IFRS Topic 3 and 4 Flashcards

Questions and Answers

Which of the following best describes Giano's financial reporting options regarding the investment in its consolidated financial statements?

The investments may be accounted for using the equity method or under the FVO under US GAAP only.

The investments may be accounted for using the equity method or under the FVO under both US GAAP and IFRS. (correct)

The investments must be accounted for under the FVO under both US GAAP and IFRS.

The investments must be accounted for as AFS under both US GAAP and IFRS.

Which of the following is not classified as a financial asset under IFRS?

A contractual right

An equity instrument of another entity

Prepaid assets (correct)

Cash

Both US GAAP and IFRS require that financial instruments be sorted into specific categories for classification and measurement purposes.

True

Under IFRS, changes in the fair value of financial assets with foreign exchange components classified as AFS are separated when attributable to which occurrence?

Foreign currency rates Signup and view all the answers

Under both US GAAP and IFRS, financial instruments are sorted into the following specific categories, except:

Restricted investments Signup and view all the answers

Equity securities (without significant influence) that are not marketable are generally recorded at cost under US GAAP. IFRS allows these securities to be measured at fair value if determinable and classified under which category?

AFS Signup and view all the answers

For investments in equity securities, when is the equity method used?

When the investor does have significant influence over the investee. Signup and view all the answers

Under IFRS, derecognition of financial instruments considers both transfers of risk and rewards and if not conclusive, then there should be an evaluation of control. The control hurdle requires which of the following?

The transferee has the practical ability to unilaterally sell the transferred asset to a third party without restrictions. Signup and view all the answers

What is a difference in impairment accounting when comparing US GAAP to IFRS?

If the value of the investment recovers, such losses are reversed through income if they relate to debt instruments. Signup and view all the answers

Which of the following is true regarding the lower of cost or net realizable value?

Reversals of prior write-downs are allowed using IFRS, but not using US GAAP. Signup and view all the answers

Which of the following is true regarding write-downs to lower of cost or net realizable value using IFRS?

IFRS does not specify where the write-down should be included on the income statement. Signup and view all the answers

Using IFRS, the journal entry to write inventory down to the lower of cost or net realizable value includes which of the following?

A debit to inventory write-down expense and a credit to inventory valuation allowance. Signup and view all the answers

A company has two inventory items of a similar nature and use. One item is held at the company's headquarters in Spain and one is held in France. Using IFRS:

The company must use the same cost flow assumptions for the inventory. Signup and view all the answers

Intangible assets produced for resale are inventory:

Using IFRS, but not using US GAAP. Signup and view all the answers

Interest is never capitalized using IFRS.

False Signup and view all the answers

Although revaluation of intangible assets is allowed using IFRS, it is uncommon in practice. This is most likely because:

It requires comparison to an active market for the specific intangible. Signup and view all the answers

If a company revalues an intangible asset for the first time and the revaluation is downward, then the journal entry will involve:

A debit to expense and a credit to the intangible asset. Signup and view all the answers

If a company revalues an intangible asset for the first time and the revaluation is upward, then the journal entry will involve:

A debit to the intangible asset and a credit through OCI to revaluation surplus. Signup and view all the answers

Using IFRS, the term 'value in use' is defined as:

The present value of future cash flows in use, including disposal value. Signup and view all the answers

Using IFRS, the impairment calculation requires use of the recoverable amount. Recoverable amount is defined as:

The greater of the fair value less the costs to sell and the value in use. Signup and view all the answers

Using IFRS, limited-life intangibles, indefinite-lived intangibles and goodwill are tested for impairment:

Annually, annually and annually, respectively. Signup and view all the answers

The treatment for negative goodwill is:

It is recognized immediately as income for both US GAAP and IFRS. Signup and view all the answers

Study Notes

Giano Limited Investment Reporting

Giano Limited owns 30% of another company, indicating significant influence.
Options for financial reporting include the equity method or the fair value option (FVO) under US GAAP, but equity method is standard under IFRS.
Investments in associates are scoped out of IAS 39, covered under IAS 28.

Classification of Financial Assets

Prepaid assets are not considered financial assets under IFRS, while cash, equity instruments, and contractual rights are classified as financial assets.

Financial Instruments Classification Requirements

Both US GAAP and IFRS mandate that financial instruments be categorized for classification and measurement purposes.

Fair Value Changes in Financial Assets

Under IFRS, changes in fair value of available-for-sale (AFS) financial assets with foreign exchange components are tracked for changes attributable to foreign currency rates.

Exclusions in Financial Instrument Categories

"Restricted investments" is not a recognized classification under either US GAAP or IFRS.

Measurement of Non-Marketable Equity Securities

Under IFRS, non-marketable equity securities without significant influence may be classified as AFS and measured at fair value if determinable.

Equity Method Use in Securities

The equity method applies when the investor has significant influence over the investee, otherwise it is not utilized.

Derecognition of Financial Instruments

Derecognition under IFRS considers the transfer of risk, rewards, and the evaluation of control, requiring the transferee's ability to sell the asset unilaterally without restrictions.

Impairment Accounting Differences

Under IFRS, recovery losses in debt securities can be reversed through income, unlike US GAAP where impairment losses are not reversible.

Lower of Cost or Net Realizable Value

IFRS allows reversals of inventory write-downs, contrasting with US GAAP which prohibits such reversals.

Treatment of Write-Downs

IFRS does not prescribe a specific expense account for inventory write-downs, allowing flexibility in presentation.

Inventory Cost Flow Assumptions

IFRS mandates the use of consistent cost flow assumptions across similar inventory types, even if held in different geographic locations.

Intangible Assets as Inventory

Under IFRS, intangible assets produced for resale are classified as inventory; this classification does not hold under US GAAP.

Capitalization of Interest

Interest may be capitalized under IFRS, contrary to the statement that it is never capitalized.

Revaluation of Intangible Assets

Revaluation of intangible assets is infrequent in practice due to the need for comparison to an active market.

Journal Entries for Downward Revaluations

A downward revaluation of an intangible asset results in debiting expense unless it offsets a prior revaluation surplus.

Journal Entries for Upward Revaluations

An upward revaluation of an intangible asset involves crediting through OCI to revaluation surplus unless reversing a previously expensed loss.

Definition of Value in Use

"Value in use" is defined as the present value of future cash flows in use, including disposal value, within IFRS guidelines.

Recoverable Amount in Impairment Calculations

Recoverable amount is determined as the higher of fair value (minus selling costs) and value in use.

Impairment Testing Frequency

Limited-life and indefinite-life intangibles, along with goodwill, are tested annually for impairment under IFRS.

Treatment of Negative Goodwill

Negative goodwill is recognized immediately as income under both US GAAP and IFRS after purchase price allocation reassessment.

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Description

This quiz focuses on key concepts in IFRS related to financial reporting and investment accounting. It examines scenarios such as significant influence and reporting methods like the equity method. Review your understanding of how these concepts apply to consolidated financial statements.