Question 1

IFRS 3 Business Combinations Goodwill and noncontrolling interest. An option is added to IFRS 3 to permit an entity to recognise 100% of the goodwill of the acquired entity, not just the acquiring entity's portion of the goodwill, with the increased amount of goodwill also increasing the noncontrolling interest [new term for 'minority interest'] in the net assets of the acquired entity. This is known as the 'full goodwill method'. Such noncontrolling interest is reported as part of consolidated equity. The 'full goodwill' option may be elected on a transaction-by-transaction basis. Example A pays 800 to purchase 80% of the shares of B. Fair value of 100% of S's identifiable net assets is 600. If A elects to measure noncontrolling interests as their proportionate interest in the net assets of B of 120 (20% x 600), the consolidated financial statements show goodwill of 320 (800 +120 600). If A elects to measure noncontrolling interests at fair value and determines that fair value to be 185, then goodwill of 385 is recognised (800 + 185 - 600). The fair value of the 20% noncontrolling interest in B will not necessarily be proportionate to the price paid by A for its 80%, primarily due to control premium or discount as explained in paragraph B45 of IFRS 3.

Relevance and reliability Relevance and reliability are two of the four key qualitative characteristics of financial accounting information. Relevance requires that the financial accounting information should be such that the users need it and it is expected to affect their decisions. Reliability requires that the information should be accurate and true and fair. Relevance and reliability are both critical for the quality of the financial information, but both are related such that an emphasis on one will hurt the other and vice versa. Hence, we have to trade-off between them. Accounting information is relevant when it is provided in time, but at early stages information is uncertain and hence less reliable. But if we wait to gain while the information gains reliability, its relevance is lost

Recognition in financial statements IAS 38 defines an intangible asset as 'an identifiable non-monetary asset without physical substance held for use in the production or supply of goods or services, for rental to others, or for administrative purposes'. Among other things, there should be a resource that is controlled by an enterprise and that is clearly distinguishable from the enterprise's goodwill. IAS 38 requires an enterprise to recognize an intangible asset in its financial statements if, and only if: it is probable that the future economic benefits that are attributable to the asset will flow to the enterprise; and the cost of the asset can be measured reliably

IAS 38 applies to all intangible assets other than: [IAS 38.2-3]

financial assets exploration and evaluation assets (extractive industries) expenditure on the development and extraction of minerals, oil, natural gas, and similar resources intangible assets arising from insurance contracts issued by insurance companies

intangible assets covered by another IFRS, such as intangibles held for sale, deferred tax assets, lease assets, assets arising from employee benefits, and goodwill. Goodwill is covered by IFRS 3

Question 2 10 marks

A. staff training cost is an expense to the company. The knowledge gained can be a non financial asset but its benefits can not be measured. So training of staff would be an expense to the company. The argument against capitalizing the costs of training employees has centered on the definition of an asset. An asset is either owned or controlled by an entity, and employees are neither owned nor controlled by the entity. Nonetheless, the future service potential of employees is given recognition in pension accounting. When unfunded, an accumulated benefit obligation is recorded with a credit to minimum liability B. conducting research for alternative fuel sources is an expense. The solar power that company has evaluated can be a non financial asset. But at the end the cost incurred is an expense to the company. C. It is asset for the company to get some type of legal laws to protect the copy right. This will help the company benefit in future with the legal laws in place no one will b able to breach the copy right as laws will be there.

Question 3 5 marks

The expense of 2003 is incorrectly recorded as expense of 2004. the expense for 2004 has increased and profit has decreased. It should have been a capital expenditure. The accountant should increase the retained earnings. The accountant should correct this error when preparing the 20X5 financial statement he should increase asset by putting Property plant and equipement which will increase the profit in the end. The accountant can also disclose a note of the error as the financial users will be able to better understand.

Accounting errors may be classified by the time of discovery or according to their effect on the balance sheet, income statement or both. Occurrence and discovery in different periods. In this case, the cumulative effect of each error on periods prior to the period of discovery must be calculated and recorded as a direct adjustment to the beginning balance of retained earnings.

You should restate prior period financial statements when there is an error correction. Restatement requires that you: Reflect the cumulative effect of the error on periods prior to those presented in the carrying amounts of assets and liabilities as of the beginning of the first period presented; and Make an offsetting adjustment to the opening balance of retained earnings for that period; and

Adjust the financial statements for each prior period presented, to reflect the error correction

Question 4 IFRS is more Principles Based whereas the US GAAP is more rules based. Discuss the reality of this statement. The International Financial Reporting Standards (IFRS) is an accounting standard used in more than 110 countries. IFRS has some key differences from the U.S Generally Accepted Accounting Principles (US GAAP). At the conceptually level, IFRS is considered more of a "principles based" accounting standard in contrast to U.S. GAAP which is considered more "rules based." By being more "principles based", IFRS, arguably, represents and captures the economics of a transaction better than U.S. GAAP In a principle-based accounting system, the areas of interpretation or discussion can be clarified by the standards-setting board, and provide fewer exceptions than a rules-based system. However, IFRS include positions and guidance that can easily be considered as sets of rules instead of sets of principles. At the time of the IFRS adoption, this led English observers to comment that international standards were really rule-based compared to U.K. GAAP that were much more principle-based. Following are some of differences between the two accounting frameworks Intangibles The treatment of acquired intangible assets helps illustrate why IFRS is considered more "principles based." Acquired intangible assets under U.S. GAAP are recognized at fair value, while under IFRS, it is only recognized if the asset will have a future economic benefit and has measured reliability. Intangible assets are things like R&D and advertising costs. Inventory Costs Under IFRS, the last-in, first-out (LIFO) method for accounting for inventory costs is not allowed. Under U.S. GAAP, either LIFO or first-in, first-out (FIFO) inventory estimates can be used. The move to a single method of inventory costing could lead to enhanced comparability between countries, and remove the need for analysts to adjust LIFO inventories in their comparison analysis.
Write Downs

Under IFRS, if inventory is written down, the write down can be reversed in future periods if specific criteria are met. Under U.S. GAAP, once inventory has been written down, any reversal is prohibited. (To learn more, check out International Reporting Standards Gain Global Recognition)

 Consolidation IFRS favors a control model whereas U.S. GAAP prefers a risks-and-rewards model. Some entities consolidated in accordance with FIN 46(R) may have to be shown separately under IFRS. Statement of Income Under IFRS, extraordinary items are not segregated in the income statement, while, under US GAAP, they are shown below the net income. Earning-per-Share Under IFRS, the earning-per-share calculation does not average the individual interim period calculations, whereas under U.S. GAAP the computation averages the individual interim period incremental shares.
Development costs

These costs can be capitalized under IFRS if certain criteria are met, while it is considered as expenses under U.S. GAAP. The difference between these two approaches is on the methodology to assess an accounting treatment. Under U.S. GAAP, the research is more focused on the literature whereas under IFRS, the review of the facts pattern is more thorough. Question 5

Why is IFRS so strong in using Fair Value instead of Historical Cost for its valuations of Property Plant and Equipment?

Fair value is the estimated value of all assets and liabilities of an acquired company used to consolidate the financial statements of both companies. In the futures market, fair value is the equilibrium price for a futures contract. This is equal to the spot price after taking into account compounded interest over a certain period of time whereas historical cost is a measure of value used in accounting in which the price of an asset on the balance sheet is based on its nominal or original cost when acquired by the company. The historical-cost method is used for assets in the U.S. under generally accepted accounting principles (USGAAP). International Financial Reporting Standard (IFRS) defines Fair value as the amount for which an asset could be exchanged or a liability settled between knowledgeable willing parties in an arms length transaction. Whereas Historical cost ignores the amount the asset could be sold for in the open market, called fair value, until the asset is actually sold. IFRS offers Companies the choice between recognizing investment property at historical cost or fair value. If a company chooses to recognize investment property at historical cost, it must

systematically depreciate the acquisition costs and disclose the investment property's fair value in the notes accompanying the financial statements. In contrast, if a company chooses to apply fair value, changes in the investment property's value become part of operating income and the assets are not subject to depreciation. The appropriate use of fair value accounting it is more relevant to users of financial statements and offers greater transparency. For historical cost the company carries the asset on the balance sheet at the purchase cost less any depreciation taken. At the time of sale, the company records a gain or a loss against the purchase cost of an asset less any depreciation if applicable. The historical cost principle follows the accounting quality of reliability since everyone can agree on the original purchase price of an asset. However, the historical price is not necessarily relevant information. For example the land that was purchased 20 years ago could be worth much more than the balance sheet shows. Based on the historical-cost principle, under U.S. GAAP, most assets held on the balance sheet are to be recorded at the historical cost even if they have significantly changed in value overtime. For example: the main headquarters of a company, which includes the land and building, was bought for $100,000 in 1980, and its expected market value today is $20 million. The asset is still recorded on the balance sheet at $100,000. Not all assets are held at historical cost. For example, marketable securities are held at market value on the balance sheet. Thus, under historical cost accounting, companies will, in practice, value assets close to fair value if depreciated historical cost exceeds fair value. In contrast, under fair value accounting, companies revalue assets either upward or downward depending on the change in the fair value estimate. This implies that book values of assets (equity) are likely to be higher for companies that use fair value accounting.