True / False
1. Under both IFRS and U.S. GAAP, interest costs incurred during construction must be capitalized.
2. As with U.S. GAAP, IFRS requires that both direct and indirect costs in self-constructed assets be capitalized.
3. IFRS, like U.S. GAAP, capitalizes all direct costs in self-constructed assets.
4. Even though IFRS does not employ the first-stage recoverability test used under U.S. GAAP − comparing the undiscounted cash flows to the carrying amount, the fact that IFRS uses a fair value test to measure impairment loss makes IFRS stricter than U.S. GAAP 5. U.S. GAAP, like IFRS permits write-up for subsequent recoveries of impairment, back up
to the original amount before the impairment in all circumstances.
6. Unlike U.S. GAAP, interest costs incurred during construction are not capitalized under IFRS.
7. Asset revaluations are permitted under IFRS and U.S. GAAP.
8. In general, IFRS adheres to very different principles than U.S. GAAP.
9. U.S. GAAP, per SFAS No. 153, now requires that gains on exchanges of nonmonetary assets be recognized if the exchange lacks commercial substance.
10. IFRS permits the same depreciation methods as U.S GAAP, with the exception of the units-of-production method, which is not allowed under IFRS.
Answers to True / False questions
1. True 2. False 3. True 4. True 5. False 6. False 7. False 8. False 9. False 10. False
Multiple-Choice Questions
1. IFRS uses a fair value test to measure impairment loss. However, IFRS does not use the first-stage recoverability test under U.S. GAAP − comparing the undiscounted cash flow to the carrying amount. As a result, the IFRS test is
a. not as strict as U.S. GAAP. b. more strict than U.S. GAAP.
c. essentially the same strictness as U.S. GAAP. d. None of the above.
2. Acceptable depreciation methods under IFRS include a. Straight-line.
b. Accelerated.
c. Units-of-production. d. All of the above.
3. The primary IFRS related to property, plant and equipment is found in a. IAS 1 and IAS 34.
b. IAS 11 and IAS 17. c. IAS 16 and IAS 23. d. IAS 27 and IAS 39.
4. The accounting exchanges of nonmonetary assets has recently converged between IFRS and U.S. GAAP, per SFAS No. 153, now requires
a. that gains on exchanges of nonmonetary assets be recognized if the exchange has commercial substance.
b. that gains on exchanges of nonmonetary assets be recognized if the exchange does not have commercial substance.
c. that gains on exchanges of nonmonetary assets be recognized if the exchange does not have commercial substance, and has never been impaired.
d. All of the above.
5. In measuring an impairment loss, IFRS uses a. undiscounted cash flows.
b. discounted cash flows. c. a fair value test.
d. a replacement value test.
6. IFRS permits companies to carry assets at historical cost or use a revaluation model for fixed assets. According to IAS 16, if revaluation is used:
1. it must be applied to all assets in a class of assets. 2. assets must be revalued on an annual basis.
3. assets must be depreciated on the straight-line basis. 4. salvage values must be zero.
a. 1 is correct b. 2 is correct
c. 1 and 2 are correct d. All are correct
Questions 7 through 10 are based on the following information:
Simpson Company applies revaluation accounting to plant assets with a carrying value of $1,600,000, a useful life of 4 years, and no salvage value. Depreciation is calculated on the straight-line basis. At the end of year 1, independent appraisers determine that the asset has a fair value of $1,500,000.
7. The journal entry to record depreciation for year one will include a a. debit to Accumulated Depreciation for $400,000.
b. debit to Depreciation Expense for $100,000. c. credit to Accumulated Depreciation for $100,000. d. debit to Depreciation Expense for $400,000.
8. The journal entry to adjust the plant assets to fair value and record revaluation surplus in year one will include a
a. debit to Accumulated Depreciation for $100,000. b. credit to Depreciation Expense for $300,000. c. credit to Plant Assets for $300,000.
d. credit to Revaluation Surplus for $300,000.
9. The financial statements for year one will include the following information a. Accumulated depreciation $400,000.
b. Depreciation expense $100,000. c. Plant assets $1,500,000.
d. Revaluation surplus $100,000.
10. The entry to record depreciation for this same asset in year two will include a a. debit to Accumulated Depreciation for $400,000.
b. debit to Depreciation Expense for $500,000. c. credit to Accumulated Depreciation for $300,000. d. debit to Depreciation Expense for $400,000.
Answers to multiple choice:
1. b 2. d 3. c 4. a 5. c 6. c 7. d 8. d 9. c 10. b
Short Answer:
1. Briefly describe some of the similarities and differences between U.S. GAAP and IFRS with respect to the accounting for property, plant, and equipment.
1. IFRS adheres to many of the same principles of U.S. GAAP in the accounting for property, plant, and equipment. Key similarities are: (1) Under IFRS, capitalization of interest or borrowing costs incurred during construction of assets can either be expensed or capitalized. Once certain criteria are met, interest must be capitalized (this accounting has recently converged to U.S. GAAP; (2) IFRS, like U.S. GAAP, capitalizes all direct costs in self-constructed assets. IFRS does not address the capitalization of fixed overhead, although in practice, these costs are generally capitalized; (3) The accounting for exchange of non- monetary assets has recently converged between IFRS and if the exchange has commercial substance. This is the framework used in IFRS; (4) IFRS also views depreciation as an allocation of cost over an asset’s life; IFRS permits the same depreciation methods (straight- line, accelerated, units-of-production) as U.S. GAAP. Key Difference: IFRS permits asset revaluation depreciation procedures must be followed. According to IAS 16, if revaluation is used, it must be applied to all assets in a class of assets and assets must be revalued on an annual basis.
2. At a recent executive committee meeting, the controller for Marino Company remarked, “With only a single key difference between U.S. GAAP and IFRS for property, plant, and
equipment, it should be smooth sailing for the FASB and IASB to converge their standards in this area.” Prepare a response to the controller.
2. While there is a single key difference, it is an important one—the issue of revaluations. With respect to frameworks, the IASB and the FASB are working on a joint project to converge their conceptual frameworks. One element of that project will examine the measurement bases used in accounting. It is too early to say whether a converged
conceptual framework will recommend fair value measurement (and revaluation accounting) for property, plant, and equipment. However, this is likely to be one of the more contentious issues, given the long-standing use of historical cost as a measurement basis in U.S. GAAP.