Chapter 04 - International Financial Reporting Standards: Part I

CHAPTER 4
INTERNATIONAL FINANCIAL REPORTING STANDARDS:
PART I
CASE 4-1 PROBLEM IS VERY IMPORTANT!!
Chapter Ot!"#e
I. The International Accounting Standards Board (IASB) had 29 International Accounting
Standards (IAS) and 9 International Financial Reporting Standards (IFRS) in force in
September 2!.
A. In 22" the IASB and #.S. Financial Accounting Standards Board (FASB) agreed to
$or% together to reduce differences bet$een IFRS and #.S. &AA'.
II. There are se(eral t)pes of differences bet$een IFRS and #.S. &AA'.
A. *efinition differences. *ifferences in definitions can occur e(en though concepts are
similar. *efinition differences can lead to differences in recognition and+or
measurement.
B. Recognition differences. *ifferences in recognition criteria and+or guidance related to
(a) $hether an item is recogni,ed" (b) ho$ it is recogni,ed" and+or (c) $hen it is
recogni,ed (timing difference).
-. .easurement differences. *ifferences in approach for determining the amount
recogni,ed resulting from either (a) a difference in the method re/uired" or (b) a
difference in the detailed guidance for appl)ing a similar method.
*. Alternati(es. 0ne set of standards allo$s a choice bet$een t$o or more alternati(e
methods1 the other set of standards re/uires one specific method to be used.
2. 3ac% of re/uirements or guidance. IFRS do not co(er an issue addressed b) #.S.
&AA'" and (ice (ersa.
F. 'resentation differences. *ifferences in the presentation of items in the financial
statements.
&. *isclosure differences. *ifferences in information presented in the notes to financial
statements related to (a) $hether a disclosure is re/uired and+or (b) the manner in
$hich a disclosure is re/uired to be made.
III. A (ariet) of differences e4ist bet$een IFRS and #.S. &AA' $ith respect to the recognition
and measurement of assets.
A. In(entor) 5 IFRS re/uire in(entor) to be reported on the balance sheet at the lo$er of
cost or net reali,able (alue1 #.S. &AA' re/uires the lo$er of cost or replacement cost"
$ith net reali,able (alue as a ceiling and net reali,able (alue less a normal profit
margin as the floor. #.S. &AA' allo$s the use of 3IF01 IFRS do not.
B. 'ropert)" plant and e/uipment 5 subse/uent to ac/uisition" IFRS allo$ fi4ed assets to
be reported on the balance sheet using a cost model (historical cost less accumulated
depreciation and impairment losses) or a re(aluation model (fair (alue at the balance
sheet date less accumulated depreciation and impairment losses)1 #.S. &AA' re/uires
the use of the cost model. -omponent depreciation must be applied under IFRS $hen
items of propert)" plant and e/uipment are comprise of significant parts1 this is not the
case under #.S. &AA'
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Chapter 04 - International Financial Reporting Standards: Part I
-. Impairment of assets 5 an asset is impaired under IFRS $hen its carr)ing amount
e4ceeds its reco(erable amount" $hich is the greater of net selling price and (alue in
use. 6alue in use is calculated as the present (alue of future cash flo$s e4pected from
continued use of the asset and from its disposal. An asset is impaired under #.S.
&AA' $hen its carr)ing amount e4ceeds the undiscounted future cash flo$s e4pected
from the asset7s continued use and disposal.
!. .easurement of impairment loss 5 the impairment loss under IFRS is the
difference bet$een carr)ing amount and reco(erable amount1 under #.S. &AA'"
the impairment loss is the amount b) $hich carr)ing amount e4ceeds fair (alue.
Reco(erable amount and fair (alue are li%el) to be different.
2. Re(ersal of impairment loss 5 if subse/uent to recogni,ing an impairment loss" the
reco(erable amount of an asset is determined to e4ceed its ne$ carr)ing amount"
IFRS re/uire the original impairment loss to be re(ersed1 #.S. &AA' does not
allo$ the re(ersal of a pre(iousl) recogni,ed impairment loss.
*. *e(elopment costs 5 $hen certain criteria are met" IFRS re/uire de(elopment costs to
be capitali,ed as an asset and then amorti,ed o(er their useful life1 #.S. &AA'
re/uires de(elopment costs to be e4pensed as incurred. An e4ception e4ists in #.S.
&AA' for soft$are de(elopment costs.
2. Borro$ing costs 5 similar to #.S. &AA'" IFRS re/uires borro$ing costs to be
capitali,ed to the e4tent the) are attributable to the ac/uisition" construction" or
production of a /ualif)ing asset. 0ther borro$ing costs are e4pensed as incurred.
8o$e(er" the amount of borro$ing costs to be capitali,ed differs bet$een IFRS and
#.S. &AA'.
F. 3eases 5 both IFRS and #.S. &AA' distinguish bet$een operating and finance
(capitali,ed) leases. #.S. &AA' pro(ides 9bright line: tests to determine $hen a lease
must be capitali,ed1 IFRS do not.
I6. A number of IASB standards deal primaril) $ith disclosure and presentation issues" and in
some cases re/uirements differ from #.S. &AA'.
A. In the statement of cash flo$s" IAS 7 allo$s interest and di(idends recei(ed to be
classified as operating or in(esting" $hereas these are al$a)s classified as operating
under #.S. &AA'. IAS ; allo$s interest and di(idends paid to be classified as
operating or financing" $hereas interest paid is operating and di(idends paid is
financing under #.S. &AA'.
B. IAS 10 re/uires financial statements to be ad<usted for so=called ad<usting e(ents that
occur up to the point that the financial statements ha(e been authori,ed for issuance.
#.S. &AA' uses the date the financial statements are issued or are a(ailable to be
issued as the cutoff date for ad<usting e(ents.
-. IAS 8 establishes a hierarch) of authoritati(e pronouncements to be considered in
selecting an accounting polic). The lo$est le(el in the hierarch) $ould allo$ the use of
#.S.&AA'. 0nce selected" accounting policies must be applied consistentl) unless a
change is re/uired b) IFRS or $ould result in more rele(ant information being reported
in the financial statements.
*. IFRS 5 pro(ides a more liberal definition of $hat /ualifies as a discontinued operation
than does #.S. &AA'.
2. IAS 34 re/uires interim periods to be treated as discrete accounting periods" $hereas
#.S. &AA' treats interim periods as an integral part of the full )ear.
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Chapter 04 - International Financial Reporting Standards: Part I
A#$%er$ t& 'e$t"&#$
!. The t)pes of differences that e4ist bet$een IFRS and #.S. &AA' can be classified as>
*efinition differences
Recognition differences
.easurement differences
*ifferences in allo$ed alternati(es
*ifferences in (lac% of) guidance
'resentation differences
*isclosure differences
2. In appl)ing the lo$er of cost and mar%et rule for in(entories" IAS 2 defines mar%et as net
reali,able (alue (?R6) and #.S. &AA' defines mar%et as replacement cost ($ith ?R6 as a
ceiling and ?R6 less normal profit margin as a floor). In addition" the rule generall) is
applied on an item b) item basis under IAS 2" $hereas it ma) be applied on an item b) item"
group of items" or total in(entor) basis under #.S. &AA'.
@. The estimated costs of dismantling and remo(ing an asset must be included in the asset7s
cost upon initial recognition.
A. The t$o models allo$ed b) IAS !B are the cost model and the re(aluation model. #nder the
re(aluation model" propert)" plant" and e/uipment is reported on the balance sheet at a
re(alued amount" measured as fair (alue at the date of remeasurement" less accumulated
depreciation and an) accumulated impairment losses.
C. An) item of propert)" plant" and e/uipment ma) be accounted for under the re(aluation
model. 8o$e(er" all other items $ithin that class of ''2 must be re(alued at the same time.
Re(aluation must occur fre/uentl) enough that the difference bet$een the re(alued assets7
carr)ing amount and fair (alue is not material.
B. The re(aluation surplus is an element of other comprehensi(e income in stoc%holders7
e/uit). The re(aluation surplus is transferred to retained earnings as the re(alued asset is
reali,ed" either through its use or upon its disposal. The surplus is transferred to retained
earnings either> (!) as a lump sum $hen the asset is disposed of" or (2) each period" as the
difference bet$een depreciation on the re(alued amount and depreciation on the historical
cost. A third treatment for re(aluation surplus is to allo$ it to sta) in other comprehensi(e
income indefinitel).
;. Dhen an item of propert)" plant" and e/uipment is comprised of significant parts that ha(e
different useful li(es" as is the case for an airplane" the asset must be split into components
and each component must be depreciated separatel).
E. #nder the fair (alue model for in(estment propert)" changes in fair (alue are recogni,ed in
net income" $hereas changes in fair (alue under the re(aluation model are ta%en to other
comprehensi(e income.
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Chapter 04 - International Financial Reporting Standards: Part I
9. #nder IAS 36" an impairment loss arises $hen an asset7s reco(erable amount is less than
its carr)ing (alue" $here reco(erable amount is the greater of net selling price and (alue in
use. 6alue in use is determined as the e4pected future cash flo$s from use of the asset
discounted to present (alue. The amount of the loss is the difference bet$een carr)ing
(alue and reco(erable amount.
#nder #.S. &AA'" an impairment loss arises $hen the e4pected future cash flo$s
(undiscounted) from the use of the asset are less than its carr)ing (alue. If impairment
e4ists" the amount of the loss is e/ual to the difference bet$een carr)ing (alue and fair
(alue" $hich can be determined in different $a)s.
!. A pre(iousl) impaired asset ma) be $ritten bac% up onl) to $hat it7s carr)ing amount $ould
ha(e been if the impairment had ne(er been recogni,ed.
!!. The three t)pes of intangible assets are> (!) purchased" (2) ac/uired in a business
combination" and (@) internall) generated. (!) and (2) are classified as ha(ing a finite or
indefinite useful life1 (@) can onl) be classified as finite=li(ed. Finite=li(ed intangibles are
amorti,ed on a s)stematic basis o(er their useful li(es. All intangibles are sub<ect to
impairment testing. Indefinite=li(ed intangibles must be tested for impairment at least
annuall).
!2. #nder IAS @B" e4penditures gi(ing rise to a potential intangible are classified as either
research or de(elopment e4penditures. Research e4penditures are e4pensed as incurred.
*e(elopment e4penditures are recogni,ed as an intangible asset $hen si4 criteria are met.
#nder #.S. &AA'" research and de(elopment costs are e4pensed as incurred. The onl)
e4ception is for soft$are de(elopment costs" $hich are recogni,ed as an asset $hen certain
criteria ha(e been met.
!@. Indefinite=li(ed intangibles and good$ill are sub<ect to impairment testing at least annuall).
!A. &ood$ill is measured as the e4cess of (a) consideration transferred plus noncontrolling
interest o(er (b) the fair (alue of the ac/uired firm7s net assets. T$o alternati(e methods are
a(ailable to measure noncontrolling interest1 therefore" t$o different measures of good$ill
e4ist for a gi(en business combination.
!C. A gain on bargain purchase e4ists $hen (a) consideration transferred plus noncontrolling
interest is less than (b) the fair (alue of the ac/uired firm7s net assets. The difference
bet$een (a) and (b) is sometimes referred to as 9negati(e good$ill.:
!B. &ood$ill must be tested for impairment annuall). &ood$ill that can be allocated to a
specific cash=generating unit is tested for impairment using a bottom=up test. In this test" the
carr)ing (alue of the cash=generating unit" including good$ill" is compared $ith the
reco(erable amount of the cash=generating unit. If the reco(erable amount of a cash=
generating unit is less its carr)ing (alue" good$ill is deemed to be impaired and is $ritten
do$n.
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Chapter 04 - International Financial Reporting Standards: Part I
!;. IAS 2@ (re(ised in 2;) re/uires borro$ing costs to be capitali,ed to the e4tent the) are
attributable to the ac/uisition" construction" or production of a /ualif)ing asset1 other
borro$ing costs are e4pensed in the period in $hich the) are incurred.
!E. Borro$ing costs are defined more broadl) in IAS 2@ than are interest costs in #.S. &AA'.
For e4ample" foreign e4change gains and losses are treated as borro$ing costs to the
e4tent the) represent ad<ustments to interest costs. Another difference is that under IFRS
interest income earned on short=term in(estment of borro$ed amounts is netted against
interest cost to determine the amount of borro$ing cost to capitali,e. There is no netting of
interest income and interest e4pense under #.S. &AA'.
!9. IAS 17 describes fi(e situations that $ould normall) lead to a lease being classified as a
finance lease" but does not describe these as being absolute tests. (The standard pro(ides
three additional situations that could lead to a lease being classified as a finance lease.) The
criteria implied in four of the situations are similar to the specific criteria in #.S. &AA'" but
the IAS 17 criteria pro(ide less 9bright line: guidance. IAS 17 indicates that a lease $ould
normall) be capitali,ed $hen the lease term is for the ma<or part of the leased asset7s life 5
#.S. &AA' specificall) defines 9ma<or part: as ;CF. IAS 17 also indicates that a lease
$ould normall) be capitali,ed $hen the present (alue of minimum lease pa)ments is e/ual
to substantiall) all the fair (alue of the leased asset 5 #.S. &AA' specificall) defines
9substantiall) all: as 9F. *etermining $hether a lease should be capitali,ed is an e4ample
of the principles=based approach follo$ed in IFRS (ersus the rules=based approach of #.S.
&AA'.
2. A difference in accounting for a sale=and=leasebac% gain e4ists bet$een IFRS and #.S.
&AA' $hen the lease is classified as an operating lease. #nder #.S. &AA'" the gain must
be amorti,ed o(er the life of the lease. #nder IAS !;" the portion of the gain e/ual to the
difference bet$een the fair (alue and the carr)ing amount of the leased asset is recogni,ed
immediatel). An) difference bet$een the fair (alue of the asset and its selling price is
amorti,ed o(er the life of the lease.
If the lease is classified as a finance lease" both IFRS and #.S. &AA' re/uire the gain on
sale=and=leasebac% to be amorti,ed o(er the life of the lease.
2!. #.S. &AA' re/uires interest paid and recei(ed and di(idends recei(ed to be classified as
operating1 di(idends paid must be classified as financing. IAS ; allo$s interest paid and
di(idends paid to be classified either as operating or financing1 interest recei(ed and
di(idends recei(ed ma) be classified as either operating or in(esting.
22. IAS ! establishes the date that financial statements are authori,ed for issuance as the cut=
off date for recognition of e(ents after the reporting period. #.S. &AA' uses the date that
financial statements are a(ailable for issuance as the cut=off date.
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Chapter 04 - International Financial Reporting Standards: Part I
2@. IAS E establishes the follo$ing hierarch) of authoritati(e pronouncements to be follo$ed in
selecting accounting policies to appl) to a specific transaction or e(ent>
!. IASB Standard or Interpretation that specificall) applies to the transaction or e(ent.
2. IASB Standard or Interpretation that deals $ith similar and related issues.
@. *efinitions" recognition criteria" and measurement concepts in the IASB Frame$or%.
A. .ost recent pronouncements of other standard=setting bodies that use a similar
conceptual frame$or% to de(elop accounting standards.
A change in accounting polic) is allo$ed onl) if the change>
a. Is re/uired b) an IFRS" or
b. Results in the financial statements pro(iding reliable and more rele(ant information.
S&!t"&#$ t& E(er)"$e$ a#* Pr&+!e,$
1- B (G!" = G!") H GB" H G@" HG2C" I G2C"
.- C lo$er of cost (GC") and net reali,able (alue (GAC") I GAC"
/- A
4- D Total G!"
.otor 2" + C )ears I GA"
Inspection !" + A )ears I 2"C
.achine G;" + 2 )ears I @"C
G!"
0- D
1- B
2- D
3- B GE" H GA" HGE"
4- C
15- A
11- B
1.- A
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Chapter 04 - International Financial Reporting Standards: Part I
1/- Opt"p!e( C&,pa#6 7 I#8e#t&r6 9*eter,"#at"&# &: )&$t;
-ost to complete the design of the generators G @"
'urchase price for materials and parts E"
3ess> Abnormal $aste (C")
Transportation cost to get materials and parts to manufacturing facilit) 2"
*irect labor (!" labor hours at G!2 per hour) !2"
6ariable o(erhead (!" labor hours at G2 per hour) 2"
Fi4ed o(erhead (!" labor hours at GB per hour
based on normal le(el of production) B"
-ost of in(entor) G2E"
?ote>The fi4ed o(erhead application rate based on a normal le(el of production is used per
IAS 2.!@. The actual le(el of production can be used if it appro4imates the normal le(el1
ho$e(er" the actual le(el of production in Jear @ does not appro4imate the normal le(el.
Storage costs are e4cluded from the cost of in(entor) per IAS 2.!B" $hich indicates that
storage costs are e4cluded from the cost of in(entories unless the) are necessar) in the
production process before a further production stage.
14- M&#r&e C&,pa#6 7 I#8e#t&r6 9LCNRV 8a!at"&#;
IFRS <-S- GAAP
8istorical cost 2"

8istorical cost 2"
2stimated selling price !;" Replacement cost !A"

-osts to complete and sell 2" ?et reali,able (alue !C"

?et reali,able (alue !C" ?ormal profit margin 2F
In(entor) loss C" ?R6 = profit margin !!"B

.ar%et !A"
In(entor) loss B"

a. (!) IFRS> Jear ! In(entor) loss GC"
Jear 2 -ost of goods sold G!B"E
(2) #.S. &AA'> Jear ! In(entor) loss GB"
Jear 2 -ost of goods sold G!C"E
b. Jear !> IFRS result in G!" larger income before ta4" assets" and stoc%holders7 e/uit).
Jear 2> IFRS result in G!" smaller income before ta41 assets and stoc%holders7 e/uit)
are the same at the end of Jear 2 under both IFRS and #.S. &AA'.
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Chapter 04 - International Financial Reporting Standards: Part I

10- Bee)h C&rp&rat"&# 7 I#8e#t&r6 9LCNRV 8a!at"&#;
IAS 2.29 indicates that in(entories are usuall) $ritten do$n to ?R6 item b) item. &rouping
is acceptable $hen se(eral criteria are met" including relating to the same product line.
Because these three products relate to three different product lines" grouping $ould not be
allo$ed.
Pr&*)t C&$t
Se!!"#=
pr")e
1.>/1>Y1
Se!!"#=
)&$t$
90?;
NRV
1.>/1>Y1
LCNRV
9"te, +6 "te,;
1.>/1>Y1
!! G!@ G!B GE G!C2 G!@
22 !B G!A G; G!@@ !@@
@@ ! G! GC G9C 9C
Item=b)=item
total
G@9 G@CE
-ost G@9
3-?R6 @CE
Drite=do$n G @2
In(entor) $rite=do$n e4pense G@2
In(entor) (aluation allo$ance G@2
?ote> The use of the contra=account 9In(entor) (aluation allo$ance: facilitates a possible
re(ersal of the $rite=do$n as is allo$ed under IAS 2.
11- Bee)h C&rp&rat"&# 7 I#8e#t&r6 9re8er$a! &: %r"te-*&%#;
IAS 2 indicates that an in(entor) $rite=do$n is re(ersed $hen" for e4ample" in(entor) is still
on hand and its selling price has increased. The re(ersal is limited to the amount of the
original $rite=do$n. The ne$ carr)ing amount should be the lo$er of original cost and
current ?R6.
Pr&*)t
Carr6"#=
A,&#t
1.>/1>Y1 C&$t
Se!!"#=
pr")e
1.>/1>Y.
Se!!"#=
)&$t$
90?;
NRV
1.>/1>Y.
LCNRV
1.>/1>Y.
!! G!@ G!@ G!9 G9.C G!E.C G!@.
22 !@@ G!B G!B GE. G!C2. !C2.
@@ 9C G! G!@ GB.C G!2@.C !.
Item=b)=item total G@CE G@9 G@E2.
In(entor) should be reported on the !2+@!+J2 balance sheet at 3-?R6 of G@E2. The
carr)ing amount at !2+@!+J! is G@CE" so in(entor) must be $ritten up b) G2A.
-arr)ing amount G@CE
3-?R6 @E2
Re(ersal of $rite=do$n G 2A
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Chapter 04 - International Financial Reporting Standards: Part I
In(entor) (aluation allo$ance G2A
Re(ersal of in(entor) $rite=do$n e4pense G2A
At !2+@!+J2" the in(entor) (aluation allo$ance has a credit balance of GE1 the difference
bet$een the original cost of G@9 and 3-?R6 of G@E2.
?ote> If 3-?R6 at !2+@!+J2 had been greater than G@9" in(entor) could ha(e been $ritten
bac% up onl) to the original cost of G@9. In other $ords" the in(entor) (aluation allo$ance
$ould be reduced to ,ero" but $ill ne(er ha(e a net debit balance.
12- Ste::e#-@%e"= C&,pa#6 7 E()ha#=e &: A$$et$
Because the e4change transaction lac%s commercial substance" no gain $ould be
recogni,ed. The ac/uired printing press is measured at the carr)ing (alue of the asset gi(en
up (G2A") less cash recei(ed (G@").
?e$ printing press G 2!"
-ash @"
Accumulated depreciation !B"
0ld printing presses G A"
?ote> According to IAS !B.2C" an entit) determines $hether an e4change transaction has
commercial substance b) considering the e4tent to $hich its future cash flo$s are
e4pected to change as a result of the transaction. An e4change transaction has
commercial substance if>
(a) the configuration (ris%" timing and amount) of the cash flo$s of the asset recei(ed
differs from the configuration of the cash flo$s of the asset transferred1 or
(b) the entit)=specific (alue of the portion of the entit)7s operations affected b) the
transaction changes as a result of the e4change1 and
(c) the difference in (a) or (b) is significant relati(e to the fair (alue of the assets
e4changed.
This problem assumes that these conditions are not met.
13- Ste8e#$&# C&rp&rat"&# 7 Pr&pert6A P!a#t a#* EB"p,e#t 9)&,p&#e#t *epre)"at"&#;
IAS !B.AA states> 9an entit) allocates the amount initiall) recogni,ed in respect of an item of
propert)" plant and e/uipment to its significant parts and depreciates separatel) each such
part.: This is referred to as 9component depreciation.: Thus" the total cost of GC"
must be allocated to carpeting" roof" 86A- s)stem" and the rest of the building" and each
component is depreciated separatel) o(er its e4pected useful life.
*epreciable base #seful 3ife *epreciation
-arpeting G !" C )ears G 2"
Roof !C" !C )ears !"
86A- s)stem @" ! )ears @"
Building AAC" C )ears E"9
Total GC" G!A"9
4-!
Chapter 04 - International Financial Reporting Standards: Part I
14- '")C C&,pa#6 7 Pr&pert6A P!a#tA a#* EB"p,e#t 9",pa"r,e#t;
a- IAS @B re/uires companies to assess annuall) $hether there are an) indicators that an
asset is impaired. If so" then an impairment loss calculation must be made. 24ternal
e(ents" such as technological changes that ad(ersel) affect the (alue of an asset" can
be indicators of impairment. Kuic% -ompan) must ma%e an impairment loss calculation
at the end of Jear A because an e4ternal e(ent impairment indicator is present.
+-
De)e,+er /1A Year 4
-ost G!"
Accumulated depreciation (G!" 4 A) A"
-arr)ing amount" !2+@!+JA GB"
(a) ?et selling price GC"
(b) 6alue in use ('6 of future cash flo$s) GC!"
Reco(erable amount (higher of (a) and (b)) GC!"
The carr)ing amount e4ceeds the reco(erable amount. Therefore" a G9" impairment loss
is recorded as follo$s>
Impairment loss G 9"
2/uipment (or Accumulated depreciation) G 9"
The carr)ing amount of the e/uipment on the !2+@!+JA balance sheet is GC!".
Annual depreciation beginning in Jear C $ill be GE"C (GC!" + B remaining )ears of life).
De)e,+er /1A Year 0
*epreciation e4pense GE"C
Accumulated depreciation GE"C
The carr)ing amount of the e/uipment on the !2+@!+JC balance sheet is GA2"C (GC!" 5
E"C).
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Chapter 04 - International Financial Reporting Standards: Part I
De)e,+er /1A Year 1
*epreciation e4pense GE"C
Accumulated depreciation GE"C
The carr)ing amount of the e/uipment on the !2+@!+JB balance sheet is G@A" (GA2"C 5
E"C)" prior to an) e(aluation of $hether the impairment has re(ersed.
Because the technological inno(ations related to the e/uipment are not as effecti(e as
e4pected" there is an indicator that the e/uipment might no longer be impaired. The
compan) must compare the carr)ing amount of the e/uipment at !2+@!+JB $ith its
reco(erable amount.
-arr)ing amount" !2+@!+JB G@A"
Reco(erable amount" !2+@!+JB>
(a) ?et selling price GA2"
(b) 6alue in use ('6 of future cash flo$s) GAA"
Reco(erable amount (higher of (a) and (b)) GAA"
The reco(erable amount e4ceeds the carr)ing amount" thus the e/uipment is no longer
impaired. The e/uipment is $ritten=up and the impairment loss re(ersed" but onl) up to the
point $here the resulting carr)ing amount is e/ual to $hat it $ould ha(e been if no
impairment had been recorded. This is calculated as>
-ost G!"
Accumulated depreciation (G!" 4 B )ears) B"
-arr)ing amount" !2+@!+JB $ithout impairment GA"
In this case" the asset is $ritten up from G@A" to GA". The follo$ing <ournal entr) is
recorded at *ecember @!" Jear B>
2/uipment (or Accumulated depreciation) GB"
Re(ersal of impairment loss (gain) GB"
4-11
Chapter 04 - International Financial Reporting Standards: Part I
.5- G&*:re6 C&,pa#6 7 Pr&pert6A P!a#t a#* EB"p 9*"$,a#t!"#= a#* "#$pe)t"&# )&$t$;
Ca!)!at"&# &: I#"t"a! C&$tA Da#ar6 1A Year .: A,&#t
PV Fa)t&r
915?;
Building
-onstruction cost G !"C"
'resent (alue of dismantling and remo(al costs 222"9BC !"C" .!AEBA
Total cost of the building G !";22"9BC
.achiner) and 2/uipment
-onstruction cost G @"C"
'resent (alue of dismantling and remo(al costs !A"EBA !" .!AEBA
Total cost of the machiner) and e/uipment G @"C!A"EBA
3ess> -ost of inspection and o(erhaul 2"
-ost allocated to machiner) and e/uipment G @"@!A"EBA
D&r#a! e#tr6 at Da#ar6 1A Year .:
Building G !";22"9BC
.achiner) and e/uipment @"@!A"EBA
Inspection and o(erhaul costs 2"
-ash G C""
'ro(ision for dismantling and remo(al
2@;"E@

4-12
Chapter 04 - International Financial Reporting Standards: Part I
Ca!)!at"&# &: Depre)"at"&# E(pe#$eA Year .
Building
-ost G!";22"9BC
#seful life 2 )ears
*epreciation e4pense G EB"!AE
.achiner) and 2/uipment
Allocated cost G@"@!A"EBA
#seful life 2 )ears
*epreciation e4pense G !BC";A@
Inspection and 0(erhaul -osts
Allocated cost G 2"
#seful life C )ears
*epreciation e4pense G A"
*epreciation e4pense G 29!"E9!
Accumulated depreciation G 29!"E9!
.1- De::er$&# C&,pa#6 7 Pr&pert6A P!a#t a#* EB"p,e#t 9,ea$re,e#t $+$eBe#t t&
a)B"$"t"&#;
-ost" !+2+J! G!""
#seful life C )ears
Annual depreciation G2""
Boo% (alue" !2+@!+J2 GB""
IFRS Allo$ed Alternati(e
Fair (alue" !+2+J@ G!2""
Remaining useful life @ )ears
Annual depreciation GA""
a. *epreciation e4pense IFRS #.S. &AA'
Jears ! and 2 G2"" G2""
Jears @" A" and C GA"" G2""
Income before ta4 is the same under IFRS and #.S. &AA' in Jears ! and 2. Income
before ta4 is G2"" smaller under IFRS in Jears @" A" and C.
4-13
Chapter 04 - International Financial Reporting Standards: Part I
b. 2nd of Jear
2/uipment (boo% (alue) ! 2 @ A C
IFRS
Beginning G! mn GE mn GB mn GE mn GA mn
Re(aluation B mn
*epreciation e4pense (2 mn) (2 mn) (A mn) (A mn) (A mn)
2nding GE mn GB mn GE mn GA mn G
<-S- GAAP
Beginning G! mn GE mn GB mn GA mn G2 mn
*epreciation e4pense (2 mn) (2 mn) (2 mn) (2 mn) (2 mn)
2nding GE mn GB mn GA mn G2 mn G
2nd of Jear
Stoc%holders7 e/uit) ! 2 @ A C
IFRS
Beginning G (G2 mn) (GA mn) (G2 mn) (GB mn)
Re(aluation GB mn
*epreciation e4pense(G2 mn) (G2 mn) (GA mn) (GA mn) (GA mn)
2nding (G2 mn) (GA mn) (G2 mn) (GB mn) (G! mn)
<-S- GAAP
Beginning G (G2 mn) (GA mn) (GB mn) (GE mn)
*epreciation e4pense(G2 mn) (G2 mn) (G2 mn) (G2 mn) (G2 mn)
2nding (G2 mn) (GA mn) (GB mn) (GE mn) (G! mn)
4-14
Chapter 04 - International Financial Reporting Standards: Part I
..- Ma*"$&# C&,pa#6 7 Pr&pert6A P!a#t a#* EB"p,e#t 9",pa"r,e#t;
IFRS <-S- GAAP
-arr)ing amount !"" -arr)ing amount !""
?et selling price ;"C" Future cash flo$s !""
*iscounted future cash flo$s E"" ?o impairment
6alue in use (larger amount) E""
Impairment loss 2""
a. (!) IFRS>
Jear ! *epreciation e4pense 2""
Impairment loss 2""
Jears 2 = B *epreciation e4pense !"B" (E""+C )ears)
(2) #.S. &AA'>
Jears !=B *epreciation e4pense 2""
b. Income before tax
IFRS Jear ! Jear 2 Jear @ Jear A Jear C Jear B
*epreciation e4pense
(2"") (!"B") (!"B") (!"B") (!"B") (!"B")
Impairment loss
(2"")
Impact on income
(A"") (!"B") (!"B") (!"B") (!"B") (!"B")
<-S- GAAP Jear ! Jear 2 Jear @ Jear A Jear C Jear B
*epreciation e4pense
(2"") (2"") (2"") (2"") (2"") (2"")
Impact on income
(2"") (2"") (2"") (2"") (2"") (2"")
*iff. (IFRS=#.S. &AA')
(2"") A" A" A" A" A"
Total Assets
IFRS Jear ! Jear 2 Jear @ Jear A Jear C Jear B
-arr)ing (alue (at !+!)
!2"" E"" B"A" A"E" @"2" !"B"
*epreciation e4pense
(2"") (!"B") (!"B") (!"B") (!"B") (!"B")
Impairment loss
(2"")
-arr)ing (alue (at !2+@!)
E"" B"A" A"E" @"2" !"B"
<-S- GAAP Jear ! Jear 2 Jear @ Jear A Jear C Jear B
-arr)ing (alue (at !+!)
!2"" !"" E"" B"" A"" 2""
*epreciation e4pense
(2"") (2"") (2"") (2"") (2"") (2"")
-arr)ing (alue (at !2+@!)
!"" E"" B"" A"" 2""
*iff. (IFRS=#.S.&AA')
(2"") (!"B") (!"2") (E") (A")
4-15
Chapter 04 - International Financial Reporting Standards: Part I
Total Stockholders Equity (ignoring income taxes)
IFRS Jear ! Jear 2 Jear @ Jear A Jear C Jear B
Beginning balance
(A"") (C"B") (;"2") (E"E") (!"A")
*epreciation e4pense
(2"") (!"B") (!"B") (!"B") (!"B") (!"B")
Impairment loss
(2"")
2nding balance
(A"") (C"B") (;"2") (E"E") (!"A") (!2"")
<-S- GAAP Jear ! Jear 2 Jear @ Jear A Jear C Jear B
Beginning balance
(2"") (A"") (B"") (E"") (!"")
*epreciation e4pense
(2"") (2"") (2"") (2"") (2"") (2"")
2nding balance
(2"") (A"") (B"") (E"") (!"") (!2"")
*iff. (IFRS=#.S.&AA') (2"") (!"B") (!"2") (E") (A")
./- Iptat I#ter#at"&#a! 7 Pr&pert6A P!a#t a#* EB"p,e#t 9re8a!at"&# ,&*e!;
a. Ad<ustment (a) relates to the depreciation of the re(aluation amount on fi4ed assets.
Ad<ustment (a) results in an addition to net income because the additional depreciation
ta%en on the re(aluation amount does not e4ist under #.S. &AA'. The addition to net
income pertains to the current )ear onl). The addition to net income in the current )ear
plus the addition to net income in pre(ious )ears is the cumulati(e effect on retained
earnings" $hich is the shareholders7 e/uit) account affected b) ad<ustment (a). The
addition to shareholders7 e/uit) is greater than the addition to net income because of this
cumulati(e effect.
b. Ad<ustment (b) relates to the re(aluation surplus (increase in shareholders7 e/uit)) that is
recorded $hen fi4ed assets are re(alued. This increase does not e4ist under #.S.
&AA' and shareholders7 e/uit) must be reduced accordingl). In this case" the
shareholders7 e/uit) account affected is Re(aluation Surplus.
.4- L"#)&!# C&,pa#6 7 Re$ear)h a#* De8e!&p,e#t C&$t$
a. IFRS Year 1 Year .
Research e4pense GB million
*eferred de(elopment costs (asset) GA million
Amorti,ation e4pense 5 deferred de(elopment costs GE"
<-S- GAAP
Research and de(elopment e4pense G! million ==
4-16
Chapter 04 - International Financial Reporting Standards: Part I
b. IFRS result in GA million larger income before ta4 in Jear ! and GE" smaller income
before ta4 in Jears 2=B compared to #.S. &AA'.
Ignoring income ta4es" total assets and total stoc%holders7 e/uit) are larger under IFRS b)
the follo$ing amounts>
Jear ! Jear 2 Jear @ Jear A Jear C Jear B
GA"" G@"2" G2"A" G!"B" GE"
G
.0- Ea#(" Petr&)he,")a! C&,pa#6 7 De:erre* *e8e!&p,e#t )&$t$F Ga"# &# $a!e a#*
!ea$e+a)C
#nder IFRS" Lan4i apparentl) has capitali,ed some de(elopment costs as an asset (IAS
38)" $hich $ould not be acceptable under #.S. &AA'. Ad<ustment (a) adds bac% the current
)ear7s amorti,ation e4pense on the deferred de(elopment costs that $as deducted in
determining IFRS net income. This ad<ustment results in a larger amount of #.S. &AA' net
income. The addition to income flo$s through to retained earnings increasing shareholders7
e/uit). The addition to net income pertains to the current )ear onl). The addition to net
income in the current )ear plus the addition to net income in pre(ious )ears is the
cumulati(e effect on retained earnings. The addition to shareholders7 e/uit) is greater than
the addition to net income because of this cumulati(e effect.
If the lease in a sale=leasebac% transaction is classified as an operating lease" IAS 17
re/uires the gain on such a transaction to be reported in income immediatel)" $hereas #.S.
&AA' re/uires the gain to be amorti,ed o(er the life of the lease. Ad<ustment (b) subtracts
the gain on sale+leasebac% in the current )ear that $as recogni,ed in full under IFRS. The
amount of ad<ustment (b) is the difference bet$een the entire gain recogni,ed under IFRS
and the portion of the gain that $ould be recogni,ed under #.S. &AA' (including
amorti,ation of gains that might ha(e been generated in earlier )ears). The same amount
should be subtracted from retained earnings reducing shareholders7 e/uit). From the fact
that ad<ustment (b) reduced shareholders7 e/uit) b) a larger amount than it reduces net
income" $e can infer that Lan4i had one or more sale+leasebac% gains in pre(ious )ears.
4-17
Chapter 04 - International Financial Reporting Standards: Part I
.1- B)h C&rp&rat"&# 7 Pr&pert6A P!a#tA a#* EB"p,e#t 9",pa"r,e#t !&$$ a#* $+$eBe#t
re8er$a! &: ",pa"r,e#t !&$$;
-ost G!"
#seful life ! )ears
Residual (alue G
Annual depreciation charge G!"
Jear ! Jear 2 Jear @
-arr)ing (alue (at !+!) G!" G9" GE"
*epreciation e4pense (!") (!") (!")
-arr)ing (alue (at !2+@!) G9" GE" G;"
Test for impairment at *ecember @!" Jear @>
-arr)ing (alue G;"
?et selling price (G;" = G;") GB@"
6alue in use GCC"
Reco(erable amount (greater of the t$o) B@"
Impairment loss G ;"
The impairment loss of G;" $ould be recogni,ed in income on *ecember @!" Jear @ $ith
an offsetting reduction in the asset7s carr)ing (alue. As a result" the asset $ill be reported at
on the *ecember @!" Jear @ balance sheet at a carr)ing (alue of GB@". This amount $ill
be depreciated o(er the remaining useful life of ; )ears on a straight=line basis.
Jear ! Jear 2 Jear @ Jear A Jear C
-arr)ing (alue (at !+!) G!" G9" GE" GB@" GCA"
*epreciation e4pense (!") (!") (!") (9") (9")
Impairment loss (;")
-arr)ing (alue (at !2+@!) G9" GE" GB@" GCA" GAC"
Re(ie$ for re(ersal of impairment loss at *ecember @!" Jear C>
-arr)ing (alue GAC"
?et selling price (GC" = G;") GA@"
6alue in use GC@"
Reco(erable amount (greater of the t$o) C@"
Impairment loss G
4-1
Chapter 04 - International Financial Reporting Standards: Part I
IAS 36 re/uires an impairment loss to be re(ersed if the reco(erable amount of an asset is
determined to e4ceed its ne$ carr)ing amount" but onl) if there are changes in the
estimates used to determine the original impairment loss or there is a change in the basis
for determining the reco(erable amount (from (alue in use to net selling price or (ice (ersa).
Because reco(erable amount has changed from net selling price at the end of Jear @ to
(alue in use at the end of Jear C" and the reco(erable amount is greater than the carr)ing
(alue at the end of Jear C" the impairment loss recogni,ed in Jear @ should be re(ersed.
8o$e(er" the carr)ing (alue of the asset after re(ersal of the impairment loss should not
e4ceed $hat it $ould ha(e been if no impairment loss had been recogni,ed. The carr)ing
(alue of .achine M at *ecember @!" Jear C $ould ha(e been GC" if no impairment loss
had been recogni,ed in Jear @ (G!" original cost less G!" annual depreciation for
fi(e )ears). Thus" an increase in the carr)ing (alue of the asset of GC" should be
recogni,ed at *ecember @!" Jear C $ith a re(ersal of impairment loss in an e/ual amount.
The asset7s carr)ing (alue on the *ecember @!" Jear C balance sheet $ill be GC"
(GAC" H GC"). This amount $ill be depreciated o(er the remaining useful life of C
)ears on a straight=line basis.
Summar) of amounts to be reported on the balance sheet and income statement in Jears !
5 C>
Jear ! Jear 2 Jear @ Jear A Jear C
-arr)ing (alue (at !+!) G!" G9" GE" GB@" GCA"
Income Statement
*epreciation e4pense (!") (!") (!") (9") (9")
Impairment loss (;")
Re(ersal of impairment loss C"
-arr)ing (alue (at !2+@!) G9" GE" GB@" GCA" GC"
Income statement effect (!") (!") (!;") (9") (A")
.2- H&!Ger C&,pa#6 7 Pr&pert6A P!a#tA a#* EB"p,e#t 9)ap"ta!"Gat"&# &: +&rr&%"#= )&$t$
a#* ,ea$re,e#t &: a$$et $+$eBe#t t& a)B"$"t"&# $"#= t%& a!ter#at"8e ,&*e!$;
IAS 1 C&$t M&*e!
-arr) asset on the balance sheet at cost less accumulated depreciation and an)
accumulated impairment losses.
-apitali,e borro$ing costs borro$ing costs attributable to the construction of /ualif)ing
assets.
Annual interest (G9" 4 !F) G9"
Interest to be capitali,ed in Jear ! (GC"N 4 !F) C"
Interest e4pense in Jear ! GA"
4-1!
Chapter 04 - International Financial Reporting Standards: Part I
N 24penditures of G!"" $ere made e(enl) throughout the )ear" so the a(erage
accumulated e4penditures during the )ear are GC" (G!"" + 2).
-ost of building>
-onstruction costs G!""
-apitali,ed interest C"
Total initial cost of building G!"C"
Annual depreciation (beginning in Jear 2) (G!"C" + A )ears) G2B"2C
Jear ! Jear 2 Jear @ Jear A Jear C
Income Statement
*epreciation e4pense G G2B"2C G2B"2C G2B"2C G2B"2C
Balance Sheet
Building (at !+!) G G!"C" G!"2@";C G99;"C G9;!"2C
*epreciation (2B"2C) (2B"2C) (2B"2C) (2B"2C)
Building (at !2+@!) G!"C" G!"2@";C G99;"C G9;!"2C G9AC"
IAS 1 Re8a!at"&# M&*e!
-arr) asset on the balance sheet at re(alued amount e/ual to fair (alue less an)
subse/uent accumulated depreciation and an) accumulated impairment losses.
-apitali,e borro$ing costs attributable to the construction of /ualif)ing assets.
Annual interest (G9" 4 !F) G9"
Interest to be capitali,ed in Jear ! (GC" 4 !F) C"
Interest e4pense in Jear ! GA"
-ost of building>
-onstruction costs G!""
-apitali,ed interest C"
Total initial cost of building G!"C"
Annual depreciation (beginning in Jear 2) (G!"C" + A )ears) G2B"2C
Jear ! Jear 2 Jear @ Jear A Jear C
Income Statement
*epreciation e4pense G G2B"2C G2B"2C G2C"C2B
2
G2C"C2B
Subtotal G G2B"2C G2B"2C G2C"C2B G2C"C2B
3oss on re(aluation 2;"C
Re(ersal of re(aluation loss (2;"C)
Total e4pense (income) G G2B"2C GA@";C G2C"C2B G(!"9;A)
4-20
Chapter 04 - International Financial Reporting Standards: Part I
Balance Sheet
Building (at !+!) G G!"C" G!"2@";C G9;" G9AA"A;A
*epreciation (2B"2C) (2B"2C) (2C"C2B) (2C"C2B)
Building (at !2+@!) G!"C" G!"2@";C G99;"C G9AA"A;A G9!E"9AE
3oss on re(aluation (2;"C)
!
Re(ersal of re(aluation loss 2;"C
@
Re(aluation surplus @"CC2
@
Building (at !2+@!) G!"C" G!"2@";C G9;" G9AA"A;A G9C"
!
At *ecember @!"Jear @" the fair (alue of the building is determined to be G9;". The
carr)ing (alue of the building is decreased b) G2;"C" $ith a loss on re(aluation
recogni,ed in Jear @ net income.
2
*epreciation in Jear A is G2C"C2B (G9;" + @E remaining )ears).
@
At *ecember @!"Jear C" the fair (alue of the building is determined to be G9C". The
carr)ing (alue of the building is increased b) G@!"C2. A re(ersal of re(aluation loss of
G2;"C is recogni,ed in income and G@"CC2 (G@!"C2 5 2;"C) is recorded as re(aluation
surplus in shareholders7 e/uit).

.3- 'a#ta)) C&,pa#6 7 Re)&#)"!"at"&# t& <-S- GAAP
Year 0
?et income under IFRS G!"
Ad<ustments>
Re(ersal of depreciation on re(aluation of fi4ed assets @"C
Re(ersal of amorti,ation of deferred de(elopment costs !B"
Re(ersal of gain on sale and leasebac% (!C")
Amorti,ation of gain on sale and leasebac% ;"C
?et income (loss) under #.S. &AA' G (2@" )
De)e,+er /1A Year 0
Stoc%holders7 e/uit) under IFRS GC"
Ad<ustments>
Re(ersal of re(aluation of fi4ed assets (@C")
Re(ersal of accumulated depreciation on re(aluation of fi4ed assets !"C
Re(ersal of deferred de(elopment costs (E")
Re(ersal of accumulated amorti,ation on deferred de(elopment costs !B"
Re(ersal of gain on sale and leasebac% (!C")
Accumulated amorti,ation of gain on sale and leasebac% ;"C
Stoc%holders7 e/uit) under #.S. &AA' G 2B9"
4-21
Chapter 04 - International Financial Reporting Standards: Part I
.4- Strat&$phere C&,pa#6 7 Pr&pert6A P!a#tA a#* EB"p,e#t 9re8a!at"&# ,&*e!;
Amounts in parentheses represent credits.
Date C&$t
A)),!ate*
*epre)"at"&#
Carr6"#=
A,&#t
Re8a!at"&#
Srp!$ I#)&,e
Reta"#e*
Ear#"#=$
Oanuar) !" Jear ! A"" A""
*ecember @!" Jear ! A"" (2") @"E" 2" 2"
*ecember @!" Jear 2 A"" (2") @"B" 2" 2"
*ecember @!" Jear 2 (22") A" !E" (!E")
Balance @";E" @";E" (!E") A"
*ecember @!" Jear @ @";E" (2!")N @"C;" !" 2!" 2"
Balance @";E" (2!") @"C;" (!;") B"
Sale" Oan 2" Jear A (@";E") 2!" (@"C;") !;" ;" (!")
Balance G 5 G 5 G 5 G 5 ;" C"
N -alculated as G@";E" di(ided b) remaining life of !E )ears.
?ote> The net impact on retained earnings o(er the life of the e/uipment is negati(e
GC" (debit)" $hich is the difference bet$een the purchase price of GA"" and the
selling price of G@"C".
D&r#a! e#tr"e$ t& a))&#t :&r the +"!*"#= #*er the re8a!at"&# ,&*e!
Da#ar6 1A Year 1
Building A""
-ash A""
De)e,+er /1A Year 1
*epreciation e4pense 2"
Accumulated depreciation 2"
De)e,+er /1A Year .
*epreciation e4pense 2"
Accumulated depreciation 2"
Accumulated depreciation A"
Building 22"
Re(aluation surplus !E"
De)e,+er /1A Year /
*epreciation e4pense 2!"
Accumulated depreciation 2!"
Re(aluation surplus !"
Retained earnings !"
4-22
Chapter 04 - International Financial Reporting Standards: Part I
Da#ar6 .A Year 4
-ash @"C"
Accumulated depreciation 2!"
3oss on sale ;"
Building @";E"
Re(aluation surplus (0-I) !;"
Retained earnings !;"
?ote> if the asset hadn7t been re(alued" the carr)ing amount of the building $ould ha(e been
G@"A" (cost of GA"" less G2" depreciation 4@ )ears) at the date of sale. If
the building $as sold for G@"C"" there $ould ha(e been a gain of G!".
Since the building $as re(alued" the depreciation e4pense o(er the three )ears $as
GB!" (G2" in Jear ! and Jear 2 and G2!" in Jear @). Re(aluation surplus $as
reduced b) G!" during this period $ith the credit applied directl) to retained earnings.
Therefore" after re(ersing the remaining re(aluation surplus of G!;" to retained
earnings" the resulting loss is G;".
/5- Re:&r)e C&,pa#6 7 I#ta#="+!e A$$et$ 9*eter,"#at"&# &: )&$t;
I#ta#="+!e
C&$t A$$et
.ar%et research costs" Jear ! G 2C" ?o
Research costs" Jear ! !" ?o
Research costs" !
st
Kuarter" Jear 2 ;" ?o
3egal fees to register patent" April" Jear 2 2C" Jes
*e(elopment costs for initial protot)pe" 2
nd
Kuarter" Jear 2 C" ?o
Testing of initial protot)pe" Oune" Jear 2 C" ?o
.anagement time to de(elop business plan" 2
nd
Kuarter" Jear 2 !C" ?o
-ost of re(isions and second protot)pe" @
rd
Kuarter" Jear 2 !;C" Jes
3egal fees to defend patent" 0ctober" Jear 2 C" Jes
'roduction costs" A
th
Kuarter" Jear 2 A" ?o
.ar%eting campaign" A
th
Kuarter" Jear 2 E" ?o
The legal fees to register and defend the patent are capitali,ed as an intangible asset
('atent" G;C").
*e(elopment costs incurred after both (a) technical feasibilit) has been established and (b)
a business plan has been de(eloped are capitali,ed (*eferred *e(elopment -osts"
G!;C").
'roduction costs $ill be capitali,ed as In(entor)1 not as an intangible asset.
?ote> #nder #.S. &AA'" onl) the costs associated $ith obtaining and defending the patent
$ould be recogni,ed as an asset.
4-23
Chapter 04 - International Financial Reporting Standards: Part I
/1- Ph"!&$&pher St&#e 7 I#ta#="+!e A$$et$ 9%e+ $"te *e8e!&p,e#t )&$t$;
Because 'hilosopher Stone7s intranet $ill onl) be used to share information about compan)
personnel" demonstrating future economic benefits might be difficult. SI- @2 tal%s about a
compan) using a $eb site to generate re(enue" $hich is not the purpose of the intranet in
this case. 2(en if future economic benefits can be demonstrated" onl) the costs incurred
be)ond the 9planning stage: are eligible for capitali,ation. In addition" SI- @2 indicates that
the estimated useful life of a $eb site should be short" meaning that $hate(er amount of
costs are capitali,ed the) $ill be amorti,ed o(er a short period of time.
/.- Barth&!&,e% C&rp&rat"&# 7 G&&*%"!! 9",pa"r,e#t;
Ca!)!at"&# &: Re)&=#"Ge* N&#)&#tr&!!"#= I#tere$t
Fair (alue of net assets (e4cluding good$ill) GC""
?oncontrolling interest F 2F
?oncontrolling interest G!""
Ca!)!at"&# &: <#re)&=#"Ge* N&#)&#tr&!!"#= I#tere$t
Implied fair (alue of !F of Samson -ompan) GC"" + EF I GB"E;C"
?oncontrolling interest F 2F
Fair (alue of noncontrolling interest G!"@;C"
Recogni,ed noncontrolling interest !""
#nrecogni,ed noncontrolling interest G @;C"
Ca!)!at"&# &: G&&*%"!!
-onsideration transferred GC"C"
'lus> ?oncontrolling interest (recogni,ed) !""
Subtotal GB"C"
3ess> Fair (alue of net assets (e4cluding good$ill) "C""
&ood$ill G!"C"
The summar) <ournal entr) to recogni,e the ac/uisition of Samson7s shares $ould be>
Samson7s net assets GC""
&ood$ill !"C"
-ash GC"C"
?oncontrolling interest !""
I,pa"r,e#t Te$tA E#* &: Year 1 Net a$$et$ G&&*%"!! T&ta!
-arr)ing amount GC"" G!"C" GB"C"
#nrecogni,ed noncontrolling interest @;C" @;C"
Ad<usted carr)ing amount GC"" G!"E;C" GB"E;C"
*etermination of reco(erable amount>
Fair (alue less costs to sell (a) GC"" = G2" I GA"E"
'resent (alue of future cash flo$s (b) A";C"
Reco(erable amount (higher of (a) and (b)) A"E"
Impairment loss (ad<usted carr)ing amount less reco(erable amount) G2";C"
4-24
Chapter 04 - International Financial Reporting Standards: Part I
A!!&)at"&# &: ",pa"r,e#t !&$$
&ood$ill G!"E;C"
Samson7s net assets 2"
Total G2";C"
The allocation of impairment loss to good$ill is shared bet$een the controlling and
noncontrolling interest. Thus" G!"C" (EF) is allocated to the parent7s in(estment in
Samson -ompan)1 the remaining G@;C" (2F) is attributed to the noncontrolling interest
but is not recogni,ed. Bartholome$ $ill reflect &ood$ill of ,ero on its *ecember @!" Jear !
balance sheet" and Samson7s net assets $ill be included in the consolidated amounts at a
total of GA"E" (GC"" 5 G2").
//- R&)Cer D"8"$"&# 7 G&&*%"!! 9",pa"r,e#t;
Part A-
Ca!)!at"&# &: ",pa"r,e#t !&$$A 1.>/1>Y0:
-arr)ing amount G2";;C
Reco(erable amount !"CB
Impairment loss G!"2!C
The impairment loss is allocated first to good$ill" until it is reduced to ,ero. The remaining
G2!C of loss is allocated to the other assets on the basis of relati(e carr)ing amounts>
'ropert)" plant" and e/uipment G!"@;C + G!";;C 4 G2!C I G!B;
0ther intangibles GA + G!";;C 4 G2!C I G AE
G&&*%"!!
Pr&pert6A P!a#tA
a#* EB"p,e#t
Other
I#ta#="+!e$ T&ta!
-arr)ing amount"
!2+@!+JA G!" G!"C GC G@"
Amorti,ation
e4pense" Jear C (!2C) (!) (22C)
Subtotal G!" G!"@;C GA G 2";;C
Impairment loss (!") (!B;) (AE) (!"2!C)
-arr)ing amount"
!2+@!+JC G G!"2E G@C2 G!"CB
Part B-
Amorti,ation e4pense is calculated for Jear B using the re(ised carr)ing amounts and
estimated remaining useful li(es of !! )ears and A )ears" respecti(el)>
'ropert)" plant" and e/uipment G!"2E + !! )ears I G!!
0ther intangibles G@C2 + A )ears I GAE

The impro(ement in e4port la$s results in a potential impairment reco(er) of GA; I G!"9@
5 G!"CB. 8o$e(er" carr)ing amounts ma) onl) be $ritten=up to the original cost less
accumulated amorti,ation (that $ould ha(e occurred $ithout the impairment loss).
4-25
Chapter 04 - International Financial Reporting Standards: Part I
-arr)ing amount of ''2 is limited to historical cost G!"C less depreciation of G2C (2
)ears at G!2C) I G!"2C1 carr)ing amount of 0ther Intangibles is limited to historical cost of
GC less amorti,ation of G2 (2 )ears at G!) I G@1 the carr)ing amount for total
assets at !2+@!+JB is limited to G!"CC (G!"2C H G@). Therefore" reco(er) of impairment
loss is G!AE (G!"CC = G!"A2)" $hich $ill be prorated to ''2 and 0ther Intangibles based
on relati(e carr)ing amounts. ?o reco(er) of impairment on good$ill is allo$ed.
'ropert)" plant" and e/uipment G!"9E + G!"A2 4 G!AE I G!!B
0ther intangibles G@A + G!"A2 4 G!AE I G @2
G&&*%"!!
Pr&pert6A P!a#tA
a#* EB"p,e#t
Other
I#ta#="+!e$ T&ta!
-arr)ing amount"
!2+@!+Jear C G G!"2E G@C2 G!"CB
Amorti,ation
e4pense" Jear B (!!) (AE) (!CE)
Subtotal G G!"9E G@A G!"A2
Impairment
loss+reco(er) !!B @2 !AE
-arr)ing amount"
!2+@!+Jear B G G!"2!A G@@B G!"CC
/4- C&,p!ete C&,pa#6 7 G&&*%"!! 9,ea$re,e#t a#* ",pa"r,e#t;
Part A-
Alternati!e 1 7 N&#)&#tr&!!"#= I#tere$t Mea$re* at Pr&p&rt"&#ate Share &: Fa"r Va!e
&: A)B"re* F"r,H$ Net A$$et$
Ca!)!at"&# &: N&#)&#tr&!!"#= I#tere$t
Fair (alue of net assets (e4cluding good$ill) (G2"" = GC") G!"C"
?oncontrolling interest F AF
?oncontrolling interest GB"
Ca!)!at"&# &: G&&*%"!!
-onsideration transferred G!"2"
'lus> ?oncontrolling interest B"
Subtotal G!"E"
3ess> Fair (alue of net assets (e4cluding good$ill) !"C"
&ood$ill G @"
4-26
Chapter 04 - International Financial Reporting Standards: Part I
Alternati!e " 7 N&#)&#tr&!!"#= I#tere$t Mea$re* at Fa"r Va!e
Ca!)!at"&# &: N&#)&#tr&!!"#= I#tere$t
Implied fair (alue of !F of 'artial -ompan) G!"2" + BF I G2""
?oncontrolling interest F AF
?oncontrolling interest GE"
Ca!)!at"&# &: G&&*%"!!
-onsideration transferred G!"2"
'lus> ?oncontrolling interest E"
Subtotal G2""
3ess> Fair (alue of net assets (e4cluding good$ill) !"C"
&ood$ill G C"
&ood$ill of GC" is comprised of G@" purchased b) -omplete plus G2"
attributed to the ?oncontrolling interest (GC" = G@").
Part B-
Alternati!e 1 7 N&#)&#tr&!!"#= I#tere$t Mea$re* at Pr&p&rt"&#ate Share &: Fa"r Va!e
&: A)B"re* F"r,H$ Net A$$et$ E()!*"#= G&&*%"!!
Ca!)!at"&# &: N&#)&#tr&!!"#= I#tere$t
Fair (alue of net assets (e4cluding good$ill) (G2"" = GC") G!"C"
?oncontrolling interest F 2F
?oncontrolling interest G@"
Ca!)!at"&# &: G&&*%"!!
-onsideration transferred G!"!"
'lus> ?oncontrolling interest @"
Subtotal G!"A"
3ess> Fair (alue of net assets (e4cluding good$ill) !"C"
&ain on bargain purchase G(!")
In this case" -omplete $ould recogni,e a gain from a bargain purchase in net income in the
)ear in $hich the ac/uisition ta%es place.
Alternati!e " 7 N&#)&#tr&!!"#= I#tere$t Mea$re* at Fa"r Va!e
Ca!)!at"&# &: N&#)&#tr&!!"#= I#tere$t
Implied fair (alue of !F of 'artial -ompan) G!"!" + EF I G!"@;C"
?oncontrolling interest F 2F
?oncontrolling interest G2;C"
4-27
Chapter 04 - International Financial Reporting Standards: Part I
Ca!)!at"&# &: G&&*%"!!
-onsideration transferred G!"!"
'lus> ?oncontrolling interest 2;C"
Subtotal G!"@;C"
3ess> Fair (alue of net assets (e4cluding good$ill) !"C"
&ain on bargain purchase G(!2C")
?ote> IFRS @.@A indicates that the gain on bargain purchase is attributable to ac/uirer.
Therefore" it does not appear that an) of the gain $ould be allocated to the noncontrolling
interest.
Part C- Assume that #om$lete #om$any ado$ted Alternati!e 1 in %art A to account
for noncontrolling interest
I,pa"r,e#t !&$$ "$ *eter,"#e* a$ :&!!&%$:
Part"a! C&- Part"a! C&-
Net a$$et$ G&&*%"!! T&ta!
-arr)ing amount G!"C" G@" G!"E"
#nrecogni,ed noncontrolling interest 2" 2"
Ad<usted carr)ing amount G!"C" GC" G2""
*etermination of reco(erable amount>
Fair (alue less costs to sell (a) G!"9" = G2" I G!"EE"
'resent (alue of future cash flo$s (b) !"EB"
Reco(erable amount (higher of (a) and (b)) !"EE"
Impairment loss (ad<usted carr)ing amount less reco(erable amount) G !2"
A!!&)at"&# &: ",pa"r,e#t !&$$:
All of the impairment loss is allocated to good$ill. Because 'artial -ompan) is a -&#" the
impairment loss is shared bet$een the controlling and noncontrolling interest. Thus"
G;2" (BF) is allocated to the parent7s in(estment in 'artial -ompan)1 the remaining
GAE" (AF) is attributed to the noncontrolling interest but is not recogni,ed.

Part"a! C&- Part"a! C&-
Net a$$et$ G&&*%"!! T&ta!
-arr)ing amount G!"C" G@" G!"E"
Impairment loss ;2" ;2"
-arr)ing amount after impairment loss G!"C" G22E" G!";2E"
Impairment loss G;2"
&ood$ill G;2"
4-2
Chapter 04 - International Financial Reporting Standards: Part I
Year 1 I#)&,e State,e#t
Impairment loss G;2"
E#* &: Year 1 C&#$&!"*ate* Ba!a#)e Sheet 9a,&#t$ re!ate* t& Part"a! C&,pa#6;
?et assets G!"C"
&ood$ill 22E"
?oncontrolling interest (B")
/0- Thr$t&#e C&,pa#6 7 B&rr&%"#= C&$t$ 9)ap"ta!"Gat"&#;
Interest cost (P@" 4 AF I P!2" 4 G2.! e4change rate on @+@!+J!) G2C"2
3ess> Income earned on temporar) in(estment (PC" 4 G2.!) (!"C)
?et interest cost G!A";
'lus> 24change rate loss (P@" 4 (G2.! = G2.)) @"
Total borro$ing cost to be capitali,ed at @+@!+J! GAA";
/1- At!a#ta T&r$ C&,pa#6 7 Lea$e$ 9)!a$$":")at"&#;
Finance 3ease -riteria -riterion metQ
0$nership is transferred to the lessee b)
the end of the lease term.
?o.
There is no indication that title transfers to
the lessee.
The lease contains a bargain purchase
option.
?o.
GA" purchase option R G@"C estimated
residual (alue
The lease term is a ma<or part of the
estimated economic life of the leased
propert).
'erhaps.
C )ears + E )ears I B2.CF1 might be <udged
as 9ma<or part:
The '6 of .3' is substantiall) all of the fair
(alue of the leased propert).
'erhaps.
GE"9@N + G!" I E9.@F1 might be <udged
as 9substantiall) all:
The leased assets are of such a speciali,ed
nature such that onl) the lessee can use
them $ithout ma<or modifications being
made.
'erhaps.
*uc% Boats Inc. probabl) $ould need to
remo(e the $ood car(ing to be able to sell or
lease the (ehicle to another customer. It is
unclear $hether this $ould be considered a
ma<or modification.
The lessee bears the lessor7s losses if the
lessee cancels the lease.
?o.
The lease is non=cancelable
The lessee absorbs the gains or losses from
fluctuations in the fair (alue of the residual
(alue of the asset.
?o.
The lessee ma) e4tend the lease for a
secondar) period at a rent substantiall)
belo$ the mar%et rent.
?o.
The lease ma) not be e4tended.
4-2!
Chapter 04 - International Financial Reporting Standards: Part I
N -alculation of '6 of .3'
'resent (alue factor for annuit) due" C pa)ments" BF I A.ABC!> G2" 4 A.ABC! I GE"9@
It is unclear $hether Atlanta Tours -ompan) should classif) this lease as a finance lease or as
an operating lease1 ultimatel)" it $ill be up to management7s <udgment. -ollecti(el)" the three
criteria that perhaps ha(e been met might lead to a decision that finance lease classification is
appropriate. This e4ercise demonstrates the <udgment needed to appl) IAS !;.
?ote> #nder #.S. &AA' this lease definitel) $ould not be capitali,ed" because it does not meet
an) of the capital lease criteria.
/2- F"e!*$ C&,pa#6 7 Sa!e-a#*-Lea$e+a)C 9re)&=#"t"&# &: =a"#;
Part A-
Because the leasebac% is an operating lease and the sales price appro4imates fair (alue"
Fields $ould record a sale and recogni,e a gain of G!" (GC" selling price =
GA" carr)ing amount).
Part B-
Because the leasebac% is an operating lease and the sales price of GC" is greater than
the fair (alue of GA;"" G@" $ould be deferred and amorti,ed at the rate of G!"
per )ear (G@" + @ )ears) o(er the three=)ear term of the lease. The remaining gain of
G;" (GA;" fair (alue = GA" carr)ing amount) $ould be recogni,ed immediatel)
in net income.
Part C-
Because this is a finance lease and there is no indication of impairment" Fields $ould defer
the gain of G!" (GC" selling price = GA" carr)ing amount) and amorti,e it
o(er the term of the lease at the rate of GC" per )ear (G!" + 2 )ears).
/3- Br"*=etH$ BaCer6 7 Operat"#= Lea$e
Total consideration for rent o(er the lease term is G292"C (G2"C for !!; months). This
consideration must be recogni,ed on a straight=line basis (unless another s)stematic basis
is more representati(e of the time pattern of the lessee7s benefit from using the leased
asset) o(er the entire lease period of ! )ears (!2 months)" resulting in a monthl) lease
e4pense of G2"A@;.C (G292"C + !2 months).
M&#th!6 I&r#a! e#tr6 :&r ea)h &: the :"r$t three ,&#th$ &: the !ea$e:
3ease e4pense G2"A@;.C
*eferred rent pa)able G2"A@;.C
*eferred rent pa)able has a balance of G;"@!2.C at the end of three months. This balance
is amorti,ed o(er the remaining !!; months at the rate of GB2.C per month (G;"@!2.C + !!;
months).
4-30
Chapter 04 - International Financial Reporting Standards: Part I
D&r#a! e#tr6 "# ,&#th$ 4 thr&=h 1.5:
3ease e4pense G2"A@;.C
*eferred rent pa)able B2.C
-ash G2"C.
?ote> SI-=!C Operating Leases-Incenties directl) relates to this situation.
/4- A))epta+!e Treat,e#t$
A))epta+!e #*er
IFRS <-S- GAAP B&th Ne"ther
A compan) ta%es out a loan to finance the
construction of a building that $ill be used b) the
compan). The interest on the loan is capitali,ed
as part of the cost of the building.
E
In(entor) is reported on the balance sheet using
the last=in" first=out (3IF0) cost flo$ assumption. E
The gain on a sale and leasebac% transaction
classified as an operating lease is deferred and
amorti,ed o(er the lease term.
E
A compan) $rites a fi4ed asset do$n to its
reco(erable amount and recogni,es an
impairment loss in Jear !. In a subse/uent
)ear" the reco(erable amount is determined to
e4ceed the asset7s carr)ing amount" and the
pre(iousl) recogni,ed impairment loss is
re(ersed.
E
A compan) pa)s less than the fair (alue of net
assets in the ac/uisition of another compan).
The ac/uirer recogni,es the difference as a gain
on purchase of another compan).

E
A compan) enters into an eight=)ear lease on
e/uipment that is e4pected to ha(e a useful life
of ten )ears. The lease is accounted for as an
operating lease.
E
1
An intangible asset $ith an acti(e mar%et that
$as purchased t$o )ears ago is carried on the
balance sheet at fair (alue.
E
In preparing interim financial statements" interim
periods are treated as discrete reporting periods
rather than as an integral part of the full )ear.
E
Research and de(elopment costs are
capitali,ed $hen certain criteria are met. E
.
Interest paid on borro$ings is classified as an
operating acti(it) in the statement of cash flo$s. E
4-31
Chapter 04 - International Financial Reporting Standards: Part I
4-32
Chapter 04 - International Financial Reporting Standards: Part I
!
This $ould be acceptable under IAS !; if EF of the life of the lease is not (ie$ed as the
9ma<or part: of the lease.
2
?either IFRS nor #.S. &AA' allo$s capitali,ation of research costs.
CASE 4-1 Be$$ra%! C&rp&rat"&#- THIS IS ON THE FINAL TEST!
ST<DY THIS BECA<SE HE JILL NOT GO OVER IT AND
MOST PEOPLE FAILED BECA<SE OF THIS '<ESTION!!
Re)&#)"!"at"&# :r&, <-S- GAAP t& IFRS

.511
I#)&,e #*er <-S- GAAP
K1A555A5
55
A*I$t,e#t$:
Re(ersal of $ritedo$n of in(entor) to replacement cost !"
Additional depreciation on re(aluation of e/uipment (2C")
Impairment loss on intangible asset (brand) (C")
Recognition of deferred de(elopment costs E"
Re(ersal of amorti,ation of deferred gain on sale and leasebac% (@")
I#)&,e #*er IFRS K1A5/5A555
.511
St&)Ch&!*er$H eB"t6 #*er <-S- GAAP
K3A555A5
55
A*I$t,e#t$:
Re(ersal of $ritedo$n of in(entor) to replacement cost !"
0riginal re(aluation surplus on e/uipment B"
Accumulated depreciation on re(aluation of e/uipment (2C")
Impairment loss on intangible assets (brand) (C")
Recognition of deferred de(elopment costs E"
Recognition of gain on sale and leasebac% in 29 !C"
Accumulated amorti,ation of deferred gain on sale and leasebac% (29=2!!) (9")
St&)Ch&!*er$H eB"t6 #*er IFRS K3A2.5A555
E(p!a#at"&# &: A*I$t,e#t$
In!entory& #nder #.S. &AA'" the compan) reports in(entor) on the balance sheet at the lo$er
of cost or mar%et" $here mar%et is defined as replacement cost (G!E")" $ith net reali,able
(alue (G!9") as a ceiling and net reali,able (alue less a normal profit (G!C2") as a floor.
4-33
Chapter 04 - International Financial Reporting Standards: Part I
In this case" in(entor) $as $ritten do$n to replacement cost and reported on the *ecember @!"
2!! balance sheet at G!E". A G;" loss $as included in 2!! income.
4-34
Chapter 04 - International Financial Reporting Standards: Part I
In accordance $ith IAS !" the compan) $ould report in(entor) on the balance sheet at the lo$er
of cost (G2C") and net reali,able (alue (G!9"). In(entor) $ould ha(e been reported on
the *ecember @!" 2!! balance sheet at net reali,able (alue of G!9" and a loss on
$ritedo$n of in(entor) of GB" $ould ha(e been reflected in net income.
IFRS income $ould be G!" larger than #.S. &AA' net income. IFRS retained earnings
$ould be larger b) the same amount.
Equi$ment- #nder #.S. &AA'" the compan) reports depreciation e4pense of G!"
S(G2";C" 5 G2C") + 2C )earsT in 2! and in 2!!.
#nder IAS 167s re(aluation model" depreciation e4pense on e/uipment in 2! $as G!""
resulting in a boo% (alue at the end of 2! of G2"BC". The e/uipment then $ould be
re(alued up$ard at the beginning of 2!! to its fair (alue of G@"2C".
The appropriate <ournal entr) to recogni,e the re(aluation $ould be>
2/uipment GB"
Re(aluation Surplus (a stoc%holders7 e/uit) account) GB"
In 2!!" depreciation e4pense $ould be G!2C" S(G@"2C" = G2C")+2A )earsT.
The additional depreciation under IFRS causes IFRS=based income in 2!! to be G2C"
smaller than #.S. &AA' income. IFRS=based stoc%holders7 e/uit) is GC;C" larger than #.S.
&AA' stoc%holders7 e/uit). This is e/ual to the amount of the re(aluation surplus (GB")
less the additional depreciation in 2!! under IFRS (G2C")" $hich reduced retained earnings.
Intangible Assets& #nder #.S. &AA'" an asset is impaired $hen its carr)ing amount e4ceeds
the undiscounted future cash flo$s e4pected to arise from continued use of the asset. The
brand ac/uired in 2E has a carr)ing amount of GA" and future e4pected cash flo$s are
GA2"" so it is not impaired under #.S. &AA'.
#nder IAS @B" an asset is impaired $hen its carr)ing amount e4ceeds its reco(erable amount"
$hich is the greater of net selling price and (alue in use. The brand7s reco(erable amount is
G@C"1 the greater of net selling price of G@C" and (alue in use (present (alue of future
cash flo$s) of G@A". As a result" an impairment loss of GC" $ould be recogni,ed under
IFRS.
IFRS income and retained earnings $ould be GC" less than #.S. &AA' income and retained
earnings.
'esearch and (e!elo$ment #osts& #nder #.S. &AA'" research and de(elopment e4pense in
the amount of G2" $ould be recogni,ed in determining 2!! income.
#nder IAS 38" G!2" (BF 4 G2") of research and de(elopment costs $ould be
e4pensed in 2!!" and GE" (AF 4 G2") of de(elopment costs $ould be capitali,ed as
an intangible asset (deferred de(elopment costs).
4-35
Chapter 04 - International Financial Reporting Standards: Part I
IFRS=based income in 2!! $ould be GE" larger than #.S. &AA' income. Because the
ne$ product has not )et been brought to mar%et" there is no amorti,ation of the deferred
de(elopment costs under IFRS in 2!!.
Sale and )easeback& #nder #.S. &AA'" the gain on the sale and leasebac% (operating lease)
is recogni,ed in income o(er the life of the lease. Dith a lease term of fi(e )ears" G@" of
the gain $ould be recogni,ed in 2!!. G@" also $ould ha(e been recogni,ed in 29 and
2!" resulting in a cumulati(e amount of retained earnings at )ear=end 2!! of G9".
#nder IAS 17" the entire gain on the sale and leasebac% of G!C" $ould ha(e been
recogni,ed in income in 29. This resulted in an increase in retained earnings of G!C" in
that )ear. ?o gain $ould be recogni,ed in 2!!. IFRS income in 2!! $ould be G@"
smaller than #.S. &AA' income" but stoc%holders7 e/uit) at *ecember @!" 2!! under IFRS
$ould be GB" larger than under #.S. &AA'.

4-36