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Example Test Questions

Chapter 3
Multiple Choice

Which of the following is not an environmental actor that could impact on the
development of a countrys accounting system?
Level of education\
Political system
Geographic location
Legal system

Answer c

What is the current acronym for the body most responsible for issuing international
accounting standards?

Answer a

How many trustees serve on the IASC Foundation?


Answer d

How many members serve on the IASB?


Answer a

Which of the following bodies has the responsibility to issue international financial
reporting standards (IFRS)


The International Financial Reporting Interpretations Committee

The International Standards Advisory Council
The IASC Foundation
The International Accounting Standards Board

Answer d


Which of the following is not a use of international accounting standards?

a. As national requirements.
b. As standards to be violated to improve intercountry comparability..
c. As an international benchmark for those countries that develop their own requirements.
d. By regulatory authorities for domestic and foreign companies
Answer b

How does the IASC enforce its standards?

Through , the International Organization of Securities Commission
Through the concept of best endeavors
Through the Securities and Exchange Commission
Through the Financial Accounting Standards Board

Answer b

What is the name given to the agreement between the FASB and IASC to harmonize
accounting standards?
The Norwalk Agreement
The London agreement
The Washing ton D C agreement
The Paris Accords

Answer a

What is the title of the form that foreign companies have used to reconcile their financial
statements to U. S. GAAP?
Form 10-K
Form 10-Q
Form SX

Answer d

Which of the following is not a qualitative characteristic contained in the IASBs

Framework for the Preparation of Financial Statements?

Answer b

Which of the following is not an element of financial statements contained in the IASBs
Framework for the Preparation of Financial Statements?

Answer a

Which of the following is seen as a pervasive difference between IASBs and FASBs
Conceptual Frameworks?


Definition of elements
Number of qualitative characteristics
Scope of authority
Level of detail

Answer d

Which of the following concepts is contained in the FASBs conceptual framework but
not in the IASCs
Comprehensive income

Answer b
1. Discuss the environmental factors that impact on the development of a countrys accounting
Financial accounting is influenced by the environment in which it operates. Nations have
different histories, values, cultures, and political and economic systems, and they are also in
various stages of economic development. These national influences interact with each other and,
in turn, influence the development and application of financial accounting practices and reporting
Level of Education
There tends to be a direct correlation between the level of education obtained by a countrys
citizens and the development of the financial accounting reporting practices in that country. The
characteristics comprising these environmental factors include (1) the degree of literacy in a
country; (2) the percentage of the population that has completed grade school, high school, and
college; (3) the orientation of the educational system (vocational, professional, etc.); and (4) the
appropriateness of the educational system to the countrys economic and social needs. Countries
with better educated populations are associated with more advanced financial accounting
Political System
The type of political system (socialist, democratic, totalitarian, etc.) can influence the
development of accounting standards and procedures. The accounting system in a country with a
centrally controlled economy will be different from the accounting system in a market-oriented
economy. For example, companies in a socialist country may be required to provide information
on social impact and costbenefit analysis in addition to information on profitability and financial
Legal System

The extent to which a countrys laws determine accounting practice influences the strengths of
that countrys accounting profession. When governments prescribe accounting practices and
procedures, the authority of the accounting profession is usually weak. Conversely, the
nonlegalistic establishment of accounting policies by professional organizations is a characteristic
of common-law countries.
Economic Development
The level of a countrys economic development influences both the development and application
of its financial reporting practices. Countries with low levels of economic development will have
relatively less need for a sophisticated accounting system than countries with high levels of
economic development
2. Discuss the approaches a company might take when issuing financial reports to users in foreign
A company issuing financial reports to users in foreign countries may take one of several
approaches in the preparation of its financial statements:
1. Send the same set of financial statements to all users (domestic or foreign).
2. Translate the financial statements sent to foreign users into the language of the foreign
nations users.
3. Translate the financial statements sent to foreign users into the foreign nations language
and currency.
4. Prepare two sets of financial statements, one using the home country language, currency,
and accounting principles, the second using the language, currency, and accounting
principles of the foreign countrys users.
5. Prepare one set of financial statements based on worldwide accepted accounting
3. What is the purpose of the International Accounting Standards Board?
The International Accounting Standards Committee (IASC) was formed in 1973 to develop
worldwide accounting standards. It was an independent private-sector body, whose objective was
to achieve uniformity in accounting principles that are used for worldwide financial reporting. In
2001 the IASC was replaced by the International Accounting Standards Board which retained the
same objective.
4. Discuss the factors that have contributed to the need for new approaches to international
standard setting.
The factors that have contributed to the need for new approaches to international standard setting
1. A rapid growth in international capital markets, combined with an increase in cross-border
listings and cross-border investment. These issues have led to efforts by securities regulators
to develop a common passport for cross-border securities listings and to achieve greater
comparability in financial reporting.
2. The efforts of global organizations (such as the World Trade Organization) and regional
bodies (such as the European Union, NAFTA, MERCOSUR [the southern common market



countries of Argentina, Brazil, Paraguay, and Uruguay], and Asia-Pacific Economic

Cooperation) to dismantle barriers to international trade.
A trend toward the internationalization of business regulation.
The increasing influence of international accounting standards on national accounting
requirements and practice.
The acceleration of innovation in business transactions.
Users increasing demands for new types of financial and other performance information.
New developments in the electronic distribution of financial and other performance
A growing need for relevant and reliable financial and other performance information both in
countries in transition from planned economies to market economies and in developing newly
industrialized economies
Discuss the IASBs annual improvements project..

In July, 2006 the IASB announced that it was beginning an annual improvements project. The
Board stated: Changes to standards, however small, are time-consuming for the Board and
burdensome for others. The IASB has adopted an annual process to deal with non-urgent but
necessary amendments to IFRSs. Issues dealt with in this process arise from matters raised by the
IFRIC and suggestions from staff or practitioners, and focus on areas of inconsistency in IFRSs or
where clarification of wording is required. As a result, the Board evaluates whether an
amendment is appropriate to address the identified issue in this project the same way as it
evaluates all other technical agenda decisions which requires judgment. The adopted
improvements are published in a single omnibus exposure draft in the third or fourth quarter of
each year.

Discuss the composition and role of The International Accounting Standards Board..
The IASB consists of fourteen individuals (twelve full time and two part-time) appointed by the
trustees. The key qualification for board membership is technical expertise. The trustees also must
ensure that the Board is not dominated by any particular constituency or regional interest;
consequently, the following guidelines have been established:
1. A minimum of five will have a background as practicing auditors.
2. A minimum of three will have a background in the preparation of financial statements.
3. A minimum of three will have a background as users of financial statements.
4. At least one member will have an academic background.
5. Seven of the full-time members will be expected to have formal liaison responsibilities
with national standards setters in order to promote the convergence of national
accounting standards and the IAS.
The Boards principal responsibilities are to develop and issue international financial reporting
standards (IFRS) and exposure drafts and approve interpretations developed by the International
Financial Reporting Interpretations Committee (IFRIC). Standards are adopted after consultation
with the SAC and national standard setters.
7. Discuss the duties of the trustees of the International Accounting Standards Committee
The trustees duties include:
1. Appointing the members of the Board, including those who will serve in liaison
capacities with national standard setters, and establish their contracts of service and
performance criteria.

2. Appointing the members of the Standing Interpretations Committee and the Standards
Advisory Council.
3. Reviewing annually the strategy of the IASB and its effectiveness.
4. Approving annually the budget of the IASB and determine the basis for funding.
5. Reviewing broad strategic issues affecting accounting standards, promote IASB and its
work, and promote the objective of rigorous application of International Accounting
Standards, provided that the trustees shall be excluded from involvement in technical
matters relating to accounting standards.
6. Establishing and amending operating procedures for the Board, the Standing
Interpretations Committee, and the Standards Advisory Council (SAC).
7. Approving amendments to this constitution after following a due process, including
consultation with the SAC and publication of an exposure draft for public comment.

Discuss the role of The International Financial Reporting Interpretations Committee

The IASC originally did not issue interpretations of its standards, however, after noting
criticism it began issuing interpretations of its standards, beginning in 1997.
Later the IASB established the International Financial Reporting Interpretations Committee
The role of the IFRIC has evolved and was clarified by the publication of the IFRIC
handbook in 2007. The IFRIC is comprised of twelve members, appointed by the trustees
of the IASB for renewable terms of three years. The trustees appoint a member of the
IASB, the director of technical activities or another senior member of the IASB staff, or
another appropriately qualified individual, to chair the committee. The chair has the right to
speak about the technical issues being considered but not to vote. The trustees also may
appoint as nonvoting observers representatives of regulatory organizations, who have the
right to attend and speak at meetings.
The committee (a) interprets the application of International Accounting Standards (IASs)
and International Financial Reporting Standards (IFRSs) and provides timely guidance on
financial reporting issues not specifically addressed in IASs and IFRSs, in the context of
the IASB Framework, and undertakes other tasks at the request of the IASB; (b) in carrying
out its work under (a) above, it must have regard to the IASBs objective of working
actively with national standard setters to bring about convergence of national accounting
standards and IASs and IFRSs to high-quality solutions; (c) publish after clearance by the
IASB the draft Interpretations for public comment and consider comments made within a
reasonable period before finalizing an Interpretation; and (d) report to the IASB and obtain
its approval for final Interpretations.


How are IASB standards used by various countries?

International accounting standards are used in a variety of ways. The IASB noted that its
standards are used:
1. As national requirements.
2. As the basis for some or all national requirements.
3. As an international benchmark for those countries that develop their own requirements.
4. By regulatory authorities for domestic and foreign companies.
5. By companies themselves.
In addition, the International Organization of Securities Commissions (IOSCO) looks to the IASB
to provide International Accounting Standards that can be used in multinational securities
offerings. Currently, several stock exchanges in different countries require or allow issuers to
prepare financial statements in accordance with International Accounting Standards

10. Discuss the Short-term International Convergence Project

The goal of the FASBs Short-term International Convergence Project is to remove a variety of
individual differences between U.S. GAAP and International Financial Reporting Standards
that are not within the scope of other major projects. The projects scope is limited to those
differences in which convergence around a high-quality solution would appear to be achievable
in the short term, usually by selecting between existing IFRS and U.S. GAAP.
The FASB intends to analyze each of the differences within the scope and either (1) amend
applicable U.S. GAAP literature to reduce or eliminate the difference or (2) communicate to the
IASB the Boards rationale for electing not to change U.S. GAAP. Concurrently, the IASB will
review IFRS and make similar determinations of whether to amend applicable IFRS or
communicate its rationale to the FASB for electing not to change the IASBs GAAP.
The FASB set September 30, 2004, as the target date for issuing final statements covering
some, if not all, of the identified differences. This target date was set to allow sufficient time for
due process to be completed while providing sufficient time in advance of the 2005 date
established by the European Commission for adoption of IAS by all EU listed companies. It is
important to note that the short-term convergence project only addressed differences that meet
the criteria for inclusion in the project scope. Differences that are associated with issues
requiring comprehensive reconsideration were not addressed by the short-term convergence
project and will be addressed over a longer term in the Roadmap to Convergence project.
11.Discuss the IASB-FASB Norwalk agreement.


The FASB and the IASB held a joint meeting in Norwalk, Connecticut, on September 18, 2002.
Both standard-setting bodies acknowledged their commitment to the development of high-quality
compatible accounting standards that can be used for both domestic and cross-border financial
reporting. They also promised to use their best efforts to make their existing financial reporting
standards compatible as soon as practicable and to coordinate their future work programs to
maintain compatibility.
To this end, both Boards agreed to:
Undertake a short-term project aimed at removing a variety of differences between U.S.
Remove any other differences between IFRSs and U.S. GAAP that remained on January 1,
2005, by undertaking projects that both Boards would address concurrently.
Continue the progress on the joint projects currently underway.
Encourage their respective interpretative bodies to coordinate their activities.
The goal of this project is to achieve compatibility by identifying common high-quality

List the milestones contained in the FASB-IASB Roadmap Convergence Project.

a. Improvements to accounting standards - whether the standards are high in quality and
sufficiently comprehensive, whether the standard-setting process is robust and independent
with input and consideration of views from investors and other affected parties, and whether
the standards, when implemented, are capable of improving the effectiveness of financial
reporting and providing financial information useful to investors
b. Funding of the International Accounting Standards Committee Foundation - the SEC will
consider the degree to which the Foundation has a secure, stable, and equitable funding
mechanism that allows the IASB to function independently of any specific constituent
group. The SEC would also consider how effectively regulators oversee the Foundation.

c. Improved ability to use interactive data for IFRS reporting - the SEC has proposed rules that
would require public companies to provide financial information formatted in the XBRL
computer language. The level of detail in the existing IFRS XBRL taxonomy would have to
be improved, according to the proposal, in order to realize the benefits of IFRS reporting in
d. Improved education and training in the US - a significant investment in preparing investors,
management and financial-statement preparers, auditors, audit committees, specialists (such
as actuaries and valuation professionals), and regulators would be needed before IFRS is
widely understood in the U.S. College and university curricula would need to incorporate
IFRS, and the CPA and other relevant professional exams would need to cover IFRS.
e. Limited use in a narrow group of companies (i.e. December 31, 2009)

SEC to determine in 2011 whether mandatory adoption of IFRS is feasible based on the
progress in the first five milestones

g. Mandatory use If decided to go full steam ahead (as discussed in milestone 6) then large
accelerated, accelerated and non-accelerated filers would be required to adopt IFRS
beginning with their years ending on or after December 15, 2014, 2015 and 2016,


What is the objective of the joint FASB-IASB Convergence Project?

The objective of convergence of accounting standards is to have companies in different countries

use the same accounting procedures to measure and report their financial position and results of

Under rules enacted prior to 2007, how could a foreign company list its securities for sale in
U. S. capital markets? How did this rule change?
Prior to 2007, foreign companies seeking to list on a U.S. stock exchange must have recast their
financial statements to reflect then current GAAP. This reconciliation was made by filing Form
20-F with the SEC within six months of the companys fiscal year-end. In 2007, the SEC
modified its position on the Form 20-F requirement when it issued; Acceptance from Foreign
Private Issuers of Financial Statements Prepared in Accordance with International Financial
Reporting Standards without Reconciliation to GAAP. This rule amends Form 20-F to accept
from foreign private issuers in their filings with the SEC financial statements prepared in
accordance with International Financial Reporting Standards as issued by the International
Accounting Standards Board without reconciliation to generally accepted accounting principles
as used in the United States. The SECs rationale for this action was to foster the adoption of a set
of globally accepted accounting standards. However, the requirements regarding reconciliation to
U.S. GAAP do not change for a foreign private issuer that files its financial statements using a
basis of accounting other than IFRSs.
15. Discuss the objectives of accounting as defined by the IASBs Framework for the Preparation
of Financial Statements

The framework indicates that the objective of financial statements is to provide information about
the financial position, performance, and changes in financial position of an enterprise that is
useful to a wide range of users making economic decisions. It also indicates that financial
statements prepared for this purpose will satisfy most user needs, but they do not provide all
information that may be needed to make economic decisions because they largely portray past
information and do not provide nonfinancial information.
In its discussion of general-purpose financial statements, the framework indicated the following:
1. Users require an evaluation of an enterprises ability to generate cash and the timing and
certainty of this generation.
2. The financial position of an enterprise is affected by the economic resources it controls, its
financial structure, its liquidity and solvency, and its capacity to adapt to changes in its
3. Information on profitability is required to assess changes in the economic resources an
enterprise controls in the future.
4. Information on the financial position of an enterprise is useful in assessing its investing,
financing, and operating activities.
5. Information about financial position is contained in the balance sheet, and information about
performance is contained in an income statement.
The framework also indicated that two underlying assumptions for the preparation of financial
statements were the accrual basis and going concern.

Discuss the qualitative characteristics of accounting information as defined by the IASBs

Framework for the Preparation of Financial Statements.

The framework describes qualitative characteristics as the attributes that make the information
provided in financial statements useful. The following four principal qualitative characteristics
were defined.
Information should be provided so that individuals with a reasonable knowledge of business and
economic activities and accounting and a willingness to study the information are capable of
using it. Nevertheless, complex information should not be withheld just because it is too difficult
for some users to understand.
Information is relevant when it influences the economic decisions of users by helping them
evaluate past, present, or future events or by confirming or correcting their past evaluations.
Relevance is also affected by materiality.
Information is reliable when it is free from material error and bias and when users can depend on
it to represent faithfully that which it purports to represent. As a consequence, events should be
accounted for and presented in accordance with their substance and economic reality, not merely
their legal form.
Users must be able to compare an enterprises performance over time and to make comparisons
with the performance of other enterprises.
The framework also recognized that timeliness and the balance between benefits and costs were
constraints on providing both relevant and reliable information.

17. Discuss the elements of financial statements defined by the IASBs Framework for the
Preparation of Financial Statements.
The elements defined by the IASBs Framework for the Preparation of Financial Statements were
defined as follows:
The elements directly related to the measurement of financial position in the balance sheet are
assets, liabilities, and equity
Asset. A resource controlled by an enterprise as a result of past events from which future
economic benefits are expected to flow to the enterprise.
Liability. A present obligation of the enterprise arising from past events, the settlement of which
is expected to result in an outflow from the enterprise of resources embodying economic benefits.
Equity. The residual interest in the assets of the enterprise after deducting all its liabilities.
The elements directly related to the measurement of performance in the income statement are
income and expenses. These elements were defined as follows:
Income. Increases in economic benefits during the accounting period in the form of inflows or
enhancement of assets or the decreases in liabilities that result in increases in equity, other than
those relating to contributions from equity participants.
Expenses. Decreases in economic benefits during the accounting period in the form of outflows
or depletions of assets or incurrences of liabilities that result in decreases in equity, other than
those relating to contributions from equity participants.

Discuss the concepts of capital and capital maintenance discussed in the Framework for the
Preparation of Financial Statements.

A final issues addressed in the framework were concepts of capital. Under the financial concept
of capital, capital was defined as being synonymous with the net assets or equity of the enterprise.
Under a physical concept of capital, capital is regarded as the productive capacity of the
enterprise. The framework indicated that the selection of the appropriate concept of capital by an
enterprise should be based on the needs of the user of its financial statements. As a consequence,
a financial concept of capital should be adopted if users are concerned primarily with the
maintenance of nominal invested capital or the purchasing power of invested capital. However, if
the users main concern is with the operating capacity of an enterprise, a physical concept of
capital should be used. As a result, the following concepts of capital maintenance may be used:

Financial capital maintenance. Profit is earned only if the financial (or money)
amount of net assets at the end of the period exceeds the net asset at the beginning of
the period excluding any distributions to or contributions from owners.
Physical capital maintenance. Profit is earned only if the physical productive
capacity (or operating capacity) of the enterprise exceeds the physical productive
capacity at the beginning of the period.
Finally, the framework noted that the selection of the measurement bases and concept of capital
maintenance will determine the accounting model used in preparing financial statements. Also,
since different accounting models differ with respect to relevance and reliability, management
must seek a balance between these qualitative characteristics. At the current time, the IASB does
not intend to prescribe a particular model other than for exceptional circumstances, such as for
reporting in the currency of a hyperinflationary economy.

Discuss IFRS No. 1, First Time Adoption of International Reporting Standards.

IFRS No. 1, First Time Adoption of International Reporting Standards, requires an entity to
comply with every IASB standard in force in the first year when the entity adopts IFRSs, with
some targeted and specific exceptions after consideration of the cost of full compliance. Under
IFRS No. 1, entities must explain how the transition to IASB standards affects their reported
financial position, financial performance, and cash flows.
IFRS No. 1 requires an entity to comply with each IFRS that has become effective at the reporting
date of its first financial statements issued under IASB standards. The following principles apply:
1. Recognize all assets and liabilities whose recognition is required under existing IFRSs;
2. Do not recognize items as assets or liabilities when existing IFRSs do not allow for such
3. Reclassify assets, liabilities, and equity as necessary to comply with existing IFRSs; and
4. Apply existing IFRSs in measuring all recognized assets and liabilities.