sheet
December 31, Year 1
Cash $130,000 Liabilities $250,000
Inventory 200,000 Common stock 600,000
Property, plant, & equipment (net) 650,000 Retained earnings 310,000
Investment in Grand Sand 180,000 Total $1,160,000
Total$1,160,0007. Horace Jones Company
Three tests are applied in determining which operating segments must be reported separately.
Only one test must be met.
Revenue Test Total Percentage
Segment Revenues of Total
A 1,060 52% reportable
Profit or Loss Test Segment Segment Segment Result
Segment Revenues Expenses Profit Loss
A 1,060 830 230 reportable
B 370 515 145 reportable
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7. (continued)
Combined profit for the profitable segments exceeds the combined loss of the non-profitable
segments, so any segment with a profit or loss greater than $32.5 ($325 x 10%) is separately
reportable.
Asset Test Total Percentage
Segment Assets of Total
A 1,750 47% reportable
Of the six operating segments, only four meet at least one of the significance tests. Segments
A, B, C, and E will be reported separately; segments D and F will be combined into All Other.
75% Test External Percentage of
Segment Revenues Consolidated Revenues
A 1,030 58%
B 350 20%
The schedule below provides an example of how the required items might be presented.
Operating Segments
A B C E All Other
External revenues 1,030 350 20 130 260
Intersegment revenues 30 20 200 0 10
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8. Iskender Company
Schedule showing the percentage of total revenues generated by each operating segment and
the percentage of external sales generated by each country.
Operating Segments
Total
Revenues % of Total Countries
Sales to
External
Customers % of Total
Automotive 23,093 26.52% Turkey 28,876 33.16%
Food 22,875 26.27% Germany 18,765 21.55%
Operating Segments
The revenue test is the only test that can be made given the information provided to determine
separately reportable operating segments. The revenue test indicates that only automotive,
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