Ifrs Test 2 - Topic 6

Front 1

In refinancing a short-term obligation into a long-term obligation, what is the primarydifference between US GAAP and IFRS?

a. There is no difference because both require the refinancing to be in placebefore the audited financial statements are issued.

b. There is no difference because both require the refinancing to be in placebefore year-end.

c. US GAAP requires the refinancing to be completed before year-end, whileIFRS requires the refinancing to be in place before the audited financialstatements are issued.

d. US GAAP requires the refinancing to be in place before the audited financialstatements are issued, while IFRS requires the refinancing to be completed beforeyear-end.

Back 1

d. US GAAP requires the refinancing to be in place before the audited financial statements are issued, while IFRS requires the refinancing to be completed before year-end.

Front 2

Using IFRS, a contingent asset, including a reimbursement such as for an environmentalliability, is only recorded when it is probable it will be received.

a. True

b. False

Back 2

b. False

Using IFRS, a contingent asset, including a reimbursement such as for an environmentalliability, is only recorded when it is virtually certain of being realized. Using US GAAP, again contingency can be recorded when it is probable (interpreted as greater than a 70%chance) it will be received.

Front 3

Slim Drug Company produced a new drugtreatment for obesity. It received government approval in 2015 and the company began sellingthe drug in 2016. At a staff meeting in late 2016, the controller suggests setting up a provisionfor possible future claims related to the new drug. The controller states that this would result inbetter matching revenues and expenses.

Using US GAAP, what would be the most appropriate response to the controller’ssuggestion:

a. Because sales began in 2016, some expenses should be recorded in 2016 forfuture claims to result in proper matching.

b. If it is more likely than not claims will be made, then a provision for futureclaims should be made.

c. If it is more likely than not claims will be made and an estimate of the amount ofthose claims can be reasonably estimated, then a provision should berecorded.

d. There is no basis for a provision to be recorded at this time.

Back 3

d. There is no basis for a provision to be recorded at this time.

Front 4

Slim Drug Company produced a new drug treatment for obesity. It received government approval in 2015 and the company began selling the drug in 2016. At a staff meeting in late 2016, the controller suggests setting up a provision for possible future claims related to the new drug. The controller states that this would result in better matching revenues and expenses.

Using IFRS, what would be the most appropriate response to the controller’s suggestion:

a. Because sales began in 2016, some expenses should be recorded in 2016 for future claims to result in proper matching.

b. If it is more likely than not claims will be made, then a provision for future claims should be made.

c. If it is more likely than not claims will be made and an estimate of the amount of those claims can be reasonably estimated, then a provision should be recorded.

d. There is no basis for a provision to be recorded at this time.

Back 4

d. There is no basis for a provision to be recorded at this time.

Front 5

Best Manufacturing Company has aDecember 31 year-end. Due to decreased demand for its product, it decided to reduceproduction at its only manufacturing plant from two shifts to one shift. The total separation payto the second shift employees is estimated to be $1 million. This plan was reviewed andapproved by the Board of Directors on December 15. Because of the holiday season,management made the decision to delay informing second shift employees of their terminationuntil early January.

Of the following statements, which best describes the appropriate accounting for thissituation using US GAAP?

a. It is more likely than not that a separation obligation will be incurred since theplan has been approved by the Board of Directors. Therefore, the separationpay should be accrued at December 31.

b. A constructive obligation exists as of the approval date by the Board ofDirectors and an accrual should be made for the estimated separation costs.

c. No accounting is required as of December 31, but disclosure may be required.

d. It is likely a liability has been incurred once the Board of Directors approved the plan.The amount to be accrued is dependent on the remaining service period of the second-shiftemployees.

Back 5

c. No accounting is required as of December 31, but disclosure may be required.

Front 6

Best Manufacturing Company has a December 31 year-end. Due to decreased demand for its product, it decided to reduce production at its only manufacturing plant from two shifts to one shift. The total separation pay to the second shift employees is estimated to be $1 million. This plan was reviewed and approved by the Board of Directors on December 15. Because of the holiday season, management made the decision to delay informing second shift employees of their termination until early January.

Of the following statements, which best describes the appropriate accounting for thissituation using IFRS?

a. It is more likely than not that a separation obligation will be incurred since the plan has been approved by the Board of Directors. Therefore, the separation pay should be accrued at December 31.

b. A constructive obligation exists as of the approval date by the Board of Directors and an accrual should be made for the estimated separation costs.

c. No accounting is required as of December 31, but disclosure may be required.

d. It is likely a liability has been incurred once the Board of Directors approved the plan. The amount to be accrued is dependent on the remaining service period of the second-shift employees.

Back 6

c. No accounting is required as of December 31, but disclosure may be required.

Front 7

Quality Furniture produces handmade furniture. It has a leased plant in Michigan which itclosed in the fourth quarter of 2015. The lease is not cancelable and one year of the leaseremains as of December 31, 2015. The annual lease payment is $200,000. There is noprospect of subleasing this plant. The production was moved to Mexico to reduce laborcosts. During the fourth quarter of 2015, there was a reduction of labor costs of $50,000,while production remained constant. The controller conservatively estimates the laborsavings will exceed $200,000 in 2016. Assuming the company reports using US GAAP,what, if any, accounting is required for this lease? Assuming the company reports usingIFRS, would your answer be different? If so, why?

Back 7

The lease is an onerous contract since there is no expected future benefit from this lease.Using either US GAAP or IFRS, the entire $200,000 would be expensed and a liabilitycreated in the fourth quarter of 2015.