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Solutions Manual, Chapter 1
Copyright © 2010 McGraw-Hill Ryerson Limited. All rights reserved. 1
A brief description of the major points covered in each case and problem. CASES
Case 1 In this case, students are introduced to the difference in accounting for R&D costs between IFRS and U.S. GAAP and asked to comment on whether one method is better than the other, as well as whether any part of R&D should be capitalized. Case 2 (prepared by Peter Secord, Saint Mary’s University) In this real life case, students are asked to discuss the merits of historical costs vs. replacement costs. Actual note disclosure from a company’s financial statements is provided as background material. Case 3 (adapted from a case prepared by Peter Secord, Saint Mary’s University) A Canadian company prepares two sets of financial statement: one based on Canadian GAAP, and the other on U.S. GAAP. investigated. Case 4 This case is based on Homburg Invest Inc.’s 2006 financial statements. A reconciliation of differences between two sets of financial statements is required along with a brief note explaining why differences exist. Case 5 This case is adapted from a CICA case. It provides details regarding a company`s activities as well as financial details that were revealed as part of planning and interim work performed in the context of an audit of the financial statements. It places the student in the role of CA, reporting to the audit partner, and asks for a memo on the results of the interim audit work as well as any issues that should be raised in an upcoming meeting between the partner and the client. The reasons for some of the differences in numbers are
Copyright © 2010 McGraw-Hill Ryerson Limited. All rights reserved. 2 Modern Advanced Accounting in Canada, Sixth Edition
and 2) IFRS using the facts provided. GAAP.S. Chapter 1 Copyright © 2010 McGraw-Hill Ryerson Limited. All rights reserved. The questions are aimed at highlighting the differences between IFRS and U. The student answers a series of questions based on the company’s financial statements. stock exchange. GAAP. Problem 4 The student compares the 2006 and most recent financial statements of Cadbury. Problem 2 The student chooses a public company incorporated in India and listed on a U. and students are asked to prepare and compare financial statement numbers during the life of the asset using both a historical cost and a current value model. The questions are aimed at highlighting the differences between IFRS and U. GAAP. Problem 3 The student chooses a public company incorporated in Japan and listed on a U. stock exchange.S. The student answers a series of questions based on the company’s financial statements.) Details of a European company that reports using IFRS are given along with specific details relating to certain account balances. stock exchange. GAAP.S. 3 . GAAP. Solutions Manual.S.S.S. The student answers a series of questions based on the company’s financial statements. The questions are aimed at highlighting the differences between IFRS and U. Problem 2 (40 min.S. Students are asked to show how these balances should be reported under 1) U.S. Students are also asked to reconcile Net Income and Shareholders` Equity to from IFRS to U.PROBLEMS Problem 1 (40 min. a British chocolate manufacturer. GAAP. and answers a series of questions aimed at highlighting the differences between IFRS and U.) A single asset is acquired. WEB-BASED PROBLEMS Problem 1 The student chooses a public company incorporated in China and listed on a U.S.
many countries are forming agreements with international allies. 4 Modern Advanced Accounting in Canada. the ties. GAAP. the level of development of capital markets. One factor that is causing a shift towards a global capital market is that market-driven economies are replacing many former communist economies. differing legal systems. there is a higher chance that they may need to interpret financial statements from other countries at some point in their career. 4. Accounting students and professionals need to be aware of the differences between accounting practices in Canada and in other countries for three reasons. 2. and they should have an awareness of the different accounting practices that may exist. Canada has moved towards this end with mandating conversion to IFRS by January 1. they may want to move to another country to further their careers. First. improvements in computer and communication technology are facilitating international trading and investing and allowing companies to list their shares on many exchanges throughout the world. a Dutch company. However. Accounting students and practitioners need to be aware of the impact this move will have on their employers and clients. All rights reserved. 2011. Countries with highly developed capital markets often have sophisticated investors who demand current and useful accounting information and full disclosure. Second. This leads to the establishment of a body of generally accepted accounting principles that investors can rely Copyright © 2010 McGraw-Hill Ryerson Limited. as the markets become more and more international.Problem 5 The student compares the 2006 and most recent financial statements of Philips Electronics. 3. Sixth Edition . the most compelling reason is that the profession is quickly moving toward harmonization of accounting practices around the world. As well. to increase their competitiveness. Five factors that have affected a particular country's accounting standards are: the role of taxation. Finally. especially the mix of debt and equity financing. and answers a series of questions aimed at highlighting the differences between IFRS and U. both current and historical. REVIEW QUESTIONS 1. between the country and other countries.S. and inflation levels. and the demand for capital is increasing.
global accounting standards that will be used uniformly for financial reporting around the world. • There are also some differences in the accounting for post-retirement benefits. 7. historical costs have meaning and there is no need for price level adjustments. When the inflation level is sufficiently high in a country to make historical costs meaningless. 9. accounting adjustments that provide for the impact of inflation have been made in order to provide information that is useful. In countries where capital markets are not fully developed. companies use the LIFO method to calculate ending inventory and circumstances) while they are expensed immediately in the U.upon and that companies must comply with. as it is allowable for tax purposes if used in the financial statements. When this is the case.S. 5 Solutions Manual. there are fewer suppliers of capital and these suppliers demand and receive whatever information they require from companies. As a result there is less need for standardized accounting principles. Some of the differences between Canadian and U.S. and owners’ equity is listed before liabilities. The convergence project between FASB and the IASB hopes to have IASB standards acceptable for use by all companies required to report under the SEC rules in the United States. long-term assets are listed before current assets. The assumption underlying many countries' accounting policies is that the monetary unit is stable. First. Chapter 1 . cost of goods sold. 5. In Canada items are usually listed from current to non-current. Canadian companies favour weighted average and FIFO. 8. whereas in some countries. GAAP are: • • Canadians capitalize and amortize development costs (under certain More U. Then the two groups plan on working together on contentious issues so that any standards issued by the Copyright © 2010 McGraw-Hill Ryerson Limited. 6. the two bodies will focus on the elimination of differences that appear capable of quick resolution and are not part of major projects of either of the boards. In these countries we have seen price level adjustments and/or current value accounting as part of the generally accepted accounting practices being used.S. All rights reserved. The IASB works to develop a single set of high-quality. as LIFO is not an acceptable alternative under GAAP.
12. In 2002.g.S. These standards will be effective in January 2011 with earlier adoption allowed starting in 2009. the United States.S. which allows private enterprises choices with the respect to certain complex accounting standards (e. the CICA announced it would adopt IASB standards for use by public companies effective January 1. The U.S. Copyright © 2010 McGraw-Hill Ryerson Limited. 11. GAAP has become increasingly complex and for smaller private enterprises this often means that the cost of complying with such rules outweighs the benefit received from compliance. GAAP. In January 2006. In August 2007. At the end of 2009.two boards will have similar outcomes. In 2009.S. GAAP and IFRS can be resolved by then. The main reason the Accounting Standards Board decided to create a separate section of the CICA handbook for private enterprises was to address the cost/benefit discrepancy with respect to smaller private companies’ ability to comply with GAAP. The standards are broad based and require professional judgment. over 100 countries had adopted IASB standards while a number of countries still did not allow their use. The target date of 2011 does not apply to any major new IFRSs now being developed that will become effective after 2011. 10. Even if all the countries in the world adopt IFRSs. and Japan. stock exchanges are permitted to file their financial statements in accordance with IFRS without reconciliation to U. the AcSB decided to create a self-contained set of standards for private enterprises. All rights reserved. 13. comparability will not completely exist if preparers do not interpret the standards on a consistent basis. 2011. the ASBJ and the IASB agreed on a process for converging Japanese GAAP and IFRSs. Three major holdouts were Canada. The two organizations have recently outlined a roadmap towards conversion that could result in U. domestic companies reporting in IFRS by 2014. Sixth Edition . foreign public companies filing on U. Currently.S. In January 2006. the option to use the cost method for investments that would otherwise require the equity method). could convert as early as 2014 if major differences between U. Also some countries are adding additional “home-grown standards” to cover local conditions. 6 Modern Advanced Accounting in Canada. the CICA announced it would adopt IASB standards for use by publicly accountable enterprises effective in January 2011. Major differences between Japanese GAAP and IFRSs will be eliminated by 30 June 2011. the AcSB adopted differential reporting.
In this case it would make sense to prepare IFRS compliant statements in anticipation of the public transaction since the company would have to provide multiple years of comparative financial statements that comply with IFRS.g. 15. partners. and so on. or the significance of certain amounts might be discussed. this is more likely than it once might have been. they are intended for users with a reasonable understanding of financial statements. certain dollar amounts reported in the financial statements might be broken down into more detail. so they cannot be criticized on the grounds that they are beyond the comprehension of the “average person”. The question then becomes should additional explanations be provided for users who have a reasonable understanding of the financial statements? The answer depends on what type of information the “explanations” will contain. Instead. it is not accounting methods per se that make financial statements difficult to understand. foreign currency translation. 7 . It may have plans to become publicly listed at some point in the future and will then be required to comply with IFRS after January 1. Chapter 1 Copyright © 2010 McGraw-Hill Ryerson Limited. Since the financial statements try to reflect these business events. it is inevitable that the financial statements will be more complex. Financial statements are not directed at the average person. such as the method of accounting for deferred income taxes. All rights reserved. creditors. Thus. It is true that financial statements are complicated by accounting methods. The business environment and business transactions are themselves more complex. Additional explanations might be of three types: They could provide more detail on information that is already contained in financial statements. some of these complexities cannot be avoided. Given the global economy and the increased number of countries that have converted to IFRS. For example. Solutions Manual. A private company may have users of their financial statements that find IFRS statements more useful for their purposes (e. 2011 as a publicly accountable enterprise. and other stakeholders that may receive the company’s financial statements). However.14. customers. There are a few reasons why a private company would want to comply with IFRSs even though it is not required to do so.
MULTIPLE-CHOICE QUESTIONS 1. Further. there is already a considerable amount of supplemental information provided in a company’s MD&A. b 10. b 12. Too much information may achieve the undesired result of making financial statements more difficult to understand. d 9. a 8. d 3. d 13. c 11. It is important to note that for publicly accountable enterprises. This must be taken into account when considering supplemental information and explanations. a 6. b 7. In all three cases. b 5. Sixth Edition .- They could make information that is currently in the financial statements easier to understand by explaining technical accounting terms and concepts used in the statements. This document provides supplementary discussion of financial results and in many cases explanations of accounting treatments used in a company’s financial statements for the period. All rights reserved. d 4. a 15. b 14. c Copyright © 2010 McGraw-Hill Ryerson Limited. or - They could provide entirely new information not included in financial statements that might help users better understand the significance of the information that appears in the financial statements. 8 Modern Advanced Accounting in Canada. it is important to note that at some point additional information may “overload” the user. d 2. the information provided might concern the future or the past.
In the U.S. To ensure comparability. the reporting of research and development costs is a good example of a rule where many different approaches can be justified and the U. Do the Solutions Manual. As a result.S. Can an accountant determine with appropriate accuracy whether the recovery of costs is reasonably expected? In the U. 9 History has shown that the amount of research and development costs capitalized tended to vary as a company Conversely. GAAP is superior and that all reporting issues can (or should) be resolved by following U. rules.S. In other countries. Chapter 1 Copyright © 2010 McGraw-Hill Ryerson Limited. Most accountants around the world would recommend capitalizing a cost that leads to future revenues that are in excess of that cost.. all companies are required to expense all R&D costs.CASES Case 1 Students often assume that U. The issue is not whether costs that will have future benefits should be capitalized.. However. Brazil. such as a patent. as well as countries such as Canada. under IFRS. some discoveries that prove to be very valuable to a company for years to come are expensed immediately. when costs can be separately identified. research and development costs are capitalized when they are incurred in relation to a specific product or technology.S. In the United States. the question can be met. development costs must be recognized as an intangible asset when an enterprise can show that the six criteria mentioned in . companies will tend to capitalize a differing array of projects because of flexibility in their guidelines. all such costs are expensed as incurred because of the difficulty of assessing the future value of these projects. The real issue is whether criteria can be developed for identifying projects that will lead to the recovery of those costs. and when the recovery of costs is reasonably expected. rule might be nothing more than an easy method to apply. a conservative approach has been taken because of the difficulty of determining whether an asset has been or will be created.S. Japan. the FASB felt that such decisions were too subjective and open to manipulation. All rights reserved. that will generate future economic benefits? For Korean businesses. experienced good years and bad. and Korea. How easy is it for an accountant to determine whether the development project will result in an intangible asset. IFRS. allow capitalization of development costs when certain criteria are met.
Although in Europe (and especially in the Netherlands). All rights reserved. The historical cost principle. meaning. As a result of these factors. in terms of replacement cost. In most countries. with many exceptions to historical cost involved (mostly downward adjustments) in the scheme of asset valuation and earnings determination. and there is still some controversy as to whether the authors of this legislation intended “historical cost” to be a part of the model. In order for any presentation to be fair to the user. fair presentation has a contextual. the basis of presentation must be known and understood. elsewhere (especially in Latin America) general price level accounting and its variations are more common when changing prices are a problem.” whether prepared in accordance with the historical cost convention. understood. had not yet been fully articulated in textbooks and become a firm basis for accounting practice.S. and consistently followed. when we refer to “fair presentation” or a “true and fair view” in the preparation of financial statements. but does not necessarily have to follow any one particular model. Arguably. accounting is hardly a pure historical cost model. as we know it. we generally qualify the statement (as the auditors here have): “in accordance with generally accepted accounting principles. Sixth Edition . as historical costs become rapidly out Copyright © 2010 McGraw-Hill Ryerson Limited. especially where asset values are volatile. or a variety of hybrid models. financial statements may be considered to provide “fair presentation. 10 Modern Advanced Accounting in Canada.benefits of consistency and comparability (each company expenses all costs each year) outweigh the cost of producing financial statements that might omit valuable assets from the balance sheet? No definitive answer exists for that question. the reader of financial statements needs to be aware of the fundamental differences in approach that exist in accounting for research and development costs before making comparisons between companies from different countries. The important issue is that the model employed is known. The first Company’s Act which included the phrase “a true and fair view” is now over 150 years old.” That is. rather than an absolute. Note that U. Case 2 (a) Can any alternative to historical cost provide for fair presentation in financial reports or are the risks too great? Discuss. current value (replacement cost) accounting is the model most likely to provide fair presentation. the purchasing power units in a general price level adjusted model. it is common to encounter current value accounting. However.
For many long-established companies. There are risks. In managerial accounting. however. General price level (“GPL”) accounting changes the measuring unit in which the historical cost is reported. Historical cost is not restated. All rights reserved. that arise from the adoption of alternatives to historical cost. the historical cost relationship among financial statement items is disregarded in favour of the new basis of accountability. Current value accounting and general price level accounting are both responses to the problem of changing prices and the impact on financial reporting. an approach to financial reporting has developed that adopts more of a managerial approach and seeks to provide the most relevant information for decision-making. and even “current costs” of prior periods may display no relationship to current costs at the present date. historical costs for some assets are significantly out of date and of no value in support of managerial decisions. whereas general price level adjustment is not a departure from historical cost. for all items on the balance sheet (with the exception of monetary items which are not restated. This is the principal risk issue arising from current value accounting. new values are determined. and publication of financial statement asset values under current cost. each of which uses a different valuation base. audit. in the financial statements. as they are already stated at current values). Current value accounting changes this underlying basis of valuation. Solutions Manual. and in many ways less relationship to GPL-adjusted amounts. Current value accounting departs from the historical cost basis of accounting. we have long recognized that the relevant costs are the current costs. The question of objective determination also arises. This introduces the risk of an important (and potentially deliberate) misstatement. The reported values in current cost basis financial statements are not directly supportable by arms’ length transactions. As a result. generally replacement cost.of date. many companies follow alternatives to historical cost. but does not change the underlying basis of valuation for items on the income statement and balance sheet. Some of these are the same risks that arise from the historical cost model in that the recorded amount may soon be out of date. Prices may go up or down. In some European countries. based on current information. Current value accounting has many variations. All of these models bear little relation to historical cost accounting. Cost is always cost in a particular context and a cost determined for a particular context or decision may not be valid for a different context or decision and the user should be aware of this. Chapter 1 Copyright © 2010 McGraw-Hill Ryerson Limited. 11 . and leads many countries to have highly detailed rules for the preparation. In all cases.
historical cost accounting will result in an overstatement of income. 12 Modern Advanced Accounting in Canada. largely because of inertia. are sunk costs and have limited value in support of decisions. With respect to income measurement. These are serious difficulties which the accounting profession has tried to address through a variety of different mechanisms. Historical cost amounts are based on objective information and have the “paper trail” of an actual transaction that provides support. however. but no other method has become universally acceptable as an answer to the problem and so historical cost accounting persists. in a period of inflation. The following note may be helpful: Historical cost accounting has the advantage that it is verifiable. These amounts may therefore be better for investment decisions than historical costs.(b) Discuss the relative merits of historical cost accounting and replacement cost accounting. Also. or if there have been significant technical developments. In other cases. At the worst. Replacement cost accounting has the advantage of enhanced relevance because the values included have been determined at the current time. the use of current cost in financial statements in no manner makes the financial statements more “accurate. Historical costs. Sixth Edition .” although (if the amounts are carefully and objectively determined) there may be advantages in the fairness of presentation and therefore the relevance of financial statement amounts. Consider the question of the achievement of a balance between relevance and reliability and the provision of a “true and fair view” or “fair presentation” in financial reporting. they could contain bias to support a particular management policy or decision. All rights reserved. they could be guesses or otherwise based on invalid information. However. Students will provide a wide range of responses to this question. They are particularly deficient if a long time has passed since the transaction occurred. Income is overstated. and because no better model has emerged. as a portion of the Copyright © 2010 McGraw-Hill Ryerson Limited. rather than at some uncertain past date. at this stage (unless they have been provided with supplementary material or have background from other courses) responses will just scratch the surface. and therefore more reliable and free from bias than replacement cost accounting. current costs are potentially deficient in that they might not be objectively determined and lack reliability.
13 Solutions Manual. All rights reserved. For example. A further important point is that both the preparer and the user of financial statements should understand the basis of preparation of the statements. more than 20 years of effort directed toward accounting harmonization did not completely resolve differences in accounting practices in the countries of the European Union. Efforts in North America are more recent but are proceeding rapidly. Certainly. Despite the conceptual similarity. there will remain differences in interpretation of the rules and differences in the practices that are in place. the income remaining is a true income. While the meaning of this concept can differ dramatically among jurisdictions. the standard-setters (and. If all profits are distributed. the actual rules in place are quite different in some areas. and the strengths and weaknesses of the approach employed. Replacement cost accounting will alleviate this problem by charging to expense the replacement cost of all items consumed. yet regardless of the changes in accounting standards. CASE 3 Case Note Ajax Communications presents the classic case of the conflict among the accounting standards that are in force in different jurisdictions. although dramatically different amounts may be presented on a variety of dimensions. Harmonization efforts are ongoing to resolve these differences. and there is no guidance for the user in choosing the right set of accounting standards to base decisions upon. the business will not have the capacity to replace the items that have been consumed in the process of earning income. Chapter 1 . generally. the accounting practitioners) of each jurisdiction believe that the rules in place locally are the best rules available. With replacement cost charged to expense. potentially available for distribution without impairment of the productive capacity of the enterprise.reported profits must be reinvested in the business to maintain the productive capacity and not all profits are available for distribution. Each set of rules can be seen to be correct. in Europe. in that they present results that are consistent with the prevailing views on a fair presentation of both financial performance and financial position. Responses to specific questions: Copyright © 2010 McGraw-Hill Ryerson Limited. accounting standards in Canada and the United States may differ in the detail yet are quite similar at the conceptual level of user orientation.
this might explain the differences in the investments account.(a) As John McCurdy. (This website presents comparisons of international accounting standards with those of other countries including the United States and Canada. and arises because there are different rules for the determination of when an investment is classified as a subsidiary and consolidated. Sixth Edition . A website provided by Deloitte (www. outline the initial approach that you will take in order to determine the reasons for the difference in the numbers. and not so in the U.S.S. and (2) the use of LIFO in the U. In addition he should search for publications or web sites that discuss differences in accounting policies among countries. 14 Modern Advanced Accounting in Canada. As a start.com) could also provide useful information. McCurdy may be able to determine where some of the difference arises by examining the summary of significant accounting policies included with the financial statements. • • Why is total revenue significantly higher in the U. for the same period? (Are their revenue recognition policies the same?) Why are operating income and income before extraordinary items higher in Canada for the same period? (Revenue differences would be part of the answer. One such publication is by the CICA under the title Significant Differences in GAAP in Canada. financial statements. differ between the two sets of financial statements.? Is classification as an extraordinary item appropriate? What is the nature of the accounting policy differences that have lead to such dramatic differences in asset valuation between the two sets of financial statements? (Two possible reasons: (1) consolidation in Canada of some investments that would not be consolidated in the U. classified as such in the United States.) Copyright © 2010 McGraw-Hill Ryerson Limited. but are there also major differences in expenses?) • • What is the nature of the extraordinary item. This source will not identify all of the accounting policies in place. Items throughout the income statement.) (b) List some of the obvious items that need resolution and indicate some of the possible causes of the discrepancies.S. and FIFO in Canada might produce different results if there have been major changes in inventory costs during the year. as do all the aspects of the balance sheet presented. Mexico and the United States.iasplus.S. from total revenue through earnings per share. Chile. All rights reserved. More detailed knowledge of the accounting policies in place could come from the specific notes to the financial statements.
• • Given the higher asset values in the Canadian financial statements. the Canadian entity may be using the revaluation option under IFRS. for example. statements? (R&D comes to mind) Does this account for the difference in intangibles? • A variety of other specific points could be raised. The difference in income tax is represented entirely by the future taxes that will be paid when (and if) these gains are actually realized. The properties are not depreciated under IFRS. and a principal reason why accounting harmonization is so important. if any. Chapter 1 Copyright © 2010 McGraw-Hill Ryerson Limited.074 $ (276. What items. $ (96. All rights reserved.083) (286. neither set of financial statements may be said to be unequivocally superior to the other for the purpose of making investment decisions.860 36. these properties are valued on a yearly basis at fair market value with the unrealized gains reported in income. including.S. these properties are valued at the lower of depreciated cost and market.862 62. Under Canadian GAAP. Although the differences represent a dilemma to the Board of Directors in this case. whereas under IFRS. have been deferred and are being amortized for Canadian purposes that are directly expensed in the U.060) (8.306) 14. This is the general dilemma of international comparisons. policies associated with tax allocation. 15 . CASE 4 (a) Net Income – Canadian GAAP Unrealized valuation changes Revenue less operating expenses and COS Goodwill impairment loss Depreciation and amortization Income taxes Net income – IFRS (b) The major difference between the two net income numbers is contained in the accounting for the company’s development properties and investment properties.653) CASE 5 Memorandum Solutions Manual.
RSI’s bias is to maximize revenue. Maintenance and contract revenue b. Convertible debentures IV. In particular: Copyright © 2010 McGraw-Hill Ryerson Limited. RSI has incurred $720. payroll and purchasing. Product revenue c. These costs have all been capitalized in Year 12. RSI implemented a new general ledger package. The new package has been functioning in parallel with the old system since April 1. The major financial reporting issues arising from our planning and interim work are: I. and will no longer be used in parallel effective July 1. 16 Modern Advanced Accounting in Canada. It was required because the old general ledger package would no longer be compatible with other software modules such as inventory. Receivable from Mountain Bank Accounting for new accounting system costs During fiscal Year 12.000 of internal salary costs. Sixth Edition . Interim Audit Results From: CA Given that Roman Systems Inc. IAS 38 offers guidance as to the costs that may be capitalized when internally developing intangible assets. All rights reserved. it should probably follow IFRS. (RSI) plans to go public within the next year. Revenue recognition a. Accounting for the costs of the new accounting system II. Year 12.To: Re: Partner Roman Systems Inc. together with $70. ABM revenue III. net income and shareholder’s equity in order to attract potential investors. Year 12. This will avoid retrospective restatement of the financial statements at a later date. The new package has been used to generate RSI’s financial results since April.000 in third-party costs associated with the new general ledger package.
000 (and all future monthly fees) is an operational cost of the system and should be expensed. 17 . (b) identified inefficiencies and initial operating losses incurred before the asset achieves planned performance. betterment. Training costs of $225. and prepare the asset to be capable of operating in the manner intended by management. The monthly support fee of $25. as they extend the life of the accounting system and enhance the service capacity.000 for new software and implementation costs represent a betterment. produce.000 should be expensed. Costs of $320. All rights reserved. and (d) amortization of patents and licenses that are used to generate the intangible asset.000 related to initial review and recommendations would be considered business process re-engineering activities and not directly related to the creation of the new system. They should be capitalized. as the costs are not directly attributable to the development.The cost of an internally generated intangible asset comprises all directly attributable costs necessary to create. administrative and other general overhead expenditure unless this expenditure can be directly attributed to preparing the asset for use. Solutions Manual. Based on the above: Costs of $110. IAS 23 specifies criteria for the recognition of interest as an element of the cost of an internally generated intangible asset. Examples of directly attributable costs are: (a) costs of materials and services used or consumed in generating the intangible asset. The following are not components of the cost of an internally generated intangible asset: (a) selling. or acquisition of the software. (b) costs of employee benefits (as defined in IAS 19) arising from the generation of the intangible asset. These costs should be expensed. (c) fees to register a legal right. and (c) expenditures on training staff to operate the asset. Chapter 1 Copyright © 2010 McGraw-Hill Ryerson Limited.
RSI should start amortizing the new system and effective June 30. It is RSI’s standard practice to obtain such evidence of acceptance. It may not be continued in the future and may not consistently reduce future service calls.000 of salaries related to employees involved with the implementation of the new system. it is questionable whether the four employees were 100% dedicated to the task of implementing the new software. and may no longer be an accurate reflection of the pattern of maintenance calls. Sixth Edition . This new method recognizes 25% of the revenue in each of the first two months and may not be appropriate. 18 Modern Advanced Accounting in Canada. the company changed its revenue recognition policy on maintenance contracts. the new method will recognize a greater proportion of the revenue earlier in the contract life. Revenue Recognition Maintenance contracts During the year. It would therefore be inappropriate to recognize revenue without such evidence of customer acceptance. Effective July 1. and should likely be expensed. it should write off the remaining net book value of the old system.- The other consulting fees of $40. Copyright © 2010 McGraw-Hill Ryerson Limited. As well. Assuming that the company previously recognized maintenance revenue on a straight-line basis over the course of the contract. All rights reserved. The preventive maintenance is entirely at the discretion of the company. Year 12. Maintenance services must be provided over the full life of the contract. Only the costs related to the implementation should be capitalized. Revenue recognition for service contracts should be based on the service obligation over the term of the contract. These salaries could be capitalized if they are directly attributable to the implementation of the new software package. - RSI has capitalized $70. Since only two additional individuals were hired to handle the work previously done by the four employees. but they appear to be part of the ongoing costs of the new system with no specific value added. Product Revenue Product revenue is recognized at the time of delivery and installation.000 should be reviewed in more detail. the study serving as a basis for the policy is two years old. Customer acceptance is evidenced by customer sign-off once installation is complete.
ABM business RSI began selling ABMs in fiscal Year 12. RSI’s share of this fee is 40%.000. with an associated expense for the 60% attributable to other parties. for a total of $4. 19 Solutions Manual.000 ABM transactions were processed at a fee of $1. It is important to better understand the relationship between RSI. Marge would have a month to ensure that there are no issues at year-end. The machines are purchased from an electronic manufacturer and resold at margins of 5%. The following factors suggest that the ABM transaction fee revenue should be recorded on a net basis: RSI has no ownership of the ABM machines. This has not been an issue in the past and may be an isolated case related to new employees who may be unfamiliar with RSI’s standard procedures. We need to ensure that Marge communicated the policy to all staff members and ensure that customer sign-off is obtained for all installations prior to year-end. Recognizing revenue on a net basis is more appropriate if RSI is simply fulfilling orders obtained by the manufacturer. RSI is being paid on a net basis. Transaction fee revenue The company has begun a new line of business related to transaction fee revenue generated from the sale of ABM machines. and the end-party customer in order to recommend an appropriate revenue recognition policy. Chapter 1 . All rights reserved. A total of 2. RSI has no responsibility for cash collection. Since it is early June.In performing the interim work. It is important to consider whether RSI is recording revenue on a gross or net basis. Recognizing revenue on a gross basis is appropriate if RSI bears the risk of selling the product.245.000 was recorded prior to obtaining customer sign-off. we determined that revenue of $640. Copyright © 2010 McGraw-Hill Ryerson Limited. the manufacturer. RSI has no responsibility for stocking or emptying the machines. for a fee.50 per transaction. RSI is currently recording the transaction fee revenue on a gross basis.830.
Two issues arise which must be analyzed in succession.000 was received from the customer and the balance remains outstanding. The cameras were installed and customer sign off at each branch was received. the client has been accommodating the changes. Year 13. Since they are convertible into common shares. $450. Year 12 we determined that there was a balance of $835. There are between five and ten sites that remain to be fixed. RSI should consider the reclassification of a portion of the debentures based on the fair value of the conversion feature.000 from Mountain Bank. Reclassifying the debentures as short-term appears to be the more appropriate form of presentation. the ability to issue the IPO is beyond the strict control of the company. 20 Modern Advanced Accounting in Canada. Convertible debentures The debentures are currently classified as long-term debt. The client has told us that this relates to a contract to install security cameras at all of the customers’ branches.- RSI does not have responsibility for maintenance of the ABMs. The debt is repayable on demand should RSI not go public by June 30. Marge Roman should be made aware that if RSI is going public. it would be appropriate for the ABM transaction fee revenue to be recorded on a net basis. The debt may therefore have to be reclassified as a short-term item in the current financial statements. Also. On June 1. The reclassification is currently not required since RSI is not a public company. We learned that payment was being withheld as several branches requested that fixes be made to the angles at which the cameras were mounted. Receivable from Mountain Bank In reviewing the aged accounts received at April 30. First. On this basis. a detailed analysis should be done related to the split between debt and equity. The financial statements in an offering document would have to be modified to split the debenture between debt and equity. While there are plans to go public and negotiations have begun (which supports a long-term classification). Sixth Edition . Although not required to do so under contract. and RSI cannot set the transaction fee amount. This reclassification will result in higher charges to the income statement through the addition of the debt discount. All rights reserved. which takes a service person approximately one hour to complete. there is no document such as terms of agreement or a memorandum of understanding providing evidence that this will likely occur. is it appropriate to recognize Copyright © 2010 McGraw-Hill Ryerson Limited. which was overdue by more than 120 days.
it could be argued that such a term exists implicitly since the client has been willing to do so and has accommodated the customer. Although no terms exists in the contract with Mountain that requires the client to come back and adjust the installation of the cameras. The work required to complete the adjustments is minimal and within the control of RSI. On the issue regarding collectibility. and sign off by the customer? And second.14 says that revenue from the sale of goods can be recognized when all of the following conditions have been met: (a) the entity has transferred to the buyer the significant risks and rewards of ownership of the goods. there is evidence that the customer is willing to pay once the minor fixes are complete given the $450. In this case. All rights reserved. (b) the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold. if revenue recognition is appropriate. It appears unlikely that the customer will not pay. We should examine Mountain’s payment history a little closer to determine whether amounts were unpaid regarding prior work/product sold and whether any Solutions Manual.000 payment that was made in June. On this basis. it must be determined whether collectibility is reasonably assured. In this case all of the above conditions were met upon delivery and installation of the cameras. however. IAS 8 par . it appears that revenue recognition was appropriate. Revenue may be held back. 21 . In this case I believe the answer is no. installation. Chapter 1 Copyright © 2010 McGraw-Hill Ryerson Limited. and (e) the costs incurred or to be incurred in respect of the transaction can be measured reliably. and has nothing to do with the quality of the product. is collection of the remaining accounts receivable doubtful? On the issue of revenue recognition. to the extent that a customer acceptance term exists in the arrangement. The question then becomes whether this implicit acceptance is material such that it could be argued that the delivery criterion has not been met. (d) it is probable that the economic benefits associated with the transaction will flow to the entity. (c) the amount of revenue can be measured reliably.revenue upon delivery.
??? .amounts were written off/forgiven.350 Convertible debentures Mountain Bank Overall impact PROBLEMS Problem 1 Historical Cost (U.??? . Exhibit I Impact of Recommendations on Key Financial Metrics Issue Software costs Revenue recognition for maintenance contracts products ABM business Transaction fees split between debt & equity amortize discount on debt . Sixth Edition .??? . 22 Modern Advanced Accounting in Canada.000 Copyright © 2010 McGraw-Hill Ryerson Limited. Overall Impact The affects of my recommendations on the key financial metrics are presented in Exhibit I.000.??? .000.??? .??? .??? Revenue Income .547 +??? .??? .??? .??? . In the absence of either.350 Equity . RSI will not like these adjustments because they worsen the key financial metrics. The adjustments are appropriate as they better reflect the results of operations and financial position of RSI in accordance with GAAP. GAAP) Jan 1 /1 Asset cost 10.S.??? . revenue. it would appear supportable that the accounts receivable related to this sale are collectible and do not need to written down/off.??? .2. net income and shareholder’s equity will decrease. All rights reserved. As indicated therein.000 Current Value (IAS 16) 10.
000 0 Problem 2 (a) (i) Copyright © 2010 McGraw-Hill Ryerson Limited.000) During the last 18 years depreciation IAS 16 > U.667 500.500. IAS 16 2.666 Dec 31/1 Balance Dec 31/2 Balance Dec 31/3 Balance Dec 31/4 Balance (a) 1.000 Jan 2/3 666. GAAP (b) 1. GAAP (c) IAS 16 12. Chapter 1 .333 8.000.000 13.000 12.000 9.000 9.000.000.000.000 Year 3 666.000.333 666. IAS 16 2. U.500.000 U.000.000 500.333.000 9.000 Dec 31/4 10. GAAP Offset by appraisal surplus Difference in shareholders’ equity (18 x 166.S.000.333.000 12.000.000 total depreciation over 20 years Years 1 & 2 Next 18 years 1.000 10. 23 Solutions Manual. GAAP > IAS 16 There would be no difference in shareholders’ equity at the end of 20 years During the first two years the reduction in shareholders’ equity is the same under the two alternatives (2 x 500.666.000.667 500.000 3.667 10.500.000.667 11.S.667) 3.666 8.000.000 Year 4 500.000 500.Year 1 Year 2 Jan 2/3 Year 3 Year 4 Depreciation Depreciation Appraisal Depreciation Depreciation 500.S.000 9.000 500.000 9. GAAP Profit total depreciation over 20 years U.000.S.000 500.000 = 1.500.000.000 Dec 31/3 11.000 500.000.000. U.000 666.000 8. All rights reserved.000 8.666.S.000 3.000 Year 2 500.
Sixth Edition .S.000 U.S. Yr 2 5 Under IFRS (IAS 17). GAAP.000).($500. However.000 4 (iii) Deferred gain on lease @ Dec 31.S. All rights reserved. Thus. Yr 2 3 IFRS3 $135. GAAP4 $0 $500. (ii) R&D @ Dec 31. under U.000). the gain is deferred and amortized over the lease term. Net realizable value is used as the market value.30)/10 = $135. Yr 2 IFRS7 $56. inventory is stated at the lower of cost or market.000 = $78. net realizable value ($98. GAAP2 $95.000 . GAAP8 $60.. and $98.250 U.000*.000) and net realizable value less normal profit margin ($98. IFRS5 $0 U.000 . inventory should be stated at the lower of $100.S.000 at Dec 31. GAAP the market value is the midpoint between replacement cost ($95. ($50. a gain on sale-leaseback is recognized immediately in income if the lease qualifies as an operating lease.000) (iv) Equipment @ Dec 31.000 $98. (IAS 38) R&D costs are expensed under U.IFRS1 Inventory @ Dec 31. GAAP. inventory is stated at the lower of cost or market. GAAP.000 – only development costs are capitalized. which is the net realizable value (market value).S.000 7 Under IFRS (IAS 36).000 . 24 Modern Advanced Accounting in Canada.$50.000. Yr 2 1 U. 2 Under U. if the lessee does not relinquish more than a minor part of the right to use the asset.000 Under IFRS (IAS 2).S.S. GAAP6 $30. an asset is impaired if the carrying amount exceeds the higher of assets value in use (discounted cash flows = $75. Yr 1) and its FV less costs to dispose Copyright © 2010 McGraw-Hill Ryerson Limited.20 x $100. 6 Under U.000/5*2 = $30.000.S.
000-$95.S. Yr 2 is therefore determined using the $75. Yr 1 less one year of depreciation ($75. GAAP Net Income Year 2 under U. All rights reserved. a mobile services provider headquartered in China.000) ($135.750) Add: lease gain deferred under U.000/5*2 = $30. (b) Net Income Year 2 under IFRS Less: additional write-down of inv ($98. (a) The financial statements are presented in Rinminbi (Chinese Yuan).($72.000 = $100.000 $2.000 less two years of depreciation ($20. 8 Under U. Chapter 1 Copyright © 2010 McGraw-Hill Ryerson Limited. GAAP ($20.S.000) development cost amort. GAAP S/E Dec 31 Year 2 under IFRS Less: additional write-down of inv ($98. This is disclosed on the face of the financial statements.$18.000-$95.000. The balance under U.000 ($3.000 at Dec 31. GAAP at Dec 31. Yr 1). The balance at Dec 31.890. If impaired. GAAP S/E @ Dec 31.S.$50. Year 2 under U.S.000) lease gain amort not recognized under IFRS additional depreciation under U. 25 . GAAP.750 $16.$20. not recognized under U.000 value in use at Dec 31.000.750). not recognized under U.000) ($1. GAAP $2. there is no indicator of impairment if the undiscounted cash flows from its use ($85. GAAP additional depreciation under U.000 .S.S.000) ($10.000 .000 . Yr 2 is therefore $100.S.S. the 2008 Form 20-F (Annual Financial Statements and MD&A) was selected for China Mobile Limited.S.000). GAAP ($20.250) $30.750) Add: development cost amort.000 .000 per year).000.000/4 = $18.000 $15.$18.000).000) are greater than the carrying amount ($80.000) ($1. Solutions Manual.250) $15.750 WEB-BASED PROBLEMS Problem 1 To illustrate the response to this problem. ($50. the asset is written down to its value in use.000 ($3.
907 = .S. because the SEC recently approved the use of IFRS without reconciliation for all foreign companies listed on U. (d) Current ratio 2008 = 240. GAAP. the liquidity of the company has slightly increased year over year. Solely for the convenience of the reader. the current year. the consolidated financial statements have been prepared in Indian rupees for both the 2008 and 2009 figures. (c) There is no reconciliation provided between IFRS and U. exchanges.682). Sixth Edition .573 = 1. This is disclosed in the statement of compliance in Note 1 on page F-11.S. The biggest item affecting net income was usage fees.953 = 1.635 / 154.33:1. Problem 2 To illustrate the response to this problem.S. 2007 = 207.S. (e) Debt/equity 2008 = (180. 2007 – 52. a leading India-based pharmaceutical company. GAAP for 2009. (b) The financial statements were prepared in accordance with International Financial Reporting Standards for the first time in 2009. the 2009 figures are also presented in United States dollars using the exchange rate at the end of the year. 2007 = (154.239 = . (a) As per note 2(d).485:1. The solvency of the company improved slightly from 2007 to 2008. On this basis.954 in 2008. the working capital position (current assets minus current liabilities) has actually increased (WC = 2008 – 59. which increased by approximately 34. Reddy’s Laboratories Limited. This is disclosed in note 2(a).506:1. in Copyright © 2010 McGraw-Hill Ryerson Limited.953 + 34.217)/442. All rights reserved.(b) The financial statements are prepared in accordance with International Financial Reporting Standards. (f) Net income improved from 87. 26 Modern Advanced Accounting in Canada.S. exchanges.000 year over year. GAAP as recently the SEC approved the use of IFRS without reconciliation for all foreign companies listed on U.401)/374.34:1.170 / 180.597. (c) There is no reconciliation provided between IFRS and U. the company used U. In prior years. Although the current ratio would seem to indicate that the liquidity position of the company slightly weakened during the year. However.573 + 34. the 2009 Form 20-F (Annual Financial Statements and MD&A) was selected for Dr.179 in 2007 to 112.
the consolidated financial statements have been prepared in Japanese yen for both the 2008 and 2009 figures.747 / 42.601 = 1.988 / 19.856 in 2009 compared to 90 in 2008.086 / 11.836 in 2008 to a loss of 5. (a) As per the title of each statement. In the end. 27 Solutions Manual.045 = . The solvency of the company weakened during the year.284 / 47. 2008 = 12. (f) Net income decreased from a profit of 3. the 2009 figures are also presented in United States dollars using the exchange rate at the end of the year.S. Since the current ratio and the working capital position declined during the year. the liquidity position of the company improved slightly during the year.99:1.01:1.81:1. GAAP because the company reports in accordance with U. Copyright © 2010 McGraw-Hill Ryerson Limited. The three major differences related to impairment of intangibles. therefore.S. 2008 = 38.589 = 1. All rights reserved. Chapter 1 . (b) As per note 2. a car manufacturer headquartered in Japan. the liquidity position of the company weakened during the year. The biggest item affecting the change in net income was a goodwill impairment loss of 10. share based payment and amortization of intangibles. the parent company and its subsidiaries in Japan maintain their records and prepare their financial statements in accordance with accounting principles generally accepted in Japan. (c) There is no reconciliation provided between IFRS and U.010 / 26.73:1.168 in 2009.47:1. the company provides a reconciliation of profit for 2008. and its foreign subsidiaries in conformity with those of their countries of domicile. GAAP.941= 1. Certain adjustments and reclassifications have been incorporated in the accompanying consolidated financial statements to conform to accounting principles generally accepted in the United States of America. However. (d) Current ratio 2009 = 39.350 = . (e) Debt/equity 2009 = 41. the prior year. 2008 = 33.299 / 10. GAAP.S.note 4. Problem 3 To illustrate the response to this problem. the 2009 Form 20-F (Annual Financial Statements and MD&A) was selected for Toyota Motor Corporation. (d) Current ratio 2009 = 11. The current ratio has increased slightly. the financial statements are presented in accordance with U.553 = 1.07:1.
872) / (539 + 10. GAAP. The biggest item affecting the change in net income was a decline in sales. quantifying the difference may be difficult to the extent that specific figures are not presented that would be necessary to reconcile to U.59:1.S. 2008 = (11.705 in 2009. (e) If a reconciliation of to U.(e) Debt/equity 2009 = (10.034 million British Pounds.S. All rights reserved.717 in 2008 to a loss of 437 in 2009.S. This is disclosed in Note 40 to the financial statements on page F-73 of the 2006 Form 20-F filing. This is discussed on page F-81 of the 2006 Form 20-F filing. the solvency of the company weakened during the year.589 + 7. This is disclosed on the face of the financial statements. GAAP treatments. Sixth Edition . profit for 2006 would have been 1. In some cases. This highlights the benefit of having a Copyright © 2010 McGraw-Hill Ryerson Limited. The debt to equity ratio increased.941 + 7. GAAP because the SEC recently approved the use of IFRS without reconciliation for all foreign companies listed on U.870) = 1. Problem 4 (a) The financial statements are presented in British Pounds for 2006 and 2008. and compare accounting policy selections to what treatments would be allowable under U.991) / (657 + 11.061) = 1. which reduced the gross margin from 4.368 in 2008 to 1. (f) Net income decreased from a profit of 1. This represents an 11% difference. GAAP were not provided. Therefore.74:1. 28 Modern Advanced Accounting in Canada.S. Under U. a financial analyst would have to read and understand the significant accounting policies of the company under IFRS. GAAP in order to determine what the potential differences might be. The following two largest differences were the treatment of retirement benefits (40(h)) and the amortization of intangible assets (50(b)(g)). (b) The financial statements for 2006 and 2008 were prepared in accordance with IFRSs as endorsed and adopted for use in the EU and IFRSs as issued by the International Accounting Standards Board. (c) Profit for 2006 under IFRS was 1.S. In 2008. exchanges. the company did not prepare a reconciliation between IFRS and U.S. (d) The largest difference between the profits under each set of standards was the treatment of gain/losses on cumulative translation adjustments upon the sale of a subsidiary.165 million British Pounds.
GAAP the SEC recently approved the use of IFRS without reconciliation for all foreign companies listed on U. This is disclosed on the face of the financial statements. (e) If a reconciliation to U.S. Solutions Manual.S. GAAP.S. GAAP because it reported under U. GAAP. (d) This is not applicable since they did not provide a reconciliation for the reasons mentioned in (c). The financial statements for 2009 were prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). a financial analyst would have to read and understand the significant accounting policies of the company under IFRS.S. quantifying the difference may be difficult to the extent that specific figures are not presented that would be necessary to reconcile to U. (c) In 2006. GAAP treatments. exchanges. In 2009.S. GAAP were not provided. 29 .S. and compare accounting policy selections to what treatments would be allowable under U.consistent set of standards that is followed by all publicly accountable entities as it greatly improves comparability. GAAP in order to determine what the potential differences might be.S. All rights reserved. the company did not prepare a reconciliation between IFRS and U.S. Chapter 1 Copyright © 2010 McGraw-Hill Ryerson Limited. Problem 5 (a) The financial statements are presented in euros for 2006 and 2009. (b) The financial statements for 2006 were prepared in accordance with U. This highlights the benefit of having a consistent set of standards that is followed by all publicly accountable entities as it greatly improves comparability. In some cases. the company did not prepare a reconciliation between IFRS and U.
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