IMChap 005

Chapter 05 - International Financial Reporting Standards: Part II
CHAPTER 5
INTERNATIONAL FINANCIAL REPORTING STANDARDS:
PART II
Chapter Outline
I.
International Financial Reporting Standards (IFRS) issued by the International Accounting

Standard Board (IASB) comprise a comprehensive set of standards providing guidance for
the preparation and presentation of financial statements.
A. This chapter focuses on the recognition and measurement of current liabilities,
provisions and contingent liabilities, employee benefits, share-based payment, income
taxes, revenue recognition, and financial instruments.
II.
Current Liabilities
A. IAS 1, Presentation of Financial Statements, requires liabilities to be classified as
current or noncurrent. Current liabilities are those liabilities that a company:
a. expects to settle in its normal operating cycle,
b. holds primarily for the purpose of trading,
c. expects to settle within twelve months of the balance sheet date, or
d. does not have the right to defer until twelve months after the balance sheet date.
III.
Provisions and Contingent Liabilities

A. IAS 37 distinguishes between a contingent liability, which is not recognized on the
balance sheet, and a provision, which is. A provision is defined as a liability of
uncertain timing or amount. A provision should be recognized when:
a. the entity has a present obligation (legal or constructive) as a result of a past event,
b. it is probable (more likely than not) that an outflow of resources embodying
economic events will be required to settle the obligation, and
c. a reliable estimate of the obligation can be made.
B. Contingent liabilities are defined in IAS 37 as:
a. Possible obligations that arise from past events and whose existence will be
confirmed by the occurrence or nonoccurrence of a future event, or
b. A present obligation that is not recognized because (1) it is not probable that an
outflow of resources will be required to settle the obligation or (2) the amount of the
obligation cannot be measured with sufficient reliability.
Contingent liabilities are disclosed unless the possibility of an outflow of resources
embodying the economic future benefits is remote.
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Education.
IV.
Employee Benefits
A. IAS 19, Employee Benefits, is a single standard that covers all forms of employee
compensation and benefits (other than share-based compensation), including
postemployment benefits such as pensions.
B. The accounting for defined benefit pension plans and other defined post-employment
benefit plans (such as medical and life insurance benefits) is basically the same, and is
generally similar to the accounting under U.S. GAAP, with some exceptions.
C. Differences between IFRS and U.S. GAAP exist with respect to:
a. The amount recognized on the employers balance sheet as an asset or liability,
and
b. The recognition of past service costs and actuarial gains/losses.
V.
Share-based Payment
A. IFRS 2, Share-based Payment, establishes measurement principles and specific
requirements for three types of share-based payment transactions: equity-settled
share-based payment transactions, cash-settled share-based payment transactions,
and choice-of-settlement share-based payment transactions.
B. Similar to U.S. GAAP, IFRS uses a fair value approach in accounting for share-based
payment transactions. In some situations, these transactions are recognized at the fair
value of the goods or services obtained, in other cases, at the fair value of the equity
instrument awarded. Fair value of shares and stock options should be based on
market prices, if available; otherwise a generally accepted valuation model should be
used.
VI.
Income Taxes
A. IAS 12, Income Taxes, and U.S. GAAP take a similar approach to accounting for
income taxes. Both standards adopt an asset-and-liability approach that recognizes
deferred tax assets and liabilities for temporary differences and for operating loss and
tax credit carryforwards. However, differences do exist between the two sets of
standards.
VII. Revenue Recognition

A. IAS 18, Revenue, is a single standard that covers most revenues, in particular
revenues from the sale of goods, the rendering of services, and interest, royalties, and
dividends. There is no equivalent single standard in U.S. GAAP.
B. The general principle in IAS 18 is that revenue should be measured at the fair value of
the consideration received or receivable.
C. Five conditions must be met in order for revenue from the sale of goods to be
recognized. One of these conditions requires an evaluation of whether significant risks
and rewards of ownership have been transferred to the buyer; sometimes this can be
difficult to determine and requires the exercise of judgment.
D. When the outcome of a service transaction (1) can be estimated reliably and (2) it is
probable that economic benefits of the transaction will flow to the enterprise, revenue
should be recognized on a stage-of-completion basis.
E. In June 2010, the IASB and FASB published a joint Exposure Draft, Revenue from
Contracts with Customers, which proposes a contract-based revenue recognition
model to be applied across a wide range of transactions and industries.
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VIII. Financial Instruments

A. Current IFRS guidance for the financial reporting of financial instruments is located in:
IAS 32, Financial Instruments: Presentation; IAS 39, Financial Instruments:
Recognition and Measurement; and IFRS 7, Financial Instruments: Disclosure. In
addition, IFRS 9, Financial Instruments was issued in November 2009 to begin the
process of replacing IAS 39; IFRS 9 becomes effective in 2013.
B. IAS 32 defines a financial instrument as any contract that gives rise to both a financial
asset of one entity and a financial liability or equity instrument of another entity.
C. A financial asset is any asset that is:
a. cash,
b. a contractual right to receive cash or another financial asset or to exchange
financial assets or financial liabilities under potentially favorable conditions,
c. an equity instrument of another entity, or
d. a contract that will or may be settled in the entitys own equity instruments and is
not classified as an equity instrument of the entity
D. A financial liability is defined as:
a. a contractual obligation to deliver cash or another financial asset or to exchange
financial assets or financial liabilities under potentially unfavorable conditions, or
b. a contract that will or may be settled in the entitys own equity instruments.
E. An equity instrument is defined as:
a. Any contract that evidences a residual interest in the assets of an entity after
deducting all of its liabilities.
F. A compound financial instrument is one that contains both a liability element and an
equity element, such as bonds convertible into common stock. Compound financial
instruments should be split into two components that are reported separately. This is
referred to as split accounting.
G. IAS 39 establishes categories into which all financial assets and liabilities must be
classified. The classification of a financial asset or financial liability determines how the
item will be measured.
H. The classes of financial assets are: financial assets at fair value through profit or loss,
and available-for-sale financial assets (both of which are measured at fair value); heldto-maturity investments, and loans and receivables (both of which are measured at
amortized cost).
I. The two classes of financial liabilities are: financial liabilities at fair value through profit
or loss, and financial liabilities measured at amortized cost.
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Answers to Questions
1. A provision is a liability of uncertain timing or amount. A provision must be recognized when:
(1) there is a present obligation, (2) an outflow of resources to settle the obligation is
probable, and (3) the obligation can be reliably estimated.
2. A contingent liability is (a) a possible obligation or (b) a present obligation that is not
recognized as a provision because (1) an outflow of resources to settle the obligation is not
probable or (2) the obligation cannot be reliably estimated. Contingent liabilities are
disclosed unless the likelihood of an outflow of resources is remote.
3. A constructive obligation exists when an entity, through past actions or current statements,
indicates it will accept certain responsibilities and as a result creates a valid expectation on
the part of other parties that it will discharge those responsibilities.
4. An onerous contract exists when the unavoidable costs of meeting the obligation of the
contract exceed the economic benefits expected to be received from it. An onerous contract
must be recognized as a provision with an offsetting decrease in net income.
5. Under IAS 19, the net amount recognized as a defined pension benefit liability (or asset) is
measured as:
+ Present value of the defined benefit obligation (PVDBO)
- Fair value of plan assets (FVPA)
If the resulting amount is negative (net pension asset), the amount of asset to be reported
on the balance sheet is limited to the asset ceiling, which is which is the present value of
any economic benefits available in the form of refunds from the plan or reductions in future
contributions to the plan.
Under U.S. GAAP, the pension liability or asset is simply measured as:
+ Present value of the defined benefit obligation (PVDBO)
- Fair value of plan assets (FVPA)
There is no limit to the amount recognized as a net pension asset.
6. Under IAS 19, past service costs are recognized immediately in net income and actuarial
gains and losses are recognized immediately in other comprehensive income (OCI), with no
recycling to net income.
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7. Compensation cost in an equity-settled share-based payment (SBP) transaction with nonemployees should be based on the fair value of the goods or services received. If this
cannot be reliably determined, then the fair value of the equity instruments should be used
to determine compensation cost.
Compensation cost in an equity-settled share-based payment (SBP) transaction with
employees should be based on the fair value of the equity instruments granted because the
fair value of the employees services generally is not reliably measurable.
8. Compensation cost associated with stock options that vest on a single date is recognized as
expense on a straight-line basis over the vesting period. When stock options vest in
installments, the compensation cost associated with each installment is recognized as
expense on a straight-line basis over that installments vesting period.
9. In a choice-of-settlement share-based payment (SBP) transaction in which the supplier of
goods and services has the choice, the entity has created a compound financial instrument
which must be split into its debt and equity components.
10. Income tax rates that have been enacted or substantively enacted should be used in
measuring current and deferred income taxes. In jurisdictions in which distributed profits are
taxed at a different rate from undistributed profits, the tax rate on undistributed profits should
be used to measure current and deferred income taxes.
11. A deferred tax asset is recognized only when it is probable that a tax benefit will be realized
in the future.
12. IAS 12 requires an explanation of the relationship between tax expense and accounting
profit using one of two approaches: (a) a numerical reconciliation between tax expense and
the product of accounting profit multiplied by the applicable tax rate, or (b) a numerical
reconciliation between the average effective tax rate and the applicable tax rate.
13. Deferred taxes are classified as noncurrent items on the balance sheet.
14. Five criteria must be met to recognize revenue from the sale of goods:
1. The significant risks and rewards of ownership of the goods have been transferred to the
buyer.
2. Neither continuing managerial involvement normally associated with ownership nor
effective control of the goods sold is retained.
3. The amount of revenue can be measured reliably.
4. It is probable that the economic benefits associated with the sale will flow to the seller.
5. The costs incurred or to be incurred with respect to the sale of goods can be measured
reliably.
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15. Revenue from the rendering of services is recognized using either (a) the stage of
completion method or (b) the cost recovery method. The stage of completion method is
appropriate when the outcome of a service transaction (1) can be estimated reliably and (2)
it is probable that economic benefits of the transaction will flow to the enterprise; otherwise,
the cost recovery method should be used.
16. There is no gain or loss recognized when assets that are similar in nature and value are
exchanged; the asset acquired is measured at the carrying amount of the asset given up.
17. Revenue may be recognized on a bill and hold sale when:
a. It is probable that delivery will be made,
b. The item is on hand, identified, and ready for delivery to the buyer at the time the sale is
recognized,
c. The buyer specifically acknowledges the deferred delivery instructions, and
d. The usual payment terms apply.
18. A customer loyalty program provides customers with award credits at the time a purchase
is made that the customer can convert into goods and/or services when a sufficient number
of credits have been accumulated. Airline frequent flyer programs are an example. The fair
value of the consideration received on the sale that provides customers with award credits
must be allocated between the award credits and the other components of the sale. The
amount allocated to the award credits, based on their fair value, is recognized as a liability
(deferred revenue) until the award credits are redeemed.
19. The five steps to follow in revenue recognition as proposed in the IASB-FASB exposure draft
Revenue from Contracts with Customers are:
1. Identify the contract with a customer.
2. Identify the separate performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the separate performance obligations.
5. Recognize the revenue allocated to each performance obligation when the entity
satisfies each performance obligation.
20. The four classes of financial assets are:
Financial assets at fair value through profit or loss (FVPL)
Held-to-maturity investments.
Loans and receivables.
Available-for-sale financial assets.
21. Preferred shares should be recognized as a liability on the balance sheet when they are
redeemable by the shareholder and the issuer cannot avoid the payment of cash to the
shareholders if they redeem their shares. Preferred shares that are contingently redeemable
based on future events outside the control of the issuer also should be classified as a
liability.
22. Convertible bonds are a compound financial instrument subject to split accounting. Upon
initial recognition and measurement, convertible bonds are split into their debt and equity
components using a with-and-without approach.
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23. When (1) a financial instrument measured at fair value through profit or loss is hedged with
(2) a financial instrument classified as available-for-sale, the gain/loss on (1) will be reported
in net income but the gain/loss on (2) will be taken to other comprehensive income. As a
result, a net gain/loss in reported in net income that is not economically meaningful.
Adopting the fair value option for (2) removes this accounting mismatch.
24. An entity is prohibited from classifying financial instruments as held-to-maturity for two years
in this situation.
25. Bond issuance costs reduce the fair value of the bonds payable and are subtracted in
determining their initial carrying amount.
26. Debt extinguishment costs are included in the calculation of the gain/loss on debt
extinguishment, resulting in a larger loss or a smaller gain.
Debt modification costs are treated in a similar fashion to debt issuance costs; they reduce
the carrying amount of the debt being modified.
27. Derecognition of receivables in a so-called pass through arrangement is appropriate only if
each of the following criteria is met:
(a) The entity has no obligation to pay cash to the buyer of the receivables unless it collects
equivalent amounts from the receivables.
(b) The entity is prohibited by the terms of the transfer contract from selling or pledging the
receivables.
(c) The entity has an obligation to remit any cash flows it collects on the receivables to the
eventual recipient without material delay. In addition, the entity is not entitled to reinvest
such cash flows. An exception exists for investments in cash equivalents during the
short settlement period from the collection date to the date of remittance to the eventual
recipients, as long as interest earned on such investments also is passed to the eventual
recipients.
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Solutions to Exercises and Problems

1. B
2. D $200,000 + $1,000,000 = $1,200,000
3. C
4. B
5. A
6. C
7. C
8. A Year 1: ($80,000 x 30%) + ($20,000 x 25%) = $29,000
Year 2: ($120,000 x 30%) ($40,000 x (30%-25%)) = $34,000
9. D
10. C
11. D IRR = 6.203%; 6.203% x $978,000 = $60,700
12. C
13. B
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14. Better Sleep Company Provisions (litigation)

Year 1 No journal entry is necessary. Claims have not yet been made, so a present
obligation does not exist.
Year 2 A present obligation exists and there is a greater than 50% probability that an
outflow of resources will occur, so a provision should be recognized. Because each
outcome in the range of $1,000 to $5,000 is equally likely, the midpoint of $3,000 should be
used for measuring the provision: $3,000 x 1,000 customers = $3,000,000
Litigation loss
$3,000,000
Provision for legal claims (liability)
$3,000,000
Year 3 The midpoint of the range of possible outcomes is now $4,500. An adjustment to
the provision is made to increase its carrying amount to $4,500,000 ($4,500 x 1,000).
Litigation loss
Provision for legal claims
$1,500,000
$1,500,000
Year 4 An entry is first made to record the payment of claims.

Cash
$1,200,000
$1,200,000
An adjustment is made to the amount of the remaining provision based on the new
estimates of losses to be incurred.
600 remaining cases x 30% x $3,000 =
Total
Current balance in provision
Adjustment
Litigation loss
$ 540,000
1,500,000
1,200,000
$3,240,000
3,300,000
$ (60,000)
$60,000
$60,000
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15. Charley Horse Company Provision (onerous contract)

The contract to purchase organic hay on January 30, Year 2 is an onerous contract. The
cost of fulfilling the contract to Charley Horse is $30,000 ($30 x 1,000 bales). The economic
benefit is $0; Charley Horse cannot use the bales of hay and will not be able to sell them to
a third party. Charley Horse must recognize a provision on December 31, Year 1 for the
unavoidable costs of the contract, which is the lower of the cost of fulfilling the contract
($30,000) and the penalty that would result from cancellation of the contract ($20,000). The
journal entry at December 31, Year 1 is:
Loss on onerous contract
$20,000
Provision for onerous contract (liability)
$20,000
16. Chestnut, Inc. Provision (restructuring)

Informing affected employees of the termination bonus creates a constructive obligation for
the company. The cost is reasonably estimable and will be carried out in a reasonable time
(by the end of Year 2). The present value of the estimated termination bonus, based on the
number of employees expected to accept the offer, should be accrued as a provision and
expense recognized on December 1, Year 1. The appropriate journal entry on that date is:
Restructuring expense
$1,000,000
Provision for termination benefits
$1,000,000
17. Kissel Trucking Company Pensions (pension plan liability)
IFRS
Present value of defined benefit obligation
$38,000,000
Fair value of plan assets
(30,000,000)
Net defined benefit liability
$ 8,000,000
18. Hoverman Corporation Pensions (past service cost)

IFRS:
All past service costs are expensed in the year in which amendments are made to the
defined benefit pension plan. Thus, the total amount of $150,000 is recognized as expense
to net income in Year 1.
U.S. GAAP:
Because the pension plan amendment only affects active employees, the past service cost
is amortized on a straight-line basis over their average expected remaining working life of 10
years. The amount of expense to be recognized in net income in each of Years 1 through 10
is $15,000.
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19. Northeastern Company Pensions (Defined Benefit Cost)

a. The components of defined benefit cost reported in net income are:
1. Current service cost
$50,000
2. Past service cost and gains and losses on settlements
not applicable
3. Net interest on the net defined benefit liability (asset) (see calculation)
10,000
Total defined benefit cost recognized in Net Income
$60,000
Calculation of net interest on the net defined benefit liability (asset):
Interest expense (PVDBO x Discount Rate*)
Interest income (FVPA x Discount Rate*)
Net interest on the net defined benefit liability (NIDBLA)
$1,000,000 x 5% = $50,000
$800,000 x 5% = 40,000
$10,000
* IAS 19 defines the discount rate as the effective yield on high quality corporate bonds.
b. Remeasurements of the net defined benefit liability (asset) are the component of defined
benefit cost reported in other comprehensive income (OCI). Remeasurements consist
of:
1. Actuarial gains (losses)
$8,000
2. Difference between the actual return on plan assets in the current period
and the interest income component of NIDBLA (see calculation)
15,000
3. Change in the effect of the asset ceiling
not applicable
Total defined benefit cost recognized in OCI
$23,000
Calculation of difference in actual return on plan assets and interest income component
of NIDBLA:
Actual return on plan assets
Interest income (as calculated above)
Difference
$55,000
40,000
$15,000
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20. White River Company Pensions (pension plan asset)

IFRS:
The amount at which a defined benefit asset may be reported on the balance sheet is the
lesser of two amounts:
(a) FVPA minus PVDBO (surplus), and
(b) asset ceiling the present value of any economic benefits available in the form of
refunds from the plan or reductions in future contributions to the plan.
Calculation of (a)
FVPA
PVDBO
Surplus
$3,700 mn
3,200 mn
$ 500 mn
Calculation of (b)
PV of reductions in future contributions: $100 mn

White River will report a defined pension benefit asset of $100 million on its December 31,
Year 1 balance sheet.
U.S. GAAP:
Under U.S. GAAP, the funded status of the defined benefit pension plan is reported as an
asset (or liability) on the balance sheet. There is no limitation of the amount of asset to be
recognized.
FVPA
PVDBO
Funded status (Defined benefit asset)
$3,700 mn
3,200 mn
$ 500 mn
White River will report a defined pension benefit asset of $500 million on its December 31,
Year 1 balance sheet.
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21. Argy Company Stock Options (graded vesting)

IFRS:
The total amount of compensation expense to be recognized is $60,000 (12,000 options x
$5 per option). Argy would allocate the expense to three tranches equally since there are
three vesting periods. Each tranche is then allocated equally over its vesting period as
follows:
Tranche
1: 12/31/Y1
2: 12/31/Y2
3: 12/31/Y3
Compensation Cost
per Tranche
4,000 x $5 = $20,000
4,000 x $5 = $20,000
4,000 x $5 = $20,000
$60,000
Year 1
$20,000
10,000
6,667
$36,667
Year 2
$
10,000
6,667
$16,667
Year 3
$
6,666
$6,666
U.S. GAAP:
Argy can choose to recognize compensation expense in an accelerated manner as is
required by IFRS. Otherwise, the company can choose to recognize compensation expense
using a straight-line method ($60,000/3 years = $20,000 per year).
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22. SC Masterpiece Company Stock Options (modification)

IFRS:
The fair value of the stock options at the grant date of January 1, Year 1 is $30,000 (1,000
options x $30.00 per option). This is the original amount of compensation cost and
represents the minimum amount that must be recognized as expense over the three-year
vesting period. $10,000 of compensation expense is recognized in Year 1.
Vesting conditions are modified on January 1, Year 2, when the fair value of the options is
$28.00 per option ($28,000 total). Although the fair value of the options is now only
$28,000, according to IFRS 2, the company must continue to recognize total compensation
expense of $30,000. The company recognizes $10,000 of compensation expense each in
Year 2 and Year 3.
US GAAP:
The fair value of the stock options is remeasured at the date of modification, which leads to
a revised total compensation cost of $28,000 (1,000 x $28.00).
Because the company already recognized $10,000 of compensation cost as expense in
Year 1, the remaining $18,000 is recognized on a straight-line basis in the amount of $9,000
in Year 2 and Year 3 ($18,000 2 = $9,000).
Journal Entries
Year
IFRS
Compensation expense
$10,000
Additional paid-in capital
$10,000
$10,000
$10,000
$10,000
$10,000
Total expense
Total expense
2
3
U.S. GAAP
$30,000
$10,000
$10,000
$9,000
$9,000
$9,000
$9,000
$28,000
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23. Updike and Patterson Investments, Inc. Income Taxes (deferred tax asset)
Year 1
The company reports an unrealized loss in other comprehensive income (OCI) in Year 1.
The journal entry is:
Unrealized loss OCI
Allowance to reduce AFS securities to market
$30,000
$30,000
The unrealized loss creates a potential deferred tax asset; if the loss is realized, the
companys tax liability will be decreased by $12,000 ($30,000 x 40%). Under IAS 12, a
deferred tax asset is recognized when it is more likely than not to be realized, which is the
case for UPI. Because the unrealized loss is reported in OCI (not income), the counterpart
to the recognition of the deferred tax asset is an increase in OCI (not income). The
unrealized loss must be reported in OCI on a net of tax basis. The following journal entry
recognizes the deferred tax asset and decreases the net amount of unrealized loss
recognized in OCI.
Deferred tax asset
Unrealized loss OCI
$12,000
$12,000
Year 2
At the end of Year 2, UPI management determines that it less than 50% likely that the
company will be able to realize the deferred tax asset related to the unrealized loss on
Available-for-Sale Investments. Therefore, the deferred tax asset recognized in Year 1 must
be decrecognized as follows:
Unrealized loss OCI
Deferred tax asset
$12,000
$12,000
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24. Gotti Manufacturing, Inc. Income Taxes (reconciliation to effective tax rate)
Presentation 1.
Reconciliation of domestic tax rate to effective tax rate:
Accounting profit
Income tax based on U.S. statutory federal tax rate
Tax effect of permanent differences
Effect of different tax rates in non-U.S. jurisdictions
Total income tax expense
$2,965,000
$1,037,750 1
(5,250) 2
(115,000) 3
$ 917,500 4
35.0%
(0.2)
(3.9)
30.9%
$2,965,000 x 35%
$(20,000) x 35% + $5,000 x 35%
3
($400,000 x (40% - 35%)) + ($500,000 x (20% - 35%)) + ($600,000 x (25% - 35%))
4
($1,450,000 x 35%) + ($400,000 x 40%) + ($500,000 x 20%) + ($600,000 x 25%)
2
Presentation 2.
Reconciliation of average tax rate to effective tax rate:
Accounting profit
Income tax based on aggregate statutory rate
Tax effect of permanent differences
Total income tax expense
1
2
3
$2,965,000
$922,750 1
(5,250) 2
$917,500 3
31.1%
(0.2)
30.9%
$922,750 = [($1,450,000 + $15,000) x 35%) + ($400,000 x 40%) + ($500,000 x 20%) +

($600,000 x 25%)]
($5,250) = [(($20,000) x 35%) + ($5,000 x 35%)]
$917,500 = [($1,450,000 x 35%) + ($400,000 x 40%) + ($500,000 x 20%) + ($600,000 x
25%)]
25. Mishima Technologies Company Revenue Recognition (right of return)

IAS 18.16 indicates that if the entity retains significant risks of ownership, the transaction is
not a sale and revenue is not recognized. IAS 18.16(d) indicates that an entity may retain
the significant risks and rewards of ownership when the buyer has the right to rescind the
purchase for a reason specified in the sales contract and the entity is uncertain about the
probability of return.
Because Product X is a new product, it is unlikely that Mishima could reliably estimate future
returns. Therefore, revenue should not be recognized at the date of sale. It is less clear
when revenue should be recognized. If there is a defined return period, it would be
appropriate to recognize revenue for the amount not returned at the end of the return period.
Note: Revenue recognition is an area in which IFRS guidance is not very precise and
therefore a significant amount of professional judgment must be applied in establishing
policies for the recognition of revenue.
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26. Ultima Company Revenue Recognition (bill and hold sale)

Ultima Company is offering to sell goods to customers as a bill and hold sale. IAS 18, Part
B, Illustrative Example 1, indicates that in this situation:
Revenue is recognized when the buyer takes title, provided:
a. it is probable that delivery will be made;
b. the item is on hand, identified and ready for delivery to the buyer at the time the sale is
recognized;
c. the buyer specifically acknowledges the deferred delivery instructions; and
d. the usual payment terms apply.
The facts of the problem indicate that customers take title at the date of sale, so the
question is whether the four criteria are met:
Criterion Criterion met?
a.
Perhaps
b.
Yes
c.
Perhaps
d.
Yes
Evidence
Whether this condition is met might hinge on whether
customers pay within the 90 day credit period. The fact that
Ultima Company will deliver upon request, which could be
prior to the end of the credit period, suggests that delivery is
not contingent upon payment. Thus, one might conclude that
this criterion is met.
The goods are on hand and ready for delivery to the
customer at the time the sale is made.
The problem does not state whether the buyer specifically
acknowledges the deferred delivery instructions; however,
one might assume that this occurs when the customer
orders goods under Ultimas special discount program.
Customers are given the normal credit period (90 days)
to pay.
This problem demonstrates the process a company might follow to establish a revenue
recognition policy that is consistent with IFRS. In the real world, there would be additional
facts and circumstances to consider that could make it easier to justify a specific policy.
Assuming that Ultima can satisfy itself that criteria (a) and (c) are met, the company would
recognize revenue at the time title passes to the customer.
5-17
Education.
27. Miller-Porter Company Revenue Recognition (multiple elements)

This problem involves a so-called multiple-element arrangement. The sale of powder
coating equipment should be accounted for as separate units of account. Because delivery,
installation, and initial testing occur at one point of time, these elements may be combined
into one unit of account, and the revenue allocated to this unit of account may be recognized
at the date at which these elements are fulfilled.
IAS 18, Part B, contains an illustrative example related to servicing fees included in the
price of the product. Consistent with the example, a portion of the total selling price of
$50,000 per unit should be allocated to the monthly service call element of the sale and
recognized as revenue over the one-year period in which the service will be performed. The
amount to be deferred must be sufficient to cover the cost of the service and provide for a
reasonable profit on the service. The cost of each monthly service call is $200 and the
company expects a gross profit of 50% on its extended service agreements. Thus, it would
be reasonable to allocate $400 per month to the service call element of the sale; total of
$4,800 per unit.
Revenue recognition policy
Revenue recognized at date of delivery, installation, and initial testing
Revenue recognized each month when service calls are made
Journal entries
Date of delivery
Accounts receivable (or Cash)

Revenue
Deferred revenue
Date of service call Deferred revenue

Revenue
$45,200
$400
$50,000
$45,200
4,800
$400
$400
5-18
Education.
28. Cypress Company Revenue Recognition (rendering of services)

IAS 18 indicates that, when the outcome of a service transaction (a) can be estimated
reliably and (b) it is probable that economic benefits of the transaction will flow to the
enterprise, revenue from the rendering of services should be recognized on a stage of
completion basis. The outcome of a transaction can be estimated reliably when (1) the
amount of revenue, (2) the costs incurred and the costs to be incurred, (3) and the stage of
completion can all be measured reliably. Whether it is appropriate for Cypress Company to
use the stage of completion method for its contract with the Gervais Group depends on
whether these three criteria are met:
1. Because this is a fixed-fee contract, the amount of revenue can be measured reliably; it
is $240,000.
2. Because Cypress has no experience in designing green buildings, it has no history upon
which to draw in estimating the costs to complete the contract, i.e., how many hours it
will take the companys employees to complete the plans and drawings. Thus, it does
not appear that the costs to be incurred can be estimated reliably at the signing of the
contract.
3. Similar to criterion 2, because Cypress has no history in providing customers with plans
and drawings for green buildings, the company might not be able to reliably estimate the
stage of completion.
Given that it does not appear that the contract meets the criteria for stage of completion
accounting, Cypress Company should recognize revenue on this contract as expenses are
incurred (assuming it expects to recover expenses through payments made by Gervais) and
defer recognition of any profit until the contract is completed.
5-19
Education.
29. Phils Sandwich Company Revenue Recognition (customer loyalty program)

Phils Sandwich Company has a customer loyalty program that must be accounted for in
accordance with IFRIC 13. In the first quarter of the current year, Phils had sales of $84,000
($7.00 average price x 12,000 sandwiches). Phils must allocate this amount between
sandwich sales revenue and award credits (deferred revenue) based on the fair value of the
credits awarded. The amount to be allocated to the free sandwich awards is determined as
follows:
Credits (stamps) awarded in Year 1
% of customers expected to accumulate enough stamps for a free sandwich
Credits expected to become eligible for redemption
% of customers expected to redeem stamps for a free sandwich
Credits expected to be redeemed
Credits needed for a free sandwich
Expected number of free sandwiches
Average value per sandwich
Fair value of points awarded
12,000
50%
6,000
80%
4,800
8
600
$7.00
$4,200
The journal entry to recognize revenue from sandwich sales in the first quarter of Year 1 is
as follows:
Cash
Revenue
Deferred revenue
$84,000
$79,800
4,200
5-20
Education.
30. Saffron Enterprises, Inc. Available-for-Sale Financial Asset (foreign currency bonds)
Saffron Enterprises Inc has a bond investment that it has classified as available-for-sale.
Thus, changes in the fair value of the investment are recognized in other comprehensive
income. The fair value of the bond investment on January 1, Year 1 is $1,500 (1,000 euros
x $1.50). The fair value on December 31, Year 1 is $1,470 (1,050 euros x $1.40). Thus,
there is a net decrease in the carrying amount of the bond investment of $30. The question
is whether this amount should be recognized as foreign exchange loss (recognized in net
income) or change in fair value (recognized in other comprehensive income), or some
combination of the two.
IAS 39 indicates that in this situation, the foreign currency-denominated financial asset
should be treated as if it were carried at amortized cost in the foreign currency. The net
gain/loss is split into an exchange gain/loss component and a fair value change
component. An exchange gain or loss is recognized for the change in exchange rate
applied to the amortized cost of the bond:
1,000 euros x ($1.40 - $1.50) = $100 foreign exchange loss
The change in fair value in the foreign currency is then translated using the current
exchange rate:
1,050 euros 1,000 euros = 50 euros x $1.40 = $70 fair value gain
Journal Entries in Year 1

1/1/Y1
Investment in bonds
Cash
$1,500
$1,500
12/31/Y1 Foreign exchange loss

Other comprehensive income
Investment in bonds
$100
$70
30
5-21
Education.
31. Spectrum Fabricators Inc. Convertible Bonds (initial recognition and interest)
Spectrum Fabricators Inc. must split the convertible bonds and the issuance costs into
separate liability and equity components. The fair value of the liability component is the
present value of future cash flows using the current market interest rate for non-convertible
bonds of 8%. The fair value of the liability component is calculated as shown below:
Present value of $20,000,000, five periods, 8% interest rate
$20,000,000 x 0.6858 = $13,611,664
Present value of an annuity of $1,200,000, five periods, 8% interest rate
$1,200,000 x 3.9927 =
4,791,252
Fair value of liability component
$18,402,916
The fair value of the equity component is the difference between the fair value of the
convertible bonds and the fair value of the liability component:
Fair value of convertible debt (selling price)
Fair value of liability component
Fair value of equity component
$20,000,000
18,402,916
$ 1,597,084
The issuance costs must be allocated to the liability and equity components based on their
relative fair values, as follows:
Liability
Equity
Total issuance costs
$18,402,916 / $20,000,000 = 92.015% x $100,000 = $ 92,015

$1,597,084 / $20,000,000 = 7.985% x $100,000 =
7,985
$100,000
The journal entry to record the issuance of the convertible bonds would be as follows:
Cash ($20,000,000 $100,000)
$19,900,000
Convertible bonds payable ($18,402,916 $92,015)
$18,310,901
Additional paid-in capital ($1,597,084 $7,985)
1,589,099
Interest expense
To determine the interest expense to be recognized in Year 1 the effective interest rate must
be calculated. Excel is used to solve for the internal rate of return (IRR) where net cash
inflow is $18,310,901; payments are $1,200,000 for Years 1-4 and $21,200,000 in Year 5;
IRR = 8.122%
Interest expense in Year 1 is calculated as the carrying amount of the convertible bonds
payable multiplied by the effective interest rate: $18,310,901 x 8.122% = $1,487,218
Interest expense
Cash
Convertible bonds payable
$1,487,218
$1,200,000
287,218
5-22
Education.
31. (continued)
Total interest cost over the life of the bonds is calculated as follows:
Cash interest
Debt issuance costs
Equity component
Total interest cost
$6,000,000
100,000
1,589,099
$7,689,099
Interest expense by year is determined as follows:
Year 1
Year 2
Year 3
Year 4
Year 5
Beginning
Balance in
Bonds
$18,310,901
$18,598,119
$18,908,665
$19,244,434
$19,607,474
Interest
Expense
(8.122%)
$1,487,218
$1,510,546
$1,535,769
$1,563,040
$1,592,526
$7,689,099
Interest
Payment
$1,200,000
$1,200,000
$1,200,000
$1,200,000
$1,200,000
$6,000,000
Ending
Balance in
Bonds
$18,598,119
$18,908,665
$19,244,434
$19,607,474
$20,000,000
5-23
Education.
32. Bockster Company Preferred Shares (classification)

Part A. Preferred Shares Redeemable at Option of Shareholder
Preferred shares that are redeemable for a fixed amount of cash at the option of the
shareholder should be classified as a financial liability. Because Bockster cannot avoid
settlement through delivery of cash should the holder demand redemption, the shares meet
the definition of a financial liability.
Part B. Preferred Shares Convertible into Common Stock
Preferred shares that are convertible into a fixed number of shares of common stock should
be classified as equity. Because Bockster has no obligation to distribute cash or another
financial asset, this does not meet the definition of a financial liability.
33. Tempe Company Long-term Debt (extinguishment)
The carrying value of the 10% bonds of $9,950,000 along with the issuance costs on the 9%
bonds of $100,000 are both included in the calculation of the gain or loss on extinguishment
of debt.
Bonds payable 10%
Loss on extinguishment of debt
Cash
Bonds payable 9%
$9,950,000
150,000
$ 100,000
10,000,000
The new 9% bonds are issued at par. Thus, the effective interest rate is the same as the
stated interest of 9%. Interest expense is $900,000 ($10,000,000 x 9%).
Interest expense
Cash
$900,000
$900,000
5-24
Education.
34. Macro Arco Corporation Long-term Debt (troubled debt restructuring)

Macro Arco Corporation (MAC) records a gain on the debt restructuring, calculated as
follows:
Mortgage note payable
Less: Carrying value of the building
Cash to the bank
Gain on discharge of debt
$10,000,000
(8,000,000)
(1,500,000)
$500,000
The journal entry would be as follows:

Mortgage notes payable
Building
Cash
Gain on discharge of debt
$10,000,000
$8,000,000
1,500,000
500,000
Friendly Neighbor Bank (FNB) would record a loss on the restructuring calculated as follows:
Mortgage receivable
Less: Fair value of the building
Cash received
Loss on debt restructuring
$10,000,000
(8,000,000)
(1,500,000)
$500,000
The journal entry to record the debt restructuring and loss would be as follows:
Building
Cash
Loan loss
Mortgage loans receivable
$8,000,000
1,500,000
500,000
$10,000,000
Note: This transaction would be accounted for in the same manner under both IFRS and
U.S. GAAP.
5-25
Education.
35. Farley Corporation Receivables (derecognition)

Farley has retained substantially all of the risks and rewards associated with the financial
assets. Under the right of recourse, Farley ultimately must deliver $100,000 to Town Square
Bank, thereby absorbing any bad debt losses. In addition to the recourse, Town Square
Bank is entitled to sell the receivables back to Farley Corp in the event of unfavorable
changes in interest rates or credit rating of the underlying debtors. The sale of receivables
does not qualify for derecognition and should be accounted for as a collateralized borrowing.
The receivables will remain on Farleys books. Farley recognizes a financial liability of
$95,000 upon the sale. The financial liability is measured at amortized cost, and $5,000 of
interest expense should be recognized over the six month life of the receivables using the
effective interest method. However, because the difference is immaterial, the straight-line
method may be used. When cash is collected on the receivables by Town Square Bank,
Farley reduces the receivable and the financial liability. Journal entries in Year 1 are:
November 1, Year 1
Cash
Loan payable
$95,000
December 31, Year 1

Interest expense
Loan payable
$1,667
$95,000
$1,667
36. Traylor Company Receivables (derecognition)

By guaranteeing to buy back up to 15% of the receivables that cannot be collected, Traylor
Company retains one of the significant risks associated with ownership of receivables
credit risk. Therefore, the company has not met the general criterion for financial asset
derecognition. Traylor will not be able to record this transaction as a sale, with derecognition
of receivables. Instead, Traylor should record the transaction as a loan payable secured by
accounts receivable.
5-26
Education.
37. Campolino Company Postretirement Benefit Plan (worksheet)
Defined
benefit cost
recognized
in
net income
Campolino Company
Benefit Fund
General Ledger
General Ledger
Defined
benefit cost
recognized
in
OCI
Cash
Balance at
January 1, Year 1
Service cost
Interest expense
$46,000
1
Defined
benefit
asset
(liability)
PVDBO
FVPA
$(230,000)
$(650,000)
$420,000
(46,000)
(46,000)
11,500
(32,500)
Interest income2
21,000
Net interest3
(11,500)
Excess of actual
return on plan
assets over
interest income4
Past service cost
(7,000)
7,000
16,000
Actuarial loss
12,000
Contributions
(50,000)
7,000
(16,000)
(16,000)
(12,000)
(12,000)
50,000
50,000
Benefits paid
Balance at
December 31,
Year 1
$73,500
$5,000
$(50,000)
$(258,500)
42,000
(42,000)
$(714,500)
$456,000
Interest expense:
$650,000 x 5% = $32,500
Interest income:
$420,000 x 5% = $21,000
Net interest on defined benefit liability:
Excess of actual return on plan assets over net interest on defined benefit liability:
Expected return
$28,000
Actual return
21,000
Excess
$ 7,000
$32,500 21,000 = $11,500
Journal Entry
Defined benefit cost (net income)
Defined benefit cost (OCI)
Cash
$73,500
5,000
$50,000
5-27
Education.
Defined benefit liability
28,500
5-28
Education.
38. Stone Company Stock Options

Part A.
According to IFRS 2.35, because Stone has granted employees stock options that can be
settled either in cash or in shares of stock, this is a compound financial instrument.
Because this is a transaction with employees, IFRS 2.36 applies. Stone must determine the
fair value of the compound financial instrument at the measurement date, taking into
account the terms and conditions on which the rights to cash or equity instruments are
granted.
To apply IFRS 2.36, IFRS 2.37 indicates that the entity first measures the debt component
(i.e. the cash-settled portion) and then measures the equity component (i.e. the equitysettled portion), taking into account that the employee must forfeit the right to receive cash
in order to receive the equity instruments. The fair value of the compound financial
instrument is the sum of the fair values of the two components.
IFRS 2.38 indicates that the debt component must be accounted for under the requirements
for cash-settled share-based payment transactions contained in IFRS 2.30-33 and the
equity component is accounted for under the requirements for equity-settled share-based
payment transactions contained in IFRS 2.10-29.
The stand alone fair value (FV) of the cash-settlement alternative at the grant date (January
1, Year 1) is $6,000 (1,000 options x $6.00 per option).
The stand alone fair value (FV) of the equity-settlement alternative at the grant date
(January 1, Year 1) also is $6,000 (1,000 options x $6.00 per option).
IFRS 2.37 indicates that this type of share-based payment often is structured such that the
FV of the debt component and the FV of the equity component are the same. In such
cases, the FV of the equity component is zero. Thus, the FV of the compound financial
instrument is $6,000 ($6,000 + $0).
Calculation of Compensation Expense for Year 1 (and Year 2)
For equity-settled share-based payment (SBP) transactions, the services received and
equity recognized is measured at the fair value of the equity instrument at grant date.
Because the fair value of the equity component for Stone is zero, there is no compensation
expense recognized related to the equity component.
For cash-settled (SBP) transactions, the services received and the liability incurred are
initially measured at the fair value of the liability at grant date. The fair value of the liability,
adjusted to reflect the number of options expected to vest, is recognized as expense over
the period that the services are rendered. At each reporting date, and ultimately at
settlement date, the fair value of the liability is remeasured with the change in fair value
affecting the amount recognized as compensation expense. As a result, the total amount of
expense recognized will be the amount paid to settle the liability.
5-29
Education.
38. (continued)
Compensation expense related to the debt component for Year 1:
Fair value per option at December 31, Year 1
Number of options
Subtotal
Percentage of options expected to vest
Total compensation expense
Vesting period (number of years)
Compensation expense - Year 1
$ 8.00
1,000
$8,000
70%
$5,600
3
$1,867
For equity-settled SBP transactions, the services received and equity recognized is
measured at the fair value of the equity instrument at grant date. Because the fair value of
the equity component for Stone is zero, there is no compensation expense recognized
related to the equity component.
12/31/Y1 Compensation expense
Share-based payment liability
1,867

1,867
1,867
1,867
The entry at 12/31/Y2 is the same as at 12/31/Y1 because the share price and therefore the
fair value of the cash alternative has not changed.
Calculation of Compensation Expense for Year 3
At December 31, Year 3, the FV of each option is equal to its intrinsic value of $9.00 ($47
fair value $38 exercise price). The FV of the liability is $9,000 ($9.00 x 1,000). The total
compensation expense is $6,300 ($9,000 x 70%). The amount to be recognized as expense
in Year 3 is $ ($6,300 $1,867 $1,867).
2,566
2,566
Settlement on December 31, Year 3

(a) Cash Alternative if the seven employees choose the cash alternative, they will receive
a total of $6,300, the intrinsic value of the 700 options that they exercise.
12/31/Y3 Share-based payment liability
Cash
6,300
6,300
(b) Stock Alternative if the seven employees choose the equity alternative, they will
receive a total of 700 shares of stock with a fair value of $6,300.
12/31/Y3 Share-based payment liability
Common stock ($1 par)
6,300
700
5,600
5-30
Education.
38. (continued)
Part B.
Under this scenario, employees receive a 10% discount on the exercise price if they choose
to settle in shares of stock. As a result, the equity-settlement alternative has a larger fair
value than the cash-settlement alternative, and therefore, the equity component has a value
greater than zero.
Calculation of Fair Value of Stock Options at Grant Date
FV of cash alternative at grant date is $6,000 (1,000 x $6.00)
FV of equity alternative at grant date is $8,800 (1,000 x $8.80)
FV of the equity component is $2,800 ($8,800 $6,000).
Fair value of the compound instrument at grant date is $8,800 ($6,000 + $2,800).
Calculation of Compensation Expense for Year 1
Compensation expense related to the debt component in Year 1 is $1,867 (same as in Part
A).
The FV of the equity component is not remeasured at each balance sheet date.
Compensation expense related to the equity component in Year 1 is $653 [($2,800 x
70%)/3].
Total compensation expense for Year 1 is $2,520 [$1,867 + $653].
2,520
2,520
Note: Because the FV of the equity component is not remeasured at each balance sheet
date, the amount of compensation expense related to the equity component will be $653 in
Year 1, Year 2, and Year 3.
5-31
Education.
39. Acceptable Treatments
IFRS
Bank overdrafts are netted against cash rather
than being recognized as a liability when
overdrafts are a normal part of cash
management.
Uncertain legal obligations, but not constructive
obligations, contingent upon a future event are
recognized as liabilities when certain criteria are
met.
A defined benefit pension liability is measured as
the excess of the present value of the defined
benefit obligation (PVDBO) over the fair value of
plan assets (FVPA).
Actuarial gains and losses in a defined benefit
pension plan are amortized to net income over a
period of time.
The compensation cost associated with graded
vesting stock options is amortized to expense on
a straight-line basis over the vesting period.
The minimum amount recognized as
compensation expense on a stock option plan is
the compensation cost as measured at the grant
date; even if a subsequent modification to the
plan decreases the total compensation cost.
Deferred taxes are classified as current or noncurrent based on the classification of the related
asset or liability.
The stage of completion method is used to
recognize revenue from service transactions
when specified criteria are met.
Non-redeemable preferred shares are classified
as a liability on the balance sheet.
Costs associated with the issuance of debt are
amortized on a straight-line basis over the life of
the debt.
Acceptable under
U.S.
GAAP
Both Neither
X
X
X
X
X
X
X
5-32
Education.
Case 5-1 S. A. Harrington Company

Reconciliation from U.S. GAAP to IFRS
2015
$5,000,0
00
Income under U.S. GAAP

Adjustments:
Restructuring charge
(300,000)
Past service cost
4,000
Compensation cost (stock options)
5,000
Recognition of service revenue
75,000
Interest expense on bonds payable
6,194
Income under IFRS
$4,790,194
2015
$40,000,
000
Stockholders equity under U.S. GAAP

Adjustments:
Restructuring charge
(300,000)
Past service cost
(48,000)
Accumulated compensation cost (stock options)
(20,000)
Recognition of service revenue
75,000
Interest expense on bonds payable
17,859
$39,724,85
9
Stockholders equity under IFRS

Explanation of Adjustments
Restructuring. Under U.S. GAAP, the restructuring is not recognized in 2015 because a legal
obligation does not yet exist.
Under IAS 37, a restructuring provision and offsetting expense in the amount of $300,000 would
be recognized in 2015 because a constructive obligation does exist.
IFRS income would be $300,000 less that U.S. GAAP income in 2015, and stockholders equity
at year-end 2015 under IFRS would be less than under U.S. GAAP by the same amount.
Pension Plan. Under IAS 19, the past service cost of $60,000 would have been expensed
immediately in 2013, with an offsetting decrease in stockholders equity of $60,000.
5-33
Education.
Case 5-1 S. A. Harrington Company (continued)

Under U.S. GAAP, the prior service cost is amortized over the remaining service life of the
employees. Expense recognized in 2015 is $4,000 [$60,000 / 15 years]. The cumulative
expense recognized since the plan was changed in 2013 is $12,000 [$4,000 x 3 years]. This is
the amount by which stockholders equity has been reduced under U.S. GAAP.
IFRS income in 2015 would be $4,000 greater than U.S. GAAP income, and stockholders
equity at year-end 2015 under IFRS would be $48,000 [$60,000 - $12,000] less than under U.S.
GAAP.
Stock Options. The total compensation cost related to the stock options is $90,000. Under U.S.
GAAP, compensation expense would be recognized at the rate of $30,000 per year, for a total
cumulative expense at year-end 2015 of $60,000.
Under IFRS, compensation expense would be recognized as follows:
Installment
1
2
3
Compensation
Cost per
Installment
$30,000
$30,000
$30,000
$90,000
Compensation
Expense
2014
$30,000
15,000
10,000
$55,000
Compensation
Expense
2015
$
15,000
10,000
$25,000
Compensation
Expense
2015
$
10,000
$10,000
Compensation expense in 2015 would be $25,000 and cumulative compensation expense

would be $80,000.
IFRS income would be $5,000 larger than U.S. GAAP income in 2015, but IFRS stockholders
equity would be $20,000 smaller.
Revenue Recognition. No revenue would be recognized on this service contract under U.S.
GAAP because the services have not yet been completed.
Under IFRS, the company would use the stage of completion method to recognize service
revenue of $75,000 [$250,000 x 30%] in 2015.
In 2015, IFRS income would be $75,000 larger than under U.S. GAAP; at December 31, 2015,
IFRS stockholders equity also will be $75,000 larger than under U.S. GAAP.
Bonds Payable. Under U.S. GAAP, $600,000 would be recognized as expense in 2014 and
2015 related to the bonds payable: $500,000 interest expense [$10,000,000 x 5%] and
$100,000 bond issuance expense [$500,000 / 5 years]. The total reduction in retained earnings
as of December 31, 2015 would be $1,200,000.
5-34
Education.
Case 5-1 S. A. Harrington Company (continued)

Under IFRS, the bond issuance costs reduce the carrying amount of the bonds to $9,500,000,
and the effective interest rate is determined to be 6.193% [$9,500,000 cash inflow on January 1,
2014; $500,000 cash outflow on December 31, 2014 2018; and $10,000,000 cash outflow on
December 31, 2018]. Interest expense in 2014 is $588,335 [$9,500,000 x 6.193%]. Interest
expense in 2015 is $593,806 [($9,500,000 + ($588,335 - $500,000)) x 6.193%]. The total
reduction in retained earnings as of December 31, 2015 would be $1,182,141.
In 2015, IFRS income would be $6,194 [$600,000 - $593,806] larger than U.S. GAAP income.
Stockholders equity at December 31, 2015 is $17,859 [$1,200,000 - $1,182,141] larger under
IFRS than U.S. GAAP.
Note: The adjustments related to interest expense on bonds payable will differ depending on
rounding of the effective interest rate. For example, if the effective interest rate is rounded to
6.2%, interest expense under IFRS would be $589,000 [$9,500,000 x 6.2%] in 2014 and
$594,518 [($9,500,000 + ($589,000 - $500,000)) x 6.2%] in 2015. In 2015, IFRS income would
be $5,482 [$600,000 - $594,518] larger than U.S. GAAP income. Stockholders equity at
December 31, 2015 would be $16,482 [$1,200,000 - $1,183,518] larger under IFRS than U.S.
GAAP.
5-35
Education.

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Chapter 05 - International Financial Reporting Standards: Part II

International Financial Reporting Standards (IFRS) issued by the International Accounting

Provisions and Contingent Liabilities

Chapter 05 - International Financial Reporting Standards: Part II

VII. Revenue Recognition

Chapter 05 - International Financial Reporting Standards: Part II

VIII. Financial Instruments

Chapter 05 - International Financial Reporting Standards: Part II

Chapter 05 - International Financial Reporting Standards: Part II

Chapter 05 - International Financial Reporting Standards: Part II

Chapter 05 - International Financial Reporting Standards: Part II

Chapter 05 - International Financial Reporting Standards: Part II

Solutions to Exercises and Problems

Chapter 05 - International Financial Reporting Standards: Part II

14. Better Sleep Company Provisions (litigation)

Year 4 An entry is first made to record the payment of claims.

Chapter 05 - International Financial Reporting Standards: Part II

15. Charley Horse Company Provision (onerous contract)

16. Chestnut, Inc. Provision (restructuring)

Fair value of plan assets

Net defined benefit liability

18. Hoverman Corporation Pensions (past service cost)

Chapter 05 - International Financial Reporting Standards: Part II

19. Northeastern Company Pensions (Defined Benefit Cost)

Chapter 05 - International Financial Reporting Standards: Part II

20. White River Company Pensions (pension plan asset)

PV of reductions in future contributions: $100 mn

Chapter 05 - International Financial Reporting Standards: Part II

21. Argy Company Stock Options (graded vesting)

Chapter 05 - International Financial Reporting Standards: Part II

22. SC Masterpiece Company Stock Options (modification)

Chapter 05 - International Financial Reporting Standards: Part II

Chapter 05 - International Financial Reporting Standards: Part II

$922,750 = [($1,450,000 + $15,000) x 35%) + ($400,000 x 40%) + ($500,000 x 20%) +

25. Mishima Technologies Company Revenue Recognition (right of return)

Chapter 05 - International Financial Reporting Standards: Part II

26. Ultima Company Revenue Recognition (bill and hold sale)

Chapter 05 - International Financial Reporting Standards: Part II

27. Miller-Porter Company Revenue Recognition (multiple elements)

Accounts receivable (or Cash)

Date of service call Deferred revenue

Chapter 05 - International Financial Reporting Standards: Part II

28. Cypress Company Revenue Recognition (rendering of services)

Chapter 05 - International Financial Reporting Standards: Part II

29. Phils Sandwich Company Revenue Recognition (customer loyalty program)

Chapter 05 - International Financial Reporting Standards: Part II

1,000 euros x ($1.40 - $1.50) = $100 foreign exchange loss

Journal Entries in Year 1

12/31/Y1 Foreign exchange loss

Chapter 05 - International Financial Reporting Standards: Part II

$18,402,916 / $20,000,000 = 92.015% x $100,000 = $ 92,015

Chapter 05 - International Financial Reporting Standards: Part II

Interest expense by year is determined as follows:

Chapter 05 - International Financial Reporting Standards: Part II

32. Bockster Company Preferred Shares (classification)

Chapter 05 - International Financial Reporting Standards: Part II

34. Macro Arco Corporation Long-term Debt (troubled debt restructuring)

The journal entry would be as follows:

Chapter 05 - International Financial Reporting Standards: Part II

35. Farley Corporation Receivables (derecognition)

December 31, Year 1

36. Traylor Company Receivables (derecognition)

Chapter 05 - International Financial Reporting Standards: Part II