978-0078025549 Appendix E Appendix E

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Differences in accounting standards cause problems for investors in comparing companies whose

financial statements are prepared under different accounting rules. Investors unfamiliar with the accounting

multinational corporations to comply with multiple sets of accounting rules.

understandable, and enforceable global accounting standards to help participants in

GAAP is needed to meet the specific legal and regulatory requirements of the U.S.

business environment. A one size fits all approach taken by the IFRS may not work. Another argument for

GAAP and IFRS. Under this agreement, the two boards pledged to remove existing

differences between their standards and to coordinate their future standard-setting agendas so that major

accounting standards. It is important that the FASB and the IASB work together in

Revenues and expenses that relate to a company’s primary operating activities

such as sales revenue, cost of goods sold, and operating expenses would be

included in operating activities. Revenues and expenses from investing such as interest revenue or a loss on

sale of an investment would be included as investing activities. Revenues and expenses from financing

Appendix E

International Financial Reporting Standards

REVIEW QUESTIONS

Question E-1 (LOE-1)

Convergence refers to the process by which U.S. GAAP and IFRS will eventually merge to become a

single set of accounting standards.

Question E-2 (LOE-1)

Financial accounting standards and practices differ from country to country for many reasons,

including different legal systems, the influence of tax laws, sources of financing, inflation, culture,

Question E-3 (LOE-1)

Legal system (common law vs. code law) is often used as a way to describe overall differences in

accounting practices between countries. Common law countries such as the U.S., U.K., Australia, and

Canada have separate rules for financial accounting and tax accounting, rely more on equity financing,

Question E-4 (LOE-1)

Question E-5 (LOE-1)

Question E-6 (LOE-2)

Question E-7 (LOE-2)

Question E-8 (LOE-2)

Question E-9 (LOE-3)

Question E-10 (LOE-3)

such as interest expense incurred on borrowing or a gain on repurchase of long-term debt would be

LIFO is allowed under U.S. GAAP, but not under IFRS. U.S. companies

currently using LIFO will lobby to keep this method because a switch from LIFO

In the U.S., market value is defined as replacement cost, which is the cost to

replace the item in its identical form. However, the designated market value

An inventory write down causes total assets and net income to decrease. The

reversal of an inventory write down causes just the opposite: total assets and net

Under U.S. GAAP, companies are not allowed to revalue long-term assets to fair

A company would be more likely to report a contingent liability under IFRS. We accrue a contingent

IFRS is more conservative in the reporting of contingent liabilities. Companies are more likely under

Under U.S. GAAP, preferred stock is usually recorded as stockholders’ equity

with dividends reported as a reduction of retained earnings. Under IFRS, most

preferred stock is reported as debt with the dividends reported in the income statement as interest expense.

As we learned in Chapter 10, preferred stock has characteristics of both liabilities and stockholders’

U.S. GAAP provides for the separate reporting, as an extraordinary item, of a

material gain or loss that is both unusual in nature and infrequent in occurrence.

Exercises

Reason Description

1. _c__ Legal system a. More developed economies have more complex

2. _e__ Tax laws b. The extent of public disclosure depends on the

3. _g__ Sources of financing c. Common law countries rely more heavily on

4. _f__ Inflation d. Countries share business activities and have

Question E-11 (LOE-3)

Question E-12 (LOE-3)

Question E-13 (LOE-3)

Question E-14 (LOE-3)

Question E-15 (LOE-3)

U.S. GAAP requires all research and development expenditures to be expensed in the period incurred.

IFRS draws a distinction between research activities and development activities. Research expenditures

Question E-16 (LOE-3)

Question E-17 (LOE-3)

Question E-18 (LOE-3)

Exercise E-1 (LOE-1)

5. _b__ Culture e. Alignment between financial reporting and tax

6. _d__ Political and economic ties f. In some countries, asset values increase rapidly

7. _a__ Economic development g. Some countries rely more heavily on debt capital

Austria’s accounting is very similar to that of Germany.

1. Legal system (b) Code law

2. Tax laws (b) Similar tax and financial accounting rules

3. Sources of financing (b) More debt financing

Australia’s accounting is very similar to that of the United Kingdom.

1. Legal system (a) Common law

2. Tax laws (a) Different tax and financial accounting rules

3. Sources of financing (a) More equity financing

4. Inflation (a) Low inflation

Exercise E-2 (LOE-1)

Requirement 1

Requirement 2

Exercise E-3 (LOE-2)

For the idea

There are several reasons to allow U.S. companies the choice of reporting under either U.S. GAAP or

IFRS. It is important to allow U.S. companies the opportunity to report under IFRS because the rest of the

Against the idea

There are also several reasons to not allow U.S. companies the choice of reporting under either U.S. GAAP

or IFRS. U.S. GAAP is customized to fit the stringent legal and regulatory requirements of the U.S.

business environment. U.S. GAAP provides a better fit and should therefore be required for U.S.

Exercise E-4 (LOE-3)

Requirement 1

Principles-based accounting standards emphasize broad principles of accounting with relatively less

Requirement 2

Principles-based standards are more concise, allowing preparers and users of accounting information to

Requirement 3

Rules-based standards are more precise, providing additional guidance to preparers and users on an issue.

Requirement 4

Most people agree that, in order to reduce the volume of accounting rules internationally, future

Exercise E-5 (LOE-3)

Requirement 1

Operating activities include transactions relating to the primary operating activities of the business.

Requirement 2

(a) Sales, cost of goods sold, and operating expenses would be classified as an operating activity.

(b) Interest revenue, dividend income, and a gain or loss on sale of an investment would be classified as an

Date Transaction

Number

of units

Unit

cost

Ending

Inventory

Jan. 1 Beginning Inventory 70 $83 $5,810

Apr. 7 Purchase 10 85 850

70 $6,660

Date Transaction

Number

of units

Unit

cost

Cost of Goods

Sold

Apr. 7 Purchase 180 $85 $15,300

Oct. 9 Purchase 90 87 7,830

270a$23,130

Date Transaction

Number

of units

Unit

cost

Ending

Inventory

Oct. 9 Purchase 80 $87 $6,960

Date Transaction

Number

of units

Unit

cost

Cost of Goods

Sold

Jan. 1 Beginning inventory 70 $83 $ 5,810

Apr. 7 Purchase 190 85 16,150

Oct. 9 Purchase 10 87 870

270a$22,830

Requirement 2

Requirement 3

FIFO will result in a higher income of $300 (gross profit of $4,170 vs. $3,870) reported on the income

Exercise E-7 (LOE-3)

Requirement 1

U.S. GAAP requires all research and development expenditures to be expensed in the period incurred.

Requirement 2

IFRS draws a distinction between research activities and development activities. Research expenditures

are expensed in the period incurred. However, development expenditures that meet specified criteria are

Requirement 3

Income under IFRS would be $500,000 higher than under U.S. GAAP. Total assets and stockholders’ equity

Exercise E-8 (LOE-3)

Requirement 1

A liability is an amount owed to a creditor. Stockholders’ equity is the owners’ claims to company

resources.

Requirement 2

Under the IFRS position, preferred stock is a liability. The true owners of the business are the common

shareholders as they control the company through voting rights. Preferred shareholders usually do not have

Requirement 3

Under the U.S. GAAP position, preferred stock is usually part of stockholders’ equity. Unlike long-term

Requirement 4The classification of preferred stock depends on the characteristics of the preferred stock

issue. Non-voting, mandatorily redeemable preferred stock with a fixed annual dividend is similar to bonds