Page 1 of 5 Gleim Exam Questions and Explanations Updates to Financial Accounting 16-1 Edition, 1st Printing February 3, 2012 NOTE: Text that should be deleted from the outline is displayed with a line through the text. New text is shown with a blue background. Study Unit 1 The Financial Reporting Environment Page 32, Differences between GAAP and IFRSs: This update removes incorrect information regarding the first presentation of IFRS financial statements. IFRS 1, First-time Adoption of International Financial Reporting Standards, applies when an entity first issues annual financial statements adopting IFRSs that include an explicit and unreserved statement of compliance with IFRSs. An entity adopting IFRSs must prepare an opening IFRSs statement of financial position at the date of transition to serve as the starting point for accounting under IFRSs. The date of transition is the start of the first period for which the entity presents full IFRSs comparative information in its first IFRSs financial statements. However, the opening statement of financial position need not be presented in the first IFRSs financial statements. The accounting policies applied in the opening IFRSs statement of financial position and for all periods in the first IFRSs financial statements must be those in effect at the end of the first IFRSs reporting period. EXAMPLE: In its annual financial statements for the reporting period ending December 31, Year 3, an entity adopts IFRSs for the first time. These statements are the first IFRSs statements because they include an explicit and unreserved statement of compliance with IFRSs. The statements also contain full comparative information for Years 1 and 2. The date of transition is January 1, Year 1, and the entity prepared a statement of financial position as of that date to serve as the starting point for IFRSs accounting. But this statement of financial position may properly be omitted from the first IFRSs statement. The first IFRSs reporting period is Year 3 because it is the latest period covered by the first IFRSs statements.
Page 55, Question 69: This edit clarifies and improves the discussion regarding the IFRS date of transition. Page 2 of 5 69. On July 1, Year 2, a company decided to adopt IFRSs. The company s first IFRSs reporting period is as of and for the year ended December 31, Year 2. The company will present 1 year of comparative information. What is the company s date of transition to IFRSs? A. January 1, Year 1. B. January 1, Year 2. C. July 1, Year 2. D. December 31, Year 2. Answer (A) is correct. (CPA, adapted) REQUIRED: The date of transition to IFRSs. DISCUSSION: Under IFRS 1, First-Time Adoption of International Financial Reporting Standards, a first-time adopter must comply with IAS 1, Presentation of Financial Statements. IAS 1 states that the first statements must include at least 1 year of comparative information reported using IFRSs. Thus, the entity s reporting date is December 31, Year 2, but its transition date is January 1, Year 1, given that the entity is presenting just 1 year of comparative information. The date of transition is the beginning of the earliest period for which an entity presents full comparative information under IFRS in its first IFRS financial statements (IFRS 1). Thus, the date of transition is January 1, Year 1. In the entity s first IFRSs financial statements, it must present at least (1) three statements of financial position, (2) two statements of comprehensive income, (3) two separate income statements (if presented), (4) two statements of cash flows, and (5) two statements of changes in equity and related notes. Answer (B) is incorrect. January 1, Year 2, does not consider the requirement to present at least 1 year of comparative information. Answer (C) is incorrect. July 1, Year 2, is the date the entity decided to adopt IFRSs. Answer (D) is incorrect. December 31, Year 2, is the reporting date. Study Unit 3 Reporting Income Page 87, Differences between GAAP and IFRSs: This edit removes incorrect and redundant information from the IFRS differences. An entity must present items of OCI in two groups: (1) those potentially reclassifiable into profit or loss (e.g., actuarial gains and losses on defined benefit pension plans) and (2) those that are not (e.g., adjustments resulting from translating amounts from the functional currency to the presentation currency.
Study Unit 10 Investments Page 256, Differences between GAAP and IFRSs: This edit clarifies (1) the IFRSs differences for asset measurement when the fair value option has not been elected and (2) the initial measurement options used for equity investments. Page 3 of 5 The equity method is not required if (1) the investment is classified as held for sale or (2) conditions exist similar to those that would exempt an entity parent from preparing consolidated statements. A financial asset not at fair value through profit or loss is measured initially at fair value plus transaction costs. Other financial assets are measured at fair value. Unless the fair value option has been elected, financial assets are classified upon initial recognition as subsequently measured at (1) measured at amortized cost or (2) measured at fair value. A financial asset is measured subsequently at amortized cost if it meets the business model test (objective: collect the contractual cash flows) and the cash flow test (contract provides for specific dates for cash flows that are principal and interest payments only). Equity investments are measured at fair value through profit or loss unless the entity has elected at initial recognition to recognize holding gains or losses in other comprehensive income. This irrevocable election may be made for an equity investment not held for trading. But dividend income is still recognized in profit or loss. Financial assets are reclassified only if the entity changes its business model for measuring them. Study Unit 11 Current Liabilities, Compensated Absences, and Contingencies Page 287, Differences between GAAP and IFRSs: This edit improves the wording used to explain contingencies. Provisions are liabilities of uncertain timing or amount except (1) those resulting from executory (unperformed) contracts (unless their unavoidable costs exceed their expected benefits) or (2) those covered by other IFRSs. Examples are liabilities for violations of environmental law, nuclear plant decommissioning costs, warranties, and restructurings. i) Provisions differ from trade payables and accruals because of their greater uncertainty. They differ from contingent liabilities because they are present obligations that meet the recognition criteria. ii) Recognition of provisions is appropriate when (a) the entity has a legal or constructive present obligation resulting from a past event (called an obligating event), (b) it is probable that an outflow of economic benefits will be necessary to settle the obligation, and (c) its amount can be reliably estimated.
Page 4 of 5 iii) If the estimate of a provision is stated within a continuous range of possible outcomes, and within the range is a better estimate than each point in the range is as likely as any other, the midpoint is used. A contingent liability is a possible obligation arising from past events. Its existence will be confirmed only by uncertain future events not wholly within the entity s control. A liability also is contingent if it is a present obligation arising from past events but does not meet the recognition criteria. For example, if the entity and other parties are jointly and severally liable on an obligation, the amount expected to be paid by the other parties is a contingent liability. A contingent liability is must not be recognized. However, it should be is disclosed unless the possibility of resource outflows is remote. A contingent asset is a possible asset arising from past events, the existence of which will be confirmed only by uncertain future events not wholly within the entity s control. An example is a potential recovery on a legal claim with an uncertain outcome. A contingent asset is must not be recognized, but should be it is disclosed if an inflow of economic benefits is probable. Appendix A Subunit Cross-References to Intermediate and Advanced Financial Accounting Textbooks This update adds a new textbook cross-reference. Page 733: INTERMEDIATE ACCOUNTING TEXTBOOKS Bazley, Jones, and Nikolai, Intermediate Accounting Update, Eleventh Edition, South-Western College Publishing Co., 2010. Horngren, Accounting: The Financial Chapters, Ninth Edition, Prentice Hall, 2012. Kieso, Warfield, and Weygandt, Intermediate Accounting, Fourteenth Edition, John Wiley & Sons, Inc., 2012. Needles and Powers, Financial Accounting, Eleventh Edition, South-Western College Publishing Co., 2012. Spiceland, Sepe, and Nelson, Intermediate Accounting, Sixth Edition, McGraw-Hill, Inc., 2011. Stice and Stice, Intermediate Accounting, Eighteenth Edition, South-Western College Publishing Co., 2012. Warren, Reeve, and Duchac, Corporate Financial Accounting, Eleventh Edition, South-Western College Publishing Co., 2012.
Page 5 of 5 Page 734: Horngren, Accounting: The Financial Chapters, Ninth Edition, Prentice Hall, 2012. Chapter 1 - Accounting and the Business Environment - SU 1 Chapter 2 - Recording Business Transactions - SU 2 Chapter 3 - The Adjusting Process - SU 2 Chapter 4 - Completing the Accounting Cycle - SU 2 Chapter 5 - Merchandising Operations - 6.1 Chapter 6 - Merchandise Inventory - SU 6 Chapter 7 - Internal Control and Cash - 5.3 Chapter 8 - Receivables - 5.4-5.7 Chapter 9 - Plant Assets and Intangibles - SU 7, SU 9 Chapter 10 - Current Liabilities and Payroll - SU 11 Chapter 11 - Long-Term Liabilities, Bonds Payable, and Classification of Liabilities on the Balance Sheet - SU 12 Chapter 12 - Corporations, Paid-In Capital, and the Balance Sheet - N/A Chapter 13 - Corporations: Effects on Retained Earnings and the Income Statement - SU 3 Chapter 14 - Statement of Cash Flows - SU 19 Chapter 15 - Financial Statement Analysis - SU 23