Solution manual advanced accounting 4e jeter ch11

The Monitoring Board also highlighted the importance of „independence and transparency in the standard setter‟s due process.‟ October 8, 2009 The International Accounting Standards Board

Chapter 11 ANSWERS TO QUESTIONS

1 There might be considerable training costs in switching to IFRS because U.S investors and accountants will need to learn how to apply and interpret IFRS The use of IFRS might also reduce the quality of financial reports and impede comparability as the IFRS GAAP allows more judgment by management Managers may choose to use methods that make them look better Finally, it is not clear who will handle the enforcement of the international rules and how violators might be punished

2 Two major projects are revenue recognition and financial statement presentation Currently, U.S GAAP provides significant guidance for revenue recognition, specifically with regards to some industries It is hoped that the joint effort can lead to a joint revenue recognition standard that might eliminate guidance required for different industries A second joint project is the financial statement presentation project This project would provide consistent presentation of the financial statement and eliminate alternative reporting options

3 The interest in harmonizing international accounting standards is due to many factors Currently, most countries have their own accounting standard setting bodies resulting in a divergence of accounting practices in the world In addition, the application of principles varies As international trade and cross-border financing increase, it is difficult to evaluate the financial status of firms The divergent accounting standards reduce the efficiency of the capital markets

4 The SEC has been reluctant to accept IAS because they are more general and often provide little guidance on applying the methods The SEC believes that the efficiency of the US markets is partly due to the high level of reporting required in the US and that any reduction in this quality would result in less efficient markets However, over the last several years, the international rules and the U.S rules have been converging and many of the significant differences that

existed in the past have been eliminate

5 ADRs are classified as either sponsored or unsponsored Unsponsored ADRs are becoming less popular These occur when a bank offers a DR program without an agreement with the issuing non-US company Sponsored programs require an exclusive agreement between a bank and the non-US company There are four types

of sponsored ADR programs: for firms not issuing capital there are Level I and Level II ADR programs, and for firms issuing capital, there are Level III and Rule

144 A programs

6 In a 1998 report of the FASB regarding the future of international accounting, the FASB described its vision of a successful international accounting system The FASB stated its belief that the worldwide use of a single set of accounting standards

is desirable and eventually attainable, but that the ideal outcome will result from

“pursuing the overall objective of increasing international compatibility while maintaining the highest quality accounting standards in the United States.” Over the last five years, the FASB has worked jointly with the IASB on issuing new

standards and converging accounting standards

7 The FASB outlined the following four points:

a The FASB has a leadership role to play in the evolution of the international accounting system

b The FASB is willing to commit the required resources needed to ensure high quality standards while increasing the convergence and quality of standards used

in different nations until the ideal outcome is achieved

c The FASB will participate in establishing a quality international accounting standard-setting structure and process

d The FASB recognizes that structural and procedural changes to the FASB may result, as well as potential changes in its national role

8 Some of the major differences between U.S GAAP and IFRS are:

a LIFO is acceptable in the U.S but not allowed under IFRS

b IFRS requires that the parent and subsidiaries use the same accounting methods, while in the U.S they can use alternative methods

c R&D is expensed in the U.S while only research is expensed under IFRS and development costs are capitalized and amortized over future years

Business Ethics

Business ethics solutions are merely suggestions of points to address The objective is to raise the students' awareness of the topics, and to invite discussion In most cases, there is clear room for disagreement or conflicting viewpoints

1 The separation of duties is an important feature of maintaining adequate internal controls In this case, the individual submitting invoices should not be the same individual that approves the invoices It is appropriate for high level

management to approve departures from normal procedures, but it is still

necessary to have controls to address this case

2 Unfortunately there are instances where ethics and compliance programs are designed for mid- and lower-level employees This should not lead anyone to believe that upper-level managers are always ethical

3 This is a very difficult issue for companies to balance On one hand, the

managers of these companies do not want stockholders and other users of the financial statements to have a mistaken belief concerning the issues at hand If the information is not reliably disclosed, there might be an adverse impact on the firm‟s stock price But at the same time, they don‟t want to appear to be hiding information In this case, the users might believe that more significant issues are being withheld, and a negative stock price reaction might occur regardless

EXERCISE 11-1 Component Depreciation LO2

The following entries would be recorded assuming either U.S GAAP or IFRS is used

U.S GAAP

IFRS

The entry to record depreciation expense would be:

Part A: Depreciation expense

U.S GAAP

Part B: Depreciation expense

IFRS

Depreciation Building – electrical systems (12,000/20) 600

Depreciation Building – Other (73,000/40) 1,825

EXERCISE 11-2

Two examples from the webpage are:

September 22, 2009

The Trustees of the IASC Foundation, the oversight body of the International Accounting Standards Board (IASB), welcomed today‟s statement by the Monitoring Board, a group of public capital market authorities to whom the IASC Foundation established a public

accountability link In its statement of principles, the Monitoring Board emphasised the relevance of providing high-quality financial information to ensure the confidence of capital providers in making investment decisions The Monitoring Board also highlighted the

importance of „independence and transparency in the standard setter‟s due process.‟

October 8, 2009

The International Accounting Standards Board (IASB) issued today an amendment to IAS 32

Financial Instruments: Presentation The amendment addresses the accounting for rights

issues (rights, options or warrants) that are denominated in a currency other than the

functional currency of the issuer Previously such rights issues were accounted for as

derivative liabilities However, the amendment issued today requires that, provided certain conditions are met, such rights issues are classified as equity regardless of the currency in which the exercise price is denominated

EXERCISE 11-3

IFAC is the global organization for the accountancy profession It works with its 157 members and associates in 123 countries and jurisdictions to protect the public interest by encouraging high quality practices by the world's accountants IFAC members and associates, which are primarily national professional accountancy bodies, represent 2.5 million accountants employed in public practice, industry and commerce, government, and academia Through its independent

standard-setting boards, IFAC develops international standards on ethics, auditing and assurance, education, and public sector accounting standards It also issues guidance to support professional accountants in business, small and medium practices, and developing nations

One example from the webpage is:

September 23, 2009

IFAC's Bunting Calls for Global Commitment to High-Quality Financial Standards to Solve Crisis

Mr Bunting reminded the audience that every kind of entity needs the financial information that high-quality standards provide as we move toward recovery from the recession Businesses in Latin America and the Caribbean often need to prove their economic viability as business partners for new opportunities in the Middle East and China, or for ongoing ones in this hemisphere

Governments need to confirm their fiscal health for the capital markets or for membership in regional economic organizations

EXERCISE 11-4 IFRS Balance Sheet LO2

A What order are assets listed on the balance sheet? The assets are listed in order of

increasing liquidity The most liquid asset is listed last (cash)

B Comment on other differences (IFRS relative to U.S GAAP) that you might notice on

the balance sheet

Liabilities and equity are also reversed using IFRS Equity accounts are listed above the liability accounts In addition, issue capital is commonly called common stock in the U.S Treasury stock is usually the last item listed in stockholders‟ equity, but that is not the case under IFRS

C What is the current ratio for the year’s ending March 31, 2006 and 2007?

2006 Current ratio =

091 , 8

493 , 8 = 1.0496

2007 Current ratio =

160 , 8

434 , 8 = 1.0336

The current ratio has decreased slightly

D What is the ratio of long-term debt to equity for the year’s ending March 31, 2006 and

2007?

2006 long-term debt to equity ratio =

853 , 7

826 , 7 = 0.9965

2007 long-term debt to equity ratio =

412 , 8

419 , 7 = 0.8819

2006 Non-current liabilities to equity ratio =

853 , 7

535 , 10

= 1.3415

2007 Non-current liabilities to equity ratio =

412 , 8

098 , 10

= 1.2004 Both ratios indicate a decreasing leverage ratio

E Are there any typical balance sheet ratios that can’t be computed using the

IFRS-based financial statement?

No, all the same balance sheet ratios can be computed

PROBLEM 11-1 LO2

A Are expenditures reported on BP’s income statement reported by function or by nature

of the expense? Be specific Do you think that this format is more or less useful for users

of the financial statements?

BP‟s income statement lists expenses by nature This can be determined by examining the expenses Instead of listing cost of goods sold, the expenses are listed as purchases, production and manufacturing expenses, and depreciation expenses

B On the BP income statement, what is the earnings from affiliates usually referred to in

the U.S.?

In the U.S., investments in affiliates are typically equity method investments where the investor owns between 20 and 50% of the outstanding stock

C On ExxonMobil’s income statement, are the expenses listed by function or by nature?

ExxonMobil‟s income statement discloses expenses using a combination of function and nature This can be determined by examining the expenses Some expenses are listed by the function, such as selling, general and administration expense while other expenses such as manufacturing costs are expensed by nature (such as crude oil purchases, production and manufacturing expenses, and depreciation)

D Compare the performance of BP relative to ExxonMobil Is it easy to compare the

numbers from companies using IFRS to companies using U.S GAAP?

Looking at the growth in revenues and the bottom line profit margin percentage (profit divided by revenues), ExxonMobil‟s revenues grew at 18% resulting in an 11.4% growth

in profits BP‟s revenues grew at almost 26%, which resulted in a modest 2.3% growth in net income Because the two companies prepare the income statement prepared using either the nature or the function of the expenses, direct comparisons of certain items, such

as gross margin, are more difficult without extensive reading of the footnotes

E Does it matter that BP is using FIFO and ExxonMobil is using LIFO for inventory?

The LIFO reserve decreased by $15.4 billion dollars in 2008

Because the LIFO reserve dropped, reported income using LIFO will exceed the amount

of income reported using FIFO The user would need to determine if the change in the LIFO reserve was caused by falling prices or merely a reduction in inventory levels This can have a significant impact on how you might interpret the results of operations for ExxonMobil

PROBLEM 11-2 IFRS Income Statement and Terminology Differences LO2

A On the income statement, the first two lines in Unilever’s income statement are

Turnover and then Operating profit What does the term ‘Turnover’ mean? Which costs are typically reported between ‘Turnover’ and operating profit?

The term „turnover‟ is a term that is used internationally to indicate revenues or sales In the financial statement for Unilever, the income statement simply listed „turnover‟ and then operating profit on the next line If you examine the footnotes, you would see that expenses not listed as a line item on the income statement (items between sales and operating margin) include cost of sales, distribution and selling costs, and administration expenses

B How useful is Unilever’s income statement presentation considering that this

information about expenses is disclosed in footnote 3 rather than being reported on the face of the income statement?

The answer to this question depends on whether you believe that important line items should be disclosed on the face of the income statement versus disclosing the detail in a footnote to the financial statements If companies only delivered summary financial statements to the users, this detail (the amount of off-balance sheet payments) often might not be disclosed Information concerning the change in gross margin provides useful information to users about the growth in inventory costs relative to the change in revenues

PROBLEM 11-3 Illustrated Financial Statements

No solution is provided for this problem

Problem 11-4 Financial Statement Presentation

Operating assets and liabilities

Short-term

Long-term

Net operating assets 1,034,400 1,120,800

Investing assets

Short-term

Long-term

Net business assets 1,068,000 1,159,200 FINANCING

Financing assets

Short-term

Financing liabilities

Short-term

Long-term

Net financing liabilities (160,800) (236,400)

Problem 11-4 (continued)

INCOME TAXES

Short-term

Long-term

Net income tax liability (85,200) (58,800)

EQUITY

Total liabilities and equity 1,324,200 1,395,600

The solution listed above is in agreement with the discussion paper issued by the FASB

in October 2008 However, in a subsequent meeting (November 2009), the FASB changed some of the aspects of the draft The following are the changes that the FASB proposed to the original discussion paper on October 2008

1 Equity will no longer be a separate category, but will be included within the Financing Section

2 Cash and short-term financial assets (or financial liabilities) used as a substitute for cash will be included in the business section (rather than reported in the financing section)

See note at the end of the solutions manual regarding other changes made by the FASB

PROBLEM 11-5 Financial Statement Presentation –Statement of Comprehensive Income

Statement of Comprehensive Income For the year ended 2011

Total selling expense 18,000

General and administration Expenses:

Total general and administration expense 142,000

Other operating expense (income)

Loss on sale of equipment

10,000

Total other operating expense (income) (4,000)

Unrealized loss on available for sale securities (11,000)