Answers to Questions.Chapter4

Answers to Questions.Chapter4 - Answers to Questions 1....

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Answers to Questions 1. Areas where IFRSs provide a benchmark and allowed alternative treatment with respect to assets include: Property, plant and equipment -- measurement subsequent to initial recognition. Benchmark: cost less accumulated depreciation and any accumulated impairment losses. Allowed alternative: revalued amount less accumulated depreciation and any accumulated impairment losses. Purchased intangibles – measurement subsequent to initial recognition. Same as property, plant and equipment. However, fair value method is only applicable for intangibles with an active secondary market. Borrowing costs. Benchmark: no borrowing costs are capitalized as part of the cost of a qualifying asset. Allowed alternative: capitalize borrowing costs to the extent they are attributable to the acquisition, construction or production of a qualifying asset. 2. In applying the lower of cost and market rule for inventories, IAS 2 defines market as net realizable value (NRV) and U.S. GAAP defines market as replacement cost (with NRV as a ceiling and NRV less normal profit margin as a floor). 3. The allowed alternative is to measure property, plant, and equipment at a revalued amount, measured as fair value at the date of remeasurement, less accumulated depreciation and any accumulated impairment losses. 4. Under IAS 36 , an impairment loss arises when an asset’s recoverable amount is less than its carrying value, where recoverable amount is the greater of net selling price and value in use. Value in use is determined as the expected future cash flows from use of the asset discounted to present value. The amount of the loss is the difference between carrying value and recoverable amount. Under U.S. GAAP, an impairment loss arises when the expected future cash flows (undiscounted) from the use of the asset are less than its carrying value. If impairment exists, the amount of the loss is equal to the difference between carrying value and fair value, which can be determined in different ways. 5. The benchmark treatment under IAS 23 requires all borrowing costs to be expensed immediately. U.S. GAAP requires interest cost to be capitalized on so-called qualifying assets. 6. IAS 17 describes five situations that would normally lead to a lease being capitalized, but does not describe these as being absolute tests. The criteria implied in four of the situations are similar to the specific criteria in U.S. GAAP, but the IAS 17 criteria provide less “bright line” guidance. IAS 17 indicates that a lease would normally be capitalized when the lease term is for the major part of the leased asset’s life – U.S. GAAP specifically defines “major part” as 75%. IAS 17 also indicates that a lease would normally be capitalized when the present value of minimum lease payments is equal to substantially all the fair value of the leased asset – U.S. GAAP specifically defines “substantially all” as 90%. Determining whether a lease should be capitalized is an example of the principles-based approach followed in IFRSs versus the rules-based approach of U.S. GAAP.
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7. The criteria for the disclosure and recognition of a contingent liability (loss) are very
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Answers to Questions.Chapter4 - Answers to Questions 1....

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