Appendix E – International Financial Reporting Standards
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)
Question E-3 (LOE-1)
Legal system (common law vs. code law) is often used as a way to describe overall differences in
Question E-4 (LOE-1)
Differences in accounting standards cause problems for investors in comparing companies whose
Question E-5 (LOE-1)
Differences in accounting standards make it more difficult and more costly for multinational
corporations to comply with multiple sets of accounting rules.
Question E-6 (LOE-2)
The IASB’s main objective is to develop a single set of high-quality, understandable, and
Appendix E – International Financial Reporting Standards
Question E-7 (LOE-2)
Principles-based accounting standards emphasize broad principles of accounting with relatively
Question E-8 (LOE-2)
The Norwalk Agreement formalized the commitment to convergence of U.S. GAAP and IFRS.
Question E-9 (LOE-2)
One argument against convergence between U.S. GAAP and IFRS is that U.S. GAAP is
Question E-10 (LOE-3)
A conceptual framework in accounting is a common structure useful in setting accounting
Question E-11 (LOE-3)
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.
Question E-12 (LOE-3)
LIFO is allowed under U.S. GAAP, but not under IFRS. U.S. companies currently using LIFO
Question E-13 (LOE-3)
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 income increase.
Appendix E – International Financial Reporting Standards
Question E-14 (LOE-3)
To revalue a long-term asset is to periodically adjust the asset to fair value. Under U.S. GAAP,
Question E-15 (LOE-3)
U.S. GAAP requires all research and development expenditures to be expensed in the period
Question E-16 (LOE-3)
A company would be more likely to report a contingent liability under IFRS. We accrue a
contingent liability under U.S. GAAP if it’s both probable and can be reasonably estimated. IFRS
Question E-17 (LOE-3)
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
Appendix E – International Financial Reporting Standards
EXERCISES
Exercise E-1 (LOE-1)
Reason
Description
1. _c__
Legal system
a.
More developed economies have more
complex business transactions.
2. _e__
Tax laws
b.
The extent of public disclosure depends
on the secretiveness of society.
3. _g__
Sources of financing
c.
Common law countries rely more
heavily on public information.
4. _f__
Inflation
Countries share business activities and
have political connections.
5. _b__
Culture
e.
Alignment between financial reporting
and tax reporting rules.
ties
rapidly because of the general price
level changes.
debt capital than on equity capital to
fund operations.
Appendix E – International Financial Reporting Standards
Exercise E-2 (LOE-1)
Requirement 1
Austria’s accounting is very similar to that of Germany.
(b) Code law
(b) Similar tax and financial accounting rules
(b) More debt financing
(a) Low inflation
(b) Secretive
(b) German ties
(a) Developed economy
Requirement 2
Australia’s accounting is very similar to that of the United Kingdom.
(a) Common law
(a) Different tax and financial accounting rules
(a) More equity financing
(a) Low inflation
(a) Transparent
(a) Developed economy
Appendix E – International Financial Reporting Standards
Exercise E-3 (LOE-2)
For the idea
There are several reasons to allow U.S. companies the choice of reporting under either
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
Appendix E – International Financial Reporting Standards
Exercise E-4 (LOE-3)
Requirement 1
Principles-based accounting standards emphasize broad principles of accounting with
Requirement 2
Principles-based standards are more concise, allowing preparers and users of
accounting information to focus on the key issues.
Appendix E – International Financial Reporting Standards
Exercise E-5 (LOE-3)
Requirement 1
Operating activities include transactions relating to the primary operating activities of
Requirement 2
(a) Sales, cost of goods sold, and operating expenses would be classified as an
Requirement 3
(a) Most current assets and current liabilities would be classified as an operating
Exercise E-6 (LOE-3)
Requirement 1
Date
Transaction
Number
of units
Unit
cost
Ending
Inventory
Jan. 1
Beginning Inventory
70
$83
$5,810
Apr. 7
Purchase
10
85
850
80
$6,660
Date
Transaction
of units
cost
Apr. 7
Purchase
Oct. 9
Purchase
Appendix E – International Financial Reporting Standards
Requirement 2
Number
Unit
Number
Unit
Ending
a First 270 units purchased are assumed sold
Requirement 3
FIFO will result in a higher income of $300 (gross profit of $4,170 vs. $3,870)
Appendix E – International Financial Reporting Standards
Exercise E-7 (LOE-3)
Requirement 1
U.S. GAAP requires all research and development expenditures to be expensed in the
period incurred. Therefore, all $700,000 would be expensed.
Requirement 2
IFRS draws a distinction between research activities and development activities.
Requirement 3
Income under IFRS would be $500,000 higher than under U.S. GAAP. Total assets
Appendix E – International Financial Reporting Standards
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
Requirement 3
Under the U.S. GAAP position, preferred stock is usually part of stockholders’ equity.
Requirement 4
The classification of preferred stock depends on the characteristics of the preferred