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Test Bank for Modern Advanced Accounting In Canada 9th Edition By Hilton Murray, Herauf Darrell
Test Bank for Modern Advanced Accounting In Canada 9th Edition By Hilton Murray, Herauf Darrell
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Complete Solution Manual forModern Advanced Accounting In
Canada 9th Edition Hilton Murray,
Herauf Darrell
Chapter 1
Conceptual & Case Analysis
Frameworks for Financial Reporting
A brief description of the major points covered in each case and problem.
CASES
Case 1-1
In this case, students are introduced to the difference in accounting for R&D costs between
IFRS and ASPE and asked to provide arguments to support the different standards.
Case 1-2 (adapted from a case prepared by Peter Secord, Saint Mary’s University)
In this real life case, students are asked to discuss the merits of historical costs vs. replacement
costs. Actual note disclosure from a company’s financial statements is provided as background
material.
Case 1-3 (adapted from a case prepared by Peter Secord, Saint Mary’s University)
Copyright 2019 McGraw-Hill Education. All rights reserved.
Solutions Manual, Chapter 6 1
,A Canadian company has just acquired a non-controlling interest in a U.S. public company. It
must decide whether to use IFRS or U.S. GAAP for the U.S. subsidiary. Financial statement
information is provided under IFRS and U.S. GAAP. The reasons for some of the differences in
numbers must be explained and an opinion provided as to which method best reflects economic
reality.
Case 1-4
This case is adapted from a CPA Canada case. A private company is planning to go public.
Analysis and recommendations are required for accounting issues related to purchase and
installation of new information system, revenue recognition, convertible debentures and doubtful
accounts receivable.
Case 1-5
This case is adapted from a CPA Canada case. A private company is planning to transition
from ASPE to IFRS. Analysis and recommendations are required for accounting issues related
to convertible debentures, unusual item, revenue recognition, contingency and impairment.
Copyright 2019 McGraw-Hill Education. All rights reserved.
2 Modern Advanced Accounting in Canada, Ninth Edition
,PROBLEMS
Problem 1-1 (40 min.)
A single asset is acquired. Students are asked to prepare and compare financial statement
numbers during the life of the asset using both a historical cost and a current value model.
Problem 1-2 (40 min.)
Details of a European company that reports using IFRS are given along with specific details
relating to certain account balances. Students are asked to show how these balances should
be reported under 1) ASPE and 2) IFRS using the facts provided. Students are also asked to
reconcile Net Income and Shareholders` Equity from IFRS to ASPE.
Problem 1-3 (50 min.)
A private company plans to convert to IFRS go public within 5 years. It wants to know the
impact on net income and shareholders’ equity if it converts from ASPE to IFRS for impaired
loans, interest costs, actuarial gains, compound financial instrument and income taxes.
Problem 1-4 (50 min.)
While taking the role of a financial analyst, the student uses vertical and horizontal analysis and
ratios to analyse and interpret the profitability, solvency and liquidity of a private company.
Problem 1-5 (25 min.)
A private company plans to convert to IFRS. It wants to know the impact on three key ratios if it
converts from ASPE to IFRS for impaired loans, capitalization of interest and actuarial
gains/losses.
Problem 1-6 (50 min.)
A private company plans to convert from ASPE to IFRS and wants to know the impact on three
key ratios if it converts from ASPE to IFRS for impairment losses, convertible bonds and income
taxes.
Copyright 2019 McGraw-Hill Education. All rights reserved.
Solutions Manual, Chapter 6 3
,SOLUTIONS TO REVIEW QUESTIONS
1. There are times when external users may want financial reports that do not follow GAAP.
For example, users may need financial statements using non-GAAP accounting policies
required for legislative or regulatory purposes, or for contract compliance. A prospective
lender may want to receive a balance sheet with assets reported at fair value rather than
historical cost. Accountants have the skills and abilities to provide financial information in a
variety of formats or using a variety of accounting policies. When the financial statements
use non-GAAP accounting policies, the accounting policies must be disclosed in the notes
to the financial statements. The accountant’s report would make reference to these
accounting policies.
2. The three main areas where judgment needs to be applied are as follows:
- Choosing accounting policies that are appropriate for the company’s situation
- Making estimates to accurately reflect the company’s financial position and results of
operations
- Deciding what to disclose and how to disclose it in the notes to the financial statements.
3. The GAAP-based financial statements are prepared primarily for the benefit of external
users. The financial statements provide a summary of the financial position and results of
operations for the company. Management has access to the detailed information available
within the company. Therefore, the formal financial statements should give priority to the
needs of the external users.
4. The main reason the Accounting Standards Board decided to create a separate section of
the CPA Canada Handbook for private enterprises was to address the cost/benefit
discrepancy with respect to smaller private companies’ ability to comply with GAAP. GAAP
has become increasingly complex and for smaller private enterprises this often means that
the cost of complying with such requirements outweighs the benefit received from
compliance. In 2002, the AcSB adopted differential reporting, which allowed private
enterprises choices with the respect to certain complex accounting standards (e.g. the
option to use the cost method for investments that would otherwise require the equity
method). In 2009, the AcSB decided to create a self-contained set of standards for private
enterprises. These standards were effective for fiscal periods beginning on or after January
1, 2011.
5. There are a few reasons why a private company would want to comply with IFRS even
though it is not required to do so. It may have plans to become publicly listed at some point
Copyright 2019 McGraw-Hill Education. All rights reserved.
4 Modern Advanced Accounting in Canada, Ninth Edition
, in the future and will then be required to comply with IFRS. In this case it would make sense
to prepare IFRS compliant statements in anticipation of the public transaction since the
company would have to provide multiple years of comparative financial statements that
comply with IFRS. A private company may have users of their financial statements that find
IFRS statements more useful for their purposes (e.g. creditors, customers, partners, and
other stakeholders that may receive the company’s financial statements). Given the global
economy and the increased number of countries that have converted to IFRS, this is more
likely than it once might have been.
6. The following financial statement items could have different account balances under ASPE
as compared to IFRS: impaired loans, property, plant, & equipment, development costs,
post-employment benefits, income taxes, compound financial instruments, preferred shares
and convertible bonds
7. For the item listed in Exhibit 1.1, all items except for disclosure would likely change when a
company switched from ASPE to IFRS.
8. The return on assets or return on equity is typically used to assess profitability. The current
ratio is typically used to assess liquidity. The debt-to-equity ratio is typically used to assess
solvency.
9. If XZY Co. had capitalized rather than expenses the development costs in Year 1, the
company’s key ratios would change as follows:
- the current ratio would increase if the development costs were classified as a current
asset because current assets would increase and current liabilities would remain the
same; the current ratio would not change if the development costs were classified as a
non-current asset because both current assets and current liabilities would remain the
same;
- the debt-to-equity ratio would decrease because debt would remain the same and equity
would increase
- the return on equity change would increase because net income and equity would
increase by the same dollar amount but net income would be a higher percentage of
equity after the change
10. The six steps of the case framework are as follows:
- Determine Your Role and Requirements
- Identify Users & Their Needs
- Identify & Rank Issues
- Identify Viable Alternatives for Each Major Issue
Copyright 2019 McGraw-Hill Education. All rights reserved.
Solutions Manual, Chapter 6 5
, - Analyze Alternatives Using Criteria for Resolving
- Communicate Practical Recommendations/Conclusions
11. The report recipient is the direct recipient of your report or memo e.g. the partner who asked
you to prepare the memo. The primary users are the users who will be affected by the
actions taken as a result of your recommendations e.g. bankers and shareholders who will
receive the financial statements. The primary users should be given priority in financial
reporting because they are primary recipients of the financial statements; they are directly
affected by the financial statements. If they did not want to receive the financial statements,
we would not be preparing them and would not have to write a memo to the partner with
respect to the financial statements.
12. The biggest factor to be used when ranking the importance of issues to be resolved is the
materiality of the item. If one problem involves a $10,000 item and another problem involves
a $10 million item, then the $10 million item likely is the most important item. After that,
issues are typically ranked in the following order of priority:
- controversial or highly contentious items
- items with errors
- complex items
13. The final case report should contain your recommendations along with the analysis and
arguments supporting your recommendations. It does not need to discuss the alternatives
for each issue unless the issue was very contentious. If in the analysis stage, you
determined that there was clearly a right answer for a problem, then your report would
provide only the recommendation with the supporting arguments. If two or more alternatives
were nearly equal in benefits, then your final report could present the arguments for both
alternatives along with your recommendation as to the best option in this contentious
situation.
SOLUTIONS TO CASES
Case 1-1 [IFRS: The conceptual framework for financial reporting: chapter 3]
Students may assume that IFRS is superior and that all reporting issues can (or should) be
resolved by following IFRS. However, the reporting of research and development costs is a
good example of a requirement where many different approaches can be justified when one
considers the cost and benefits involved.
Copyright 2019 McGraw-Hill Education. All rights reserved.
6 Modern Advanced Accounting in Canada, Ninth Edition
,IFRS requires capitalization of development costs when certain criteria are met. ASPE allows a
policy choice between expensing all development costs without assessing whether they will
provide future benefits or capitalizing those developments costs that are expected to provide
future benefits.
The issue is not whether costs that will have future benefits should be capitalized. Most
accountants around the world would recommend capitalizing a cost that leads to future
revenues that are in excess of that cost. The real issue is whether criteria can be developed for
identifying projects that will lead to the recovery of those costs. One could argue that it is too
subjective to determine whether future benefits will be realized and the assessment could be
open to manipulation. History has shown that the amount of research and development costs
capitalized tended to vary as a company experienced good years and bad. Conversely, under
IFRS, development costs must be recognized as an intangible asset when an enterprise can
show that the six criteria mentioned in the question can be met.
How easy is it for an accountant to determine whether the development project will result in an
intangible asset, such as a patent, that will generate future economic benefits?
Do the benefits of making a determination of future benefits outweigh the cost of making this
determination? No definitive answer exists for that question. Therefore, the option to simply
expense all development costs under ASPE may be a good approach especially when there is
lots of judgment involved in determining whether there will be future benefits.
Case 1-2 [IFRS: The conceptual framework for financial reporting: chapter 3]
(a) Can any alternative to historical cost provide for fair presentation in financial
reports or are the risks too great? Discuss.
When we refer to ―present fairly‖ in the preparation of financial statements, we generally qualify
the statement (as the auditors here have): ―in accordance with generally accepted accounting
principles.‖ That is, fair presentation has a contextual, rather than an absolute, meaning. In
order for any presentation to be fair to the user, the basis of presentation must be known and
understood, but does not necessarily have to follow any one particular model.
Copyright 2019 McGraw-Hill Education. All rights reserved.
Solutions Manual, Chapter 6 7
,Financial statements may be considered to ―present fairly‖ whether prepared in accordance with
the historical cost convention, replacement cost, general price level adjusted model, or net
realized value. The important issue is that the model employed is known, understood, and
consistently followed.
Arguably, fair value accounting is the model most likely to provide fair presentation, especially
where asset values are volatile, as historical costs become rapidly out of date. For many long-
established companies, historical costs for some assets are significantly out of date and of no
value in support of managerial decisions. In managerial accounting, we have long recognized
that the relevant costs are the current costs. In some European countries, an approach to
financial reporting has developed that adopts more of a managerial approach and seeks to
provide the most relevant information for decision-making. As a result, many companies follow
alternatives to historical cost, generally fair values, in the financial statements.
There are risks, however, that arise from the adoption of alternatives to historical cost. Some of
these are the same risks that arise from the historical cost model in that the recorded amount
may soon be out of date. Prices may go up or down, and even ―fair values‖ of prior periods may
display no relationship to fair values at the present date. Cost is always cost in a particular
context and a cost determined for a particular context or decision may not be valid for a different
context or decision and the user should be aware of this.
The question of objective determination also arises. The reported values in fair value based
financial statements are not directly supportable by arms’ length transactions. This introduces
the risk of an important (and potentially deliberate) misstatement. This is the principal risk
arising from fair value accounting, and leads many countries to have highly detailed rules for the
preparation, audit, and publication of financial statement asset values under fair values.
(b) Discuss the relative merits of historical cost accounting and fair value accounting.
Consider the question of the achievement of a balance between relevance and reliability
when trying to ―present fairly‖ the financial position of the reporting entity.
Students will provide a wide range of responses to this question; at this stage (unless they have
been provided with supplementary material or have background from other courses) responses
will just scratch the surface. The following note may be helpful:
Copyright 2019 McGraw-Hill Education. All rights reserved.
8 Modern Advanced Accounting in Canada, Ninth Edition
,Historical cost accounting has the advantage that it is verifiable, and therefore tends to be more
reliable and free from bias than fair value accounting. Historical cost amounts are based on
objective information and are more likely to have the ―paper trail‖ of an actual transaction that
provides support. Historical costs, however, are sunk costs and have limited value in support of
decisions. They are particularly deficient if a long time has passed since the transaction
occurred, or if there have been significant technical developments. These are serious difficulties
which the accounting profession has tried to address through a variety of different mechanisms,
but no other method has become universally acceptable as an answer to the problem and so
historical cost accounting persists, largely because of inertia, and because no better model has
emerged.
Fair value accounting has the advantage of enhanced relevance because the values included
have been determined at the current time, rather than at some uncertain past date. These
amounts may therefore be better for investment decisions than historical costs. However, fair
values may be potentially deficient in that they might not be objectively determined and lack
reliability. At the worst, they could contain bias to support a particular management policy or
decision. In other cases, they could be guesses or otherwise based on invalid information. Also,
the use of fair value in financial statements in no manner makes the financial statements more
―accurate,‖ although (if the amounts are carefully and objectively determined) there may be
advantages in the fairness of presentation and therefore the relevance of financial statement
amounts.
With respect to income measurement, in a period of inflation, historical cost accounting will
result in an overstatement of income. Income is overstated, as a portion of the reported profits
must be reinvested in the business to maintain the productive capacity and not all profits are
available for distribution. If all profits are distributed, the business will not have the capacity to
replace the items that have been consumed in the process of earning income. Fair value
accounting will alleviate this problem by charging to expense the fair value of all items
consumed. With fair value charged to expense, the income remaining is a true income,
potentially available for distribution without impairment of the productive capacity of the
enterprise.
A further important point is that both the preparer and the user of financial statements should
understand the basis of preparation of the statements, and the strengths and weaknesses of the
approach employed.
Copyright 2019 McGraw-Hill Education. All rights reserved.
Solutions Manual, Chapter 6 9
, (c) Financial statements are now beyond the comprehension of the average person. Many of
the accounting terms and methods of accounting used are simply too complex to
understand just from reading the financial statements. Additional explanations should be
provided with, or in, the financial statements, to help investors understand the financial
statements. Briefly discuss.
It is true that financial statements are complicated by accounting methods, such as the method
of accounting for deferred income taxes, foreign currency translation, and so on. However,
some of these complexities cannot be avoided. The business environment and business
transactions are themselves more complex. Since the financial statements try to reflect these
business events, it is inevitable that the financial statements will be more complex. Thus, it is
not accounting methods per se that make financial statements difficult to understand.
Financial statements are not directed at the average person, so they cannot be criticized on the
grounds that they are beyond the comprehension of the ―average person‖. Instead, they are
intended for users with a reasonable understanding of financial statements. The question then
becomes should additional explanations be provided for users who have a reasonable
understanding of the financial statements? The answer depends on what type of information
the ―explanations‖ will contain.
Additional explanations might be of three types:
- They could provide more detail on information that is already contained in financial
statements. For example, certain dollar amounts reported in the financial statements might be
broken down into more detail, or the significance of certain amounts might be discussed;
- They could make information that is currently in the financial statements easier to
understand by explaining technical accounting terms and concepts used in the statements; or
- They could provide entirely new information not included in financial statements that
might help users better understand the significance of the information that appears in the
financial statements.
In all three cases, the information provided might concern the future or the past. It is important
to note that for publicly accountable enterprises, there is already a considerable amount of
supplemental information provided in a company’s MD&A. This document provides
Copyright 2019 McGraw-Hill Education. All rights reserved.
10 Modern Advanced Accounting in Canada, Ninth Edition
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