Exam (elaborations) TEST BANK FOR Intermediate Accounting IFRS Edition Volume 1 By Kieso Weygandt and Warfield Intermediate Accounting, ISBN: 9780471687306

Exam (elaborations) TEST BANK FOR Intermediate Accounting IFRS Edition Volume 1 By Kieso Weygandt and Warfield Intermediate Accounting, ISBN: 7306 True. 2. False. Any company claiming compliance with IFRS must comply with all standards and interpretations, including disclosure requirements. 3. False. The SEC is the governmental body that has influence over the FASB, not the IASB. 4. True. 5. False. The IASB has no government mandate and does follow a due process in issuing IFRS. CA 1-2 1. False. In general, the IASB uses a principles-based approach to standard setting while the FASB uses rules-based approach. 2. False. The objective emphasizes an entity perspective. 3. False. The objective of financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions in their capacity as capital providers. 4. False. International Accounting Standards were issued by the International Accounting Standards Committee while International Financial Reporting Standards are issued by the IASB. 5. True. CA 1-3 1. (c); 2. (d); 3. (b); 4. (d); 5. (b); 6. (a); 7. (a); 8. (b); 9. (d); 10. (b). CA 1-4 (a) Financial accounting is the process that culminates in the preparation of financial reports relative to the enterprise as a whole for use by parties both internal and external to the enterprise. In contrast, managerial accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of financial information used by the management to plan, evaluate, and control within an organization and to assure appropriate use of, and accountability for, its resources. (b) The financial statements most frequently provided are the statement of financial position, the income statement, the statement of cash flows, and the statement of changes in equity. To download more slides, ebook, solutions and test bank, visit Copyright © 2011 John Wiley & Sons, Inc. Kieso, IFRS, 1/e, Solutions Manual (For Instructor Use Only) 1-11 CA 1-4 (Continued) (c) Financial statements are the principal means through which financial information is communicated to those outside an enterprise. As indicated in (b), there are four major financial statements. However, some financial information is better provided, or can be provided only, by means of financial reporting other than formal financial statements. Financial reporting (other than financial statements and related notes) may take various forms. Examples include the company president’s letter or supplementary schedules in the corporate annual reports, prospectuses, reports filed with government agencies, news releases, management’s forecasts, and descriptions of an enterprise’s social or environmental impact. CA 1-5 It is not appropriate to abandon mandatory accounting rules and allow each company to voluntarily disclose the type of information it considered important. Without a coherent body of accounting theory and standards, each accountant or enterprise would have to develop its own theory structure and set of practices, and readers of financial statements would have to familiarize themselves with every company’s peculiar accounting and reporting practices. As a result, it would be almost impossible to prepare statements that could be compared. In addition, voluntary disclosure may not be an efficient way of disseminating information. A company is likely to disclose less information if it has the discretion to do so. Thus, the company can reduce its cost of assembling and disseminating information. However, an investor wishing additional information has to pay to receive additional information desired. Different investors may be interested in different types of information. Since the company may not be equipped to provide the requested information, it would have to spend additional resources to fulfill such needs; or the company may refuse to furnish such information if it’s too costly to do so. As a result, investors may not get the desired information or they may have to pay a significant amount of money for it. Furthermore, redundancy in gathering and distributing information occurs when different investors ask for the same information at different points in time. To the society as a whole, this would not be an efficient way of utilizing resources. CA 1-6 (a) The International Accounting Standards Committee Foundation (IASCF) is the sponsoring organization of the IASB. The IASCF selects the members of the IASB and the Advisory Council, funds their activities, and generally oversees the IASB’s activities. The IASB follows a due process in establishing a typical IASB International Financial Reporting Standard. The following steps are usually taken: (1) A topic or project is identified and placed on the Board’s agenda. (2) Research and analysis are conducted by the IASB and a preliminary views document is drafted and released. (3) A public hearing is often held. (4) The Board analyzes and evaluates the public response and issues an exposure draft. (5) The Board studies the exposure draft in relation to the public responses, revises the draft if necessary, gives the revised draft final consideration and votes on issuance of an IFRS. The passage of a new accounting standard in the form of an IASB Standard requires the support of nine of the fourteen Board members. (b) The IASB issues three major types of pronouncements: International financial reporting standards, Framework for financial reporting, and International financial reporting interpretations. Financial accounting standards issued by the IASB are preferred to as International Financial Reporting Standards (IFRS). To download more slides, ebook, solutions and test bank, visit 1-12 Copyright © 2011 John Wiley & Sons, Inc. Kieso, IFRS, 1/e, Solutions Manual (For Instructor Use Only) CA 1-6 (Continued) The International Accounting Standards Committee (IASB predecessor) issued a document entitled “Framework for the Preparation and Presentation of Financial Statements.” This framework sets forth fundamental objectives and concepts that the Board uses in developing future standards of financial reporting. The intent of the document is to form a cohesive set of interrelated concepts, a conceptual framework, that will serve as tools for solving existing and emerging problems in a consistent manner. Interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) are also considered authoritative and cover (1) newly identified financial reporting issues not specifically dealt with in IFRS, and (2) issues where unsatisfactory or conflicting interpretations have developed, or seem likely to develop in the absence of authoritative guidance. IFRIC can address controversial accounting problems as they arise. It determines whether it can quickly resolve them, or whether to involve the IASB in solving them. The IASB will hopefully work on more pervasive long-term problems, while the IFRIC deals with short-term emerging issues. CA 1-7 Accounting numbers affect investing decisions. Investors, for example, use the financial statements of different companies to enhance their understanding of each company’s financial strength and operating results. Because these statements follow international accounting standards, investors can make meaningful comparisons of different financial statements to assist their investment decisions. Accounting numbers also influence creditors’ decisions. A commercial bank usually looks into a company’s financial statements and past credit history before deciding whether to grant a loan and in what amount. The financial statements provide a fair picture of the company’s financial strength (for example, shortterm liquidity and long-term solvency) and operating performance for the current period and over a period of time. The information is essential for the bank to ensure that the loan is safe and sound. CA 1-8 (a) Arguments for politicalization of the accounting standard-setting process: 1. Accounting depends in large part on public confidence for its success. Consequently, the critical issues are not solely technical, so all those having a bona fide interest in the output of accounting should have some influence on that output. 2. There are numerous conflicts between the various interest groups. In the face of this, compromise is necessary, particularly since the critical issues in accounting are value judgments, not the type which are solvable, as we have traditionally assumed, using deterministic models. Only in this way (reasonable compromise) will the financial community have confidence in the fairness and objectivity of accounting standard-setting. 3. Over the years, accountants have been unable to establish, on the basis of technical accounting elements, standards which would bring about the desired uniformity and acceptability. This inability itself indicates standard-setting is primarily consensual in nature. 4. The public accounting profession made rules which business enterprises and individuals “had” to follow. For many years, these businesses and individuals had little say as to what the standards would be, in spite of the fact that their economic well-being was influenced to a substantial degree by those standards. It is only natural that they would try to influence or control the factors that determine their economic well-being. To download more slides, ebook, solutions and test bank, visit Copyright © 2011 John Wiley & Sons, Inc. Kieso, IFRS, 1/e, Solutions Manual (For Instructor Use Only) 1-13 CA 1-8 (Continued) (b) Arguments against the politicalization of the accounting standard-setting process: 1. Many accountants feel that accounting is primarily technical in nature. Consequently, they feel that substantive, basic research by objective, independent and fair-minded researchers ultimately will result in the best solutions to critical issues, such as the concepts of income and capital, even if it is accepted that there isn’t necessarily a single “right” solution. 2. Even if it is accepted that there are no “absolute truths” as far as critical issues are concerned, many feel that professional accountants, taking into account the diverse interests of the various groups using accounting information, are in the best position, because of their independence, education, training, and objectivity, to decide what international financial reporting standards ought to be. 3. The complex situations that arise in the business world require that trained accountants develop the appropriate reporting standards. 4. The use of consensus to develop reporting standards would decrease the professional status of the accountant. 5. This approach would lead to “lobbying” by various parties to influence the establishment of reporting standards. CA 1-9 (a) In many respects, the IASB is a quasi-governmental agency in that its pronouncements are required to be followed in some jurisdictions. For example, all public european companies are required to use IASB standards when preparing financial statements. In fact, both the FASB and the IASB believe that the IFRS have the best potential to provide a common platform on which companies can report and investors can compare financial information. The purely political approach is used in France and West Germany. The private, professional approach is employed in Australia, Canada, and the United Kingdom. (b) Publicly reported accounting numbers influence the distribution of scarce resources. Resources are channeled where needed at returns commensurate with perceived risk. Thus, reported accounting numbers have economic effects in that resources are transferred among entities and individuals as a consequence of these numbers. It is not surprising then that individuals affected by these numbers will be extremely interested in any proposed changes in the financial reporting environment. CA 1-10 (a) President Sarkozy is putting pressure on the IASB to craft fair value standards that favor banks. However, by introducing politics into the standard-setting process will likely lead to the following consequences: 1. Too many alternatives. 2. Lack of clarity that will lead to inconsistent application. 3. Lack of disclosure that reduces transparency. 4. Not comprehensive in scope. To download more slides, ebook, solutions and test bank, visit 1-14 Copyright © 2011 John Wiley & Sons, Inc. Kieso, IFRS, 1/e, Solutions Manual (For Instructor Use Only) CA 1-10 (Continued) When the resulting standards have these attributes, they will be of lower quality and the credibility of the standard-setting process will be questioned. At the extreme, market participants will have less confidence in accounting information and capital markets will be less liquid—cost of capital will be higher. Another indication of the problem of government intervention is shown in the accounting standards used by some countries around the world. Completeness and transparency of information needed by investors and creditors is not available in order to meet or achieve other objectives. In the fair value case, the IASB did respond by accelerating its process to develop a new standard, which provided some exceptions to the fair value accounting that benefited some banks and insurance companies. (b) Accounting reports have consequences for the companies that prepare them and the users of those reports—investors, creditors, government bodies, and so on. Considering the economic consequences of accounting standards, it is not surprising that special interest groups become vocal and critical (some supporting, some opposing) when rules are being formulated. The FASB’s derivative accounting pronouncement is no exception. Many from the banking industry, for example, criticized the rule as too complex and leading to unnecessary earnings volatility. They also indicated that the proposal may discourage prudent risk management activities and in some cases could present misleading financial information. As a result, elected officials are often approached to put pressure on the standard-setters (IASB and FASB to change its rulings. In the derivative controversy, Rep. Richard Baker introduced a bill which would force the SEC to formally approve each standard issued by the FASB. Not only would this process delay adoption, but could lead to additional politicalization of the rule-making process. Dingell commented that Congress should stay out of the rule-making process and defended the FASB’s approach to establishing accounting standards. CA 1-11 (a) Inclusion or omission of information that materially affects net income harms particular stakeholders. Accountants must recognize that their decision to implement (or delay) reporting requirements will have immediate consequences for some stakeholders. (b) Yes. Because the IASB rule results in a fairer representation, it should be implemented as soon as possible—regardless of its impact on net income. (c) The accountant’s responsibility is to provide financial statements that present fairly the financial condition of the company. By advocating early implementation, Weller fulfills this task. (d) Potential lenders and investors, who read the financial statements and rely on their fair representation of the financial condition of the company, have the most to gain by early implementation—they would be most directly harmed by deferral of implementation. At the same time, a stockholder who is considering the sale of shares may be harmed by early implementation that lowers net income (and may lower the value of the shares). If employee bonuses are based on the reported income number, the employees could receive lower bonuses with early implementation. CA 1-12 (a) The ethical issue in this case relates to making questionable entries to meet expected earnings forecasts. As indicated in this chapter, businesses’ concentration on “maximizing the bottom line,” “facing the challenges of competition,” and “stressing short-term results” places accountants in a