Solution Manual For Intermediate Accounting Ifrs 4th Edition by Donald e Kieso Jerry J Weygandt Terry D War

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Solution Manual
Intermediate Accounting IFRS 4th Edition
by Kieso, Weygandt and Warfield all Chapters 1-24
Copyright © 2020 Wiley Kieso, IFRS,4/e, Solutions Manual (For Instructor Use Only) 1-1-
TABLE OF CONTENTS
1 Financial Reporting and Accounting Standards 1-1
2 Conceptual Framework for Financial Reporting 2-1
3 The Accounting Information System 3-1
4 Income Statement and Related Information 4-1
5 Statement of Financial Position and Statement of Cash Flows 5-1
6 Accounting and the Time Value of Money 6-1
7 Cash and Receivables 7-1
8 Valuation of Inventories: A Cost-Basis Approach 8-1
9 Inventories: Additional Valuation Issues 9-1
10 Acquisition and Disposition of Property, Plant, and Equipment 10-1
11 Depreciation, Impairments, and Depletion 11-1
12 Intangible Assets 12-1
13 Current Liabilities, Provisions, and Contingencies 13-1
14 Non-Current Liabilities 14-1
15 Equity 15-1
16 Dilutive Securities and Earnings per Share 16-1
17 Investments 17-1
18 Revenue Recognition 18-1
19 Accounting for Income Taxes 19-1
20 Accounting for Pensions and Postretirement Benefits 20-1
21 Accounting for Leases 21-1
22 Accounting Changes and Error Analysis 22-1
23 Statement of Cash Flows 23-1

1-1- Copyright © 2020 Wiley Kieso, IFRS, 4/e, Solutions Manual (For Instructor Use Only)
24 Presentation and Disclosure in Financial Reporting 24-1
CHAPTER 1
Financial Reporting and Accounting
Standards
ASSIGNMENT CLASSIFICATION TABLE
Topics Questions Concepts for

Analysis
1. Global markets and financial reporting. 1, 2, 3, 4 4
2. Objective of financial reporting. 5, 6, 7, 8, 9, 10 2, 3
3. Standard-setting organizations. 11, 12, 13, 14, 1, 2, 3, 5, 6, 8, 9,

15, 16, 17, 18 11
4. Financial reporting challenges. 19, 20, 21, 3, 7, 8, 10, 11, 12

22, 23, 24, 25
ASSIGNMENT CHARACTERISTICS TABLE
Level of Time
Item Difficult (minutes
Descriptio y )
n
CA1.1 IFRS and standard-setting. Simple 5–10

CA1.2 IFRS and standard-setting. Simple 5–10
CA1.3 Financial reporting and accounting standards. Simple 15–20
CA1.4 Financial accounting. Simple 15–20
CA1.5 Need for IASB. Simple 15–20
CA1.6 IASB role in standard-setting. Simple 15–20
CA1.7 Accounting numbers and the environment. Simple 10–15
CA1.8 Politicalization of IFRS. Complex 15–20
CA1.9 Models for setting IFRS. Simple 10–15
CA1.10 Economic consequences. Moderate 10–15
CA1.11 Rule-making Issues. Complex 20–25
CA1.12 Financial reporting pressures. Moderate 25–35
ANSWERS TO QUESTIONS
1. World markets are becoming increasingly intertwined. The tremendous variety and volume of both
exported and imported goods indicates the extensive involvement in international trade. As a
result, the move towards adoption of international financial reporting standards has and will
continue in the future.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
2. Financial accounting measures, classifies, and summarizes in report form those activities and that
information which relate to the enterprise as a whole for use by parties both internal and external
to a business enterprise. Managerial accounting also measures, classifies, and summarizes in
report form enterprise activities, but the communication is for the use of internal, managerial
parties, and relates more to subsystems of the entity. Managerial accounting is management
decision-oriented and directed more toward product line, division, and profit center reporting.
3. Financial statements generally refer to the four basic financial statements: statement of financial
position, statement of comprehensive income (or income statement), statement of cash flows, and
statement of changes in equity. Financial reporting is a broader concept; it includes the basic
financial statements and any other means of communicating financial and economic data to
interested external parties.
4. If a company‘s financial performance is measured accurately, fairly, and on a timely basis, the right
managers and companies are able to attract investment capital. To provide unreliable and irrelevant
information leads to poor capital allocation which adversely affects the securities market.
5. A single set of high quality accounting standards ensures adequate comparability. Investors are
able to make better investment decisions if they receive financial information from a U.S. company
that is comparable to an international competitor.
6. The objective of general-purpose financial reporting is to provide financial information about the
reporting entity that is useful to present and potential equity investors, lenders, and other creditors
in making decisions about providing resources to the entity.
7. General-purpose financial statements provide financial reporting information to a wide variety of

users. To be cost effective in providing this information, general-purpose financial statements
provide at the least cost the most useful information possible.
8. Shareholders, creditors, suppliers, employees, and regulators all use general-purpose financial
statements. The primary user group is capital providers (shareholders and creditors).
9. The proprietary perspective is not considered appropriate because this perspective generally does
not reflect a realistic view of the financial reporting environment. Instead, the entity perspective
is adopted which is consistent with the present business environment where most companies
engaged in financial reporting have substance separate and distinct from their owners.
Questions Chapter 1 (Continued)
10. This statement is not correct. The objective of financial reporting is primarily to provide information
to investors interested in assessing the company‘s ability to generate net cash inflows and
management‘s ability to protect and enhance the capital providers‘ investments. Financial
reporting should help investors assess the amounts, timing and uncertainty of prospective cash
inflows.
11. The two organizations involved in international standard-setting are IOSCO (International Organi-
zation of Securities Commissions) and the IASB (International Accounting Standards Board.) The
IOSCO does not set accounting standards, but ensures that the global markets can operate in an
efficient and effective manner. Conversely, the IASB‘s mission is to develop a single set of high
quality, enforceable and global financial reporting standards (IFRSs) for general-purpose financial
statements.
12. IOSCO (International Organization of Securities Commissions) is an association of organizations

that regulate the world‘s securities markets. Members are generally the main financial regulators
for a given country. IOSCO does not set accounting standards.
13. The mission of the IASB (International Accounting Standards Board) is to develop, in the public
interest, a single set of high quality, enforceable global international financial reporting standards
(IFRSs) for general-purpose financial statements.
14. The purpose of the Monitoring Board is to establish a link between accounting standard-setters
and those public authorities (such as IOSCO) that generally oversee accounting standard-setters.
This board also provides political legitimacy to the overall organization.
15. The IASB preliminary views are based on research and analysis conducted by the IASB staff.
IASB exposure drafts are issued after the Board evaluates research and public response to
preliminary views. IASB standards are issued after the Board evaluates responses to the exposure
draft.
16. IASB International Financial Reporting Standards are financial accounting standards issued by the
IASB and are referred to as International Financial Reporting Standards (IFRS). The IFRS
Conceptual Framework for Financial Reporting sets forth fundamental objectives and concepts
that the Board uses in developing future standards of financial reporting. The intent of the
Conceptual Framework is to form a cohesive set of interrelated concepts that will serve as tools for
solving existing and emerging problems in a consistent manner.
17. In ranking from the most authoritative to least authoritative, International Financial Reporting
Standards are the most authoritative, followed by International Financial Reporting Standard
Interpretations and then the Conceptual Framework for Financial Reporting.
18. The International Financial Reporting Standards Interpretations Committee (IFRIC) applies a
principles-based approach in providing interpretative guidance. The IFRIC issues interpretations
that cover newly identified financial reporting issues not specifically dealt with in IFRS, and issues
where conflicting interpretations have developed, or seem likely to develop in the absence of
authoritative guidance.
19. Some major challenges facing the accounting profession relate to the following items:
Nonfinancial measurement—how to report significant key performance measurements such as
customer satisfaction indexes, backlog information and reject rates on goods purchased.
Forward-looking information—how to report more future-oriented information.
Soft assets—how to report on intangible assets, such as market know-how, market
dominance, and well-trained employees.
Timeliness—how to report more real-time information.
20. The sources of pressure are innumerable, but the most intense and continuous pressure to
change or influence the development of IFRS come from individual companies, industry
associations, governmental agencies, practicing accountants, academicians, professional
accounting organizations, and investing public.
21. Economic consequences means the impact of accounting reports on the wealth positions of
issuers and users of financial information, and the decision-making behavior resulting from that
impact. In other words, accounting information impacts various users in many different ways which
leads to wealth transfers among these various groups.
If politics plays an important role in the development of accounting rules, the rules will be subject
to manipulation for the purpose of furthering whatever policy prevails at the moment. No matter
how well intentioned the rule-maker may be, if information is designed to indicate that investing in
a particular enterprise involves less risk than it actually does, or is designed to encourage invest-
ment in a particular segment of the economy, financial reporting will suffer an irreplaceable loss of
credibility.
22. No one particular proposal is expected in answer to this question. The students‘ proposals,
however, should be defensible relative to the following criteria:
(1) The method must be efficient, responsive, and expeditious.
(2) The method must be free of bias and be above or insulated from pressure groups.
(3) The method must command widespread support if it does not have legislative authority.
(4) The method must produce sound yet practical accounting principles or standards.
The students‘ proposals might take the form of alterations of the existing methodology, an accoun-
ting court (as proposed by Leonard Spacek), or governmental device.
23. Concern exists about fraudulent financial reporting because it can undermine the entire financial
reporting process. Failure to provide information to users that is accurate can lead to inappropriate
allocations of resources in our economy. In addition, failure to detect massive fraud can lead to
additional governmental oversight of the accounting profession.
24. The ―expectations gap‖ is the difference between what people think accountants should be doing
and what accountants think they can do. It is a difficult gap to close. The accounting profession
recognizes it must play an important role in narrowing this gap. To meet the needs of society, the
profession is continuing its efforts in developing accounting standards, such as numerous
pronouncements issued by the IASB, to serve as guidelines for recording and processing business
transactions in the changing economic environment.
25. Accountants must perceive the moral dimensions of some situations because IFRS does not
define or cover all specific features that are to be reported in financial statements. In these
instances, accountants must choose among alternatives. These accounting choices influence
whether particular stakeholders may be harmed or benefited. Moral decision-making involves
awareness of potential harm or benefit and taking responsibility for the choices.
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 1.1 (Time 5–10 minutes)

Purpose—to provide the student with an opportunity to answer questions about IFRS and standard-
setting.

Purpose—to provide the student with an opportunity to answer questions about IFRS and standard-
setting.

Purpose—to provide the student with an opportunity to answer questions about financial reporting and
standard-setting.

Purpose—to provide the student with an opportunity to distinguish between financial accounting and
managerial accounting, identify major financial statements, and differentiate financial statements and
financial reporting.

Purpose—to provide the student with an opportunity to evaluate the viewpoint of removing mandatory
accounting rules and allowing each company to voluntarily disclose the information it desired.

Purpose—to provide the student with an opportunity to identify the sponsoring organization of the IASB,
the method by which the IASB arrives at a decision, and the types and the purposes of documents
issued by the IASB.

Purpose—to provide the student with an opportunity to describe how reported accounting numbers
might affect an individual‘s perceptions and actions.

Purpose—to provide the student with an opportunity to focus on the types of organizations involved in
the rule making process, what impact accounting has on the environment, and the environment‘s
influence on accounting.

Purpose—to provide the student with an opportunity to focus on what type of rule-making environment
exists. In addition, this CA explores why user groups are interested in the nature of IFRS and why some
groups wish to issue their own rules.

Purpose—to provide the student with the opportunity to discuss the role of government officials in
accounting rule-making.

Purpose—to provide the student with an opportunity to consider the ethical dimensions
of implementation of a new accounting pronouncement.

Purpose—to provide the student with a writing assignment concerning the ethical issues related to
meeting earnings targets.
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 1.1
1. True.
2. False. Any company claiming compliance with IFRS must comply with all standards and inter-
pretations, including disclosure requirements.
3. False. The IFRS advisory council provides advice and counsel to the IASB on major policies and
technical issues. It is not a governmental body.
4. True.
5. False. The IASB has no government mandate and does follow a due process in issuing IFRS.
CA 1.2
1. False. The objective emphasizes an entity perspective, not a stewardship approach.
2. False. The objective of financial reporting is to provide financial information about the reporting
entity that is useful to present and potential equity investors, lenders, and other creditors in making
decisions in their capacity as capital providers, not preparing the financial statements.
3. False. International Accounting Standards were issued by the International Accounting Standards
Committee while International Financial Reporting Standards are issued by the IASB. Both have
authoritative support.
4. True.
LO: 2,3, Bloom: K, Difficulty: Simple, Time: 5-10, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
CA 1.3
1. c. 2. d. 3. c. 4. d. 5. b. 6. a. 7. a. 8. b. 9. d. 10. b.
CA 1.4
(a) Financial accounting is the process that culminates in the preparation of financial reports relative
to the enterprise as a whole for use by parties both internal and external to the enterprise. In
contrast, managerial accounting is the process of identification, measurement, analysis, and
communication of financial information used by the management to plan, evaluate, and control
within an organization and to assure appropriate use of, and accountability for, its resources.
(b) The financial statements most frequently provided are the statement of financial position, the
statement of comprehensive income (or income statement), the statement of cash flows, and the
statement of changes in equity.
CA 1.4 (Continued)
(c) Financial statements are the principal means through which financial information is communicated
to those outside an enterprise. As indicated in (b), there are four major financial statements.
However, some financial information is better provided, or can be provided only, by means of
financial reporting other than formal financial statements. Financial reporting (other than financial
statements and related notes) may take various forms. Examples include the company president‘s
letter or supplementary schedules in the corporate annual reports, prospectuses, reports filed with
govern-ment agencies, news releases, management‘s forecasts, and descriptions of an
enterprise‘s social or environmental impact.
CA 1.5
It is not appropriate to abandon mandatory accounting rules and allow each company to voluntarily
disclose the type of information it considered important. Without a coherent body of accounting theory
and standards, each accountant or enterprise would have to develop its own theory structure and set of
practices, and readers of financial statements would have to familiarize themselves with every
company‘s peculiar accounting and reporting practices. As a result, it would be almost impossible to
prepare statements that could be compared.
In addition, voluntary disclosure may not be an efficient way of disseminating information. A company is
likely to disclose less information if it has the discretion to do so. Thus, the company can reduce its cost
of assembling and disseminating information. However, an investor wishing additional information has
to pay to receive additional information desired. Different investors may be interested in different types
of information. Since the company may not be equipped to provide the requested information, it would
have to spend additional resources to fulfill such needs; or the company may refuse to furnish such
information if it‘s too costly to do so. As a result, investors may not get the desired information or they
may have to pay a significant amount of money for it. Furthermore, redundancy in gathering and
distributing information occurs when different investors ask for the same information at different points
in time. To the society as a whole, this would not be an efficient way of utilizing resources.
LO: 3, Bloom: AP, Difficulty: Simple, Time: 15-20, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
CA 1.6
(a) The International Financial Reporting Standards Committee Foundation (The Foundation) is the
sponsoring organization of the IASB. The Foundation selects the members of the IASB and the
Advisory Council, funds their activities, and generally oversees the IASB‘s activities.
The IASB follows a due process in establishing a typical International Financial Reporting Standard.
The following steps are usually taken: (1) A topic or project is identified and placed on the Board‘s
agenda. (2) Research and analysis are conducted by the IASB and a preliminary views document
is drafted and released. (3) A public hearing is often held. (4) The Board analyzes and evaluates
the public response and issues an exposure draft. (5) The Board studies the exposure draft
in relation to the public responses, revises the draft if necessary, gives the revised draft final
consideration and votes on issuance of an IFRS. The passage of a new accounting standard in
the form of an IASB Standard requires the support of eight of the fourteen Board members.
(b) The IASB issues three major types of pronouncements: International Financial Reporting
Standards, conceptual framework for financial reporting, and International Financial Reporting
Standards Interpretations. Financial reporting standards issued by the IASB are referred to as
International Financial Reporting Standards (IFRS).
CA 1.6 (Continued)
The International Accounting Standards Committee (IASB predecessor) issued a document entitled
―Framework for the Preparation and Presentation of Financial Statements.‖ This framework sets forth
fundamental objectives and concepts that the Board uses in developing future standards of financial
reporting. The intent of the document is to form a cohesive set of interrelated concepts, a conceptual
framework, that will serve as tools for solving existing and emerging problems in a consistent
manner.
Interpretations issued by the International Financial Reporting Standards Interpretations Committee

(The Interpretations Committee) are also considered authoritative and cover (1) newly identified
financial reporting issues not specifically dealt with in IFRS, and (2) issues where unsatisfactory
or conflicting interpretations have developed, or seem likely to develop, in the absence of
authoritative guidance.
The Interpretations Committee can address controversial accounting problems as they arise. It
determines whether it can quickly resolve them, or whether to involve the IASB in solving them.
The IASB will hopefully work on more pervasive long-term problems, while the Interpretations
Committee deals with short-term emerging issues.
CA 1.7
Accounting numbers affect investing decisions. Investors, for example, use the financial statements of
different companies to enhance their understanding of each company‘s financial strength and operating
results. Because these statements follow international accounting standards, investors can make
meaningful comparisons of different financial statements to assist their investment decisions.
Accounting numbers also influence creditors‘ decisions. A commercial bank usually looks into a company‘s
financial statements and past credit history before deciding whether to grant a loan and in what
amount. The financial statements provide a fair picture of the company‘s financial strength (for
example, short-term liquidity and long-term solvency) and operating performance for the current period
and over a period of time. The information is essential for the bank to ensure that the loan is safe and
sound.
CA 1.8
(a) Arguments for politicalization of the accounting standard-setting process:
1. Accounting depends in large part on public confidence for its success. Consequently, the
critical issues are not solely technical, so all those having a bona fide interest in the output of
accounting should have some influence on that output.
2. There are numerous conflicts between the various interest groups. In the face of this, compro-
mise is necessary, particularly since the critical issues in accounting are value judgments, not
the type which are solvable, as we have traditionally assumed, using deterministic models.
Only in this way (reasonable compromise) will the financial community have confidence in the
fairness and objectivity of accounting standard-setting.
3. Over the years, accountants have been unable to establish, on the basis of technical accoun-
ting elements, standards which would bring about the desired uniformity and acceptability. This
inability itself indicates standard-setting is primarily consensual in nature.
CA 1.8 (Continued)
4. The public accounting profession made rules which business enterprises and individuals
―had‖ to follow. For many years, these businesses and individuals had little say as to what the
standards would be, in spite of the fact that their economic well-being was influenced to a
substantial degree by those standards. It is only natural that they would try to influence or
control the factors that determine their economic well-being.
(b) Arguments against the politicization of the accounting standard-setting process:

1. Many accountants feel that accounting is primarily technical in nature. Consequently, they feel
that substantive, basic research by objective, independent and fair-minded researchers
ultimately will result in the best solutions to critical issues, such as the concepts of income and
capital, even if it is accepted that there isn‘t necessarily a single ―right‖ solution.
2. Even if it is accepted that there are no ―absolute truths‖ as far as critical issues are concerned,
many feel that professional accountants, taking into account the diverse interests of the
various groups using accounting information, are in the best position, because of their
independence, education, training, and objectivity, to decide what international financial
reporting standards ought to be.
3. The complex situations that arise in the business world require that trained accountants
develop the appropriate reporting standards.
4. The use of consensus to develop reporting standards would decrease the professional status
of the accountant.
5. This approach would lead to ―lobbying‖ by various parties to influence the establishment of
reporting standards.
LO: 3, 4, Bloom: K, Difficulty: Complex, Time: 15-20, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
CA 1.9
(a) Most believe the IASB process is a public private mixed approach. In many respects, the IASB is a
quasi-governmental agency in that its pronouncements are required to be followed in some
jurisdictions. For example, all public European companies are required to use IASB standards
when preparing financial statements. In fact, both the FASB and the IASB believe that IFRS has
the best potential to provide a common platform on which companies can report and investors can
compare financial information. The purely political approach is used in France and West Germany.
The private, professional approach is employed in Australia, Canada, and the United Kingdom.
(b) Publicly reported accounting numbers influence the distribution of scarce resources. Resources
are channeled where needed at returns commensurate with perceived risk. Thus, reported
accounting numbers have economic effects in that resources are transferred among entities and
individuals as a consequence of these numbers. It is not surprising then that individuals affected
by these numbers will be extremely interested in any proposed changes in the financial reporting
environment.
CA 1.10
President Sarkozy put pressure on the IASB to craft fair value standards that favor banks. However,
by introducing politics into the standard-setting process will likely lead to the following
consequences:
1. Too many alternatives.
2. Lack of clarity that will lead to inconsistent application.
3. Lack of disclosure that reduces transparency.
4. Not comprehensive in scope.
CA 1.10 (Continued)
When the resulting standards have these attributes, they will be of lower quality and the credibility
of the standard-setting process will be questioned. At the extreme, market participants will have
less confidence in accounting information and capital markets will be less liquid—cost of capital
will be higher. Another indication of the problem of government intervention is shown in the
accounting standards used by some countries around the world. Completeness and transparency
of information needed by investors and creditors is not available in order to meet or achieve other
objectives. In the fair value case, the IASB did respond by accelerating its process to develop a
new standard, which provided some exceptions to the fair value accounting that benefited some
banks and insurance companies.
LO: 4, Bloom: AP, Difficulty: Moderate, Time: 10-15, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
CA 1.11
(a) Inclusion or omission of information that materially affects net income harms particular
stakeholders. Accountants must recognize that their decision to implement (or delay) reporting
requirements will have immediate consequences for some stakeholders.
(b) Yes. Because the IASB rule results in a fairer representation, it should be implemented as soon as
possible—regardless of its impact on net income.
(c) The controller‘s responsibility is to provide financial statements that present fairly the financial
condition of the company. By advocating early implementation, Weller fulfills this task.
(d) Potential lenders and investors, who read the financial statements and rely on their fair
representation of the financial condition of the company, have the most to gain by early
implementation—they would be most directly harmed by deferral of implementation. At the same
time, a shareholder who is considering the sale of shares may be harmed by early implementation
that lowers net income (and may lower the value of the shares). If employee bonuses are based
on the reported income number, the employees could receive lower bonuses with early
implementation.
LO: 3, 4, Bloom: AP, Difficulty: Complex, Time: 20-25, AACSB: Ethics, AICPA BB: None, AICPA FC: Reporting, AICPA PC Communication, Ethical Conduct
CA 1.12
(a) The ethical issue in this case relates to making questionable entries to meet expected earnings
forecasts. As indicated in this chapter, businesses‘ concentration on ―maximizing the bottom line,‖
―facing the challenges of competition,‖ and ―stressing short-term results‖ places accountants in an
environment of conflict and pressure.
(b) Given that Normand has pleaded guilty, he certainly acted improperly. Doing the right thing,
making the right decision, is not always easy. Right is not always obvious, and the pressures to
―bend the rules,‖ ―to play the game,‖ or ―to just ignore it‖ can be considerable.
Copyright © 2020 Wiley Kieso, IFRS,4/e, Solutions Manual (For Instructor Use Only) 1-1-11
(c) No doubt, Normand was in a difficult position. I am sure that he was concerned that if he failed to
go along, it would affect his job performance negatively or that he might be terminated. These job
pressures, time pressures, and peer pressures often lead individuals astray. Can it happen to you?
One individual noted that at a seminar on ethics sponsored by the CMA Society of Southern
California, attendees were asked if they had ever been pressured to make questionable entries.
This individual noted that to the best of his recollection, everybody raised a hand, and more than
one had eventually chosen to resign.
(d) Major stakeholders are: (1) Troy Normand, (2) present and potential shareholders and creditors of
WorldCom, (3) employees, and (4) family. Recognize that WorldCom is one of the largest
bankruptcies in United States history, so many individuals are affected.
LO: 4, Bloom: AP, Difficulty: Moderate, Time: 25-35, AACSB: Ethics, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication, Ethical Conduct
FINANCIAL REPORTING PROBLEM
(a) The two organizations involved in international standard-setting

are International Organization of Securities Commissions (IOSCO)
and the International Accounting Standards Board (IASB).
(b) Different authoritative literature pertaining to methods of

recording accounting transactions exists today. Some authoritative
literature has received more support from the profession than
other literature. The literature that has substantial authoritative
support is the one most supported by the profession and should
be followed when recording accounting transactions. These
standards and procedures are called International Financial
Reporting Standards (IFRS).
FINANCIAL REPORTING CASE
(a) The International Accounting Standards Board is an independent,

pri- vately-funded accounting standards-setter based in London,
UK. The Board is committed to developing, in the public interest, a
single set of high quality, enforceable and global accounting
standards that require transparent and comparable information in
general-purpose financial statements. In addition, the Board
cooperates with national accounting standards setters to achieve
convergence in accounting standards around the world.
(b) In summary, the following groups might benefit from the use of
Inter- national Accounting Standards:
 Investors, investment analysts and stockbrokers: to facilitate
1-1-14 Copyright © 2020 Wiley Kieso, IFRS, 4/e, Solutions Manual (For Instructor Use Only)
international comparisons for investment decisions.
 Credit grantors: for similar reasons to bullet point above.
 Multinational companies: as preparers, investors, appraisers of
products or staff, and as movers of staff around the globe;
also, as raisers of finance on international markets (this also
applies to some com-panies that are not multinationals).
 Governments: as tax collectors and hosts of multinationals;
also interested are securities markets regulators and
governmental and nongovernmental rule makers.
(c) The fundamental argument against convergence is that, to the

extent that international differences in accounting practices result
from under-lying economic, legal, social, and other environmental
factors, convergence may not be justified. Different accounting has
grown up to serve the different needs of different users; this might
suggest that the existing accounting practice is ―correct‖ for a
given nation and should not be changed merely to simplify the
work of multinational companies or auditors. There does seem to
be strength in this point particularly for smaller companies with
no significant multinational activities or connections. To impose
upon a small, private family- company in Luxembourg lavish
disclosure requirements and the need to report a ―true and fair‖
view may be an expensive and unnecessary piece of convergence.
FINANCIAL REPORTING CASE (Continued)
The most obvious obstacle to convergence is the sheer size and

deep rootedness of the differences in accounting. These
differences have grown up over the previous century because of
differences in users, legal systems, and so on. Thus, the
differences are structural rather than cosmetic, and require
revolutionary action to remove them.
LO: 1,2,3,4, Bloom: K, Difficulty: Moderate, Time: 20-25, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
ACCOUNTING, ANALYSIS AND PRINCIPLES
ACCOUNTING
(a) The requirements will depend on the jurisdiction in which they

intend to sell the securities. The International Accounting
Standards Board (IASB) issues International Financial Reporting
Standards (IFRS) which are used on most foreign exchanges. The
IASB standards require companies to prepare a full set of financial
statements and related disclosures so investors can evaluate and
compare investments.
(b) The two entities that are primarily responsible for establishing IFRS
are IOSCO (International Organization of Securities Commissions)
and the IASB (International Accounting Standards Board).
The IOSCO does not set accounting standards, but ensures that
the global markets can operate in an efficient and effective
manner. Conversely, the IASB‘s mission is to develop a single
set of high quality, enforceable and global International Financial
Reporting Standards (IFRSs) for general-purpose financial
statements.
ANALYSIS
(a) Decision-usefulness involves providing investors interested in

financial reporting information that is useful for making decisions.
(b) The financial statements provide information on company

performance (statement of comprehensive income or income
statement), financial position – assets owned and liabilities
incurred (statement of financial position) and cash flows
(statement of cash flows) and statement of changes in equity.
Investors and creditors use this information to form their own
expectations about a company‘s future cash flows. These
assessments are the basis of the decision about an investment in
the company.
ACCOUNTING, ANALYSIS AND PRINCIPLES
(Continued) PRINCIPLES
The hierarchy of IFRS to determine what recognition, valuation,

and disclosure requirements should be used
are:
1. International Financial Reporting Standards;
2. International Accounting Standards; and
3. Interpretations from the International Financial Reporting
Standards Interpretations Committee.
Any company indicating that it is preparing its financial statements

in conformity with IFRS must use these standards and
interpretations, as appropriate.
LO: 1,2,3,4, Bloom: K, Difficulty: Moderate, Time: 20-25, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
RESEARCH CASE
The following responses are drawn from the IFRS Conceptual Framework
(a) According the Conceptual Framework (2018, par. 1.2) The

objective of general purpose financial reporting is to provide
financial information about the reporting entity that is useful to
existing and potential investors, lenders and other creditors in
making decisions relating to providing resources to the entity.
Those decisions involve decisions about:
(a) buying, selling or holding equity and debt instruments;
(b) providing or settling loans and other forms of credit; or
(c) exercising rights to vote on, or otherwise influence,
management‘s actions that affect the use of the entity‘s
economic resources.
(b) According to Chapter 7 of the Conceptual Framework,

presentation and disclosure objectives and principles (paras 4 to
6):
7.4 To facilitate effective communication of information in
financial statements, when developing presentation and
disclosure requirements in Standards a balance is needed
between:
(a) giving entities the flexibility to provide relevant
information that faithfully represents the entity‘s
assets, liabilities, equity, income and expenses; and
(b) requiring information that is comparable, both from
period to period for a reporting entity and in a single
reporting period across entities.
7.5 Including presentation and disclosure objectives in
Standards supports effective communication in financial
statements because such objectives help entities to identify
useful information and to decide how to communicate that
information in the most effective manner.
7.6 Effective communication in financial statements is also
supported by considering the following principles:
(a) entity-specific information is more useful than
standardized descriptions, sometimes referred to as
boilerplate‘; and
(b) duplication of information in different parts of the
financial statements is usually unnecessary and can
make financial statements less understandable.
RESEARCH CASE (Continued)
(c)According to the Conceptual Framework (Chapter 1, paras. 6 to 10):

1.6 … general purpose financial reports do not and cannot
provide all of the information that existing and potential
investors, lenders and other creditors need. Those users need
to consider pertinent information from other sources, for
example, general economic conditions and expectations,
political events and political climate, and industry and
company outlooks.
1.7 General purpose financial reports are not designed to show
the value of a reporting entity; but they provide information
to help existing and potential investors, lenders and other
creditors to estimate the value of the reporting entity.
1.8 Individual primary users have different, and possibly
conflicting, information needs and desires. The Board, in
developing Standards, will seek to provide the information set
that will meet the needs of the maximum number of primary
users. However, focusing on common information needs
does not prevent the reporting entity from including
additional information that is most useful to a particular
subset of primary users.
1.9 The management of a reporting entity is also interested in
financial information about the entity. However,
management need not rely on general purpose financial
reports because it is able to obtain the financial information
it needs internally.
1.10 Other parties, such as regulators and members of the
public other than investors, lenders and other creditors, may
also find general purpose financial reports useful. However,
those reports are not primarily directed to these other groups.
In addition, regarding Information about use of the entity‘s
economic resources:
1.22 Information about how efficiently and effectively the
reporting entity‘s management has discharged its
responsibilities to use the entity‘s economic resources helps
users to assess management‘s stewardship of those
resources. Such information is also useful for predicting how
efficiently and effectively management will use the entity‘s
economic resources in future periods. Hence, it can be useful
for assessing the entity‘s prospects for future net cash inflows.
1.23 Examples of management‘s responsibilities to use the
entity‘s economic resources include protecting those
resources from unfavourable effects of economic factors,
such as price and technological changes, and ensuring that
the entity complies with applicable laws, regulations and
contractual provisions.
LO: 2,4, Bloom: K, Difficulty: Complex, Time: 25-30, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
GAAP CONCEPTS AND APPLICATION
GAAP1.1 Generally accepted accounting principles (GAAP) for U.S.

companies are developed by the Financial Accounting
Standards Board (FASB). The FASB is a private
organization. The U.S. Securities and Exchange
Commission (SEC) exercises oversight over the actions of
the FASB.
GAAP1.2 Differences between U.S. GAAP and IFRS should not be

surprising because standard-setters have developed
standards in response to different user needs. In some
countries, the primary users of financial statements are
private investors. In others, the primary users are tax
authorities or central government planners. In the United
States, investors and creditors have driven accounting
standard formulation.
CHAPTER 2
Conceptual Framework for Financial Reporting
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)

Brief Concepts
Topics Exercises Exercises for
Question Analysis
s
1. Conceptual framework– 1 1, 2
general.
2. Objective of financial 2, 3, 9 13 1, 2 3
reporting.
3. Qualitative characteristics 4, 5, 6, 7, 8, 10 1, 2, 3, 4, 11, 2, 3, 4 4, 8

of accounting. 13
4. Elements of financial 11, 12, 27 5, 6 5

statements.
5. Basic assumptions. 13, 14, 15 7, 8, 12 6, 7
6. Basic principles:
a. Measurement. 16, 17, 18, 19, 20 9, 10, 12 6, 7, 9, 10
b. Revenue recognition. 21, 22, 23, 24, 25 9 6, 7, 9, 10 5, 6, 7, 9
c. Expense recognition. 26 9, 12 6, 7, 9, 10
d. Full disclosure. 27, 28, 29 9, 12 6, 7, 8, 9, 10
7. Constraint. 30, 31 12, 13 3, 6, 7 10
8. Comprehensive 13 6, 7, 9, 10
assignments on
assumptions, principles,
and constraints.
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)

Concepts
Learning Objectives Brief Exercises Exercises for
Analysis
1. Describe the usefulness of a conceptual 13 1, 2 1, 2, 3

framework and the objective of financial
reporting.
2. Identify the qualitative characteristics of 1, 2, 3, 4, 5, 2, 3, 4, 5 2, 4, 8
accounting information and the basic 6,11, 13
elements of financial statements.
3. Review the basic assumptions of 7, 8, 12 6, 7

accounting.
4. Explain the application of the basic 9, 10, 11, 12, 3, 6, 7, 8, 9, 5, 6, 7, 9, 10

principles of accounting. 13 10
Copyright © 2020 Wiley Kieso, IFRS, 4/e, Solutions Manual (For Instructor Use Only) 6-1-19
ASSIGNMENT CHARACTERISTICS TABLE
Level of Time
Item Description Difficult (minutes
E2.1 Usefulness, objective of financial reporting Moderate 10–15

E2.2 Usefulness, objective of financial reporting, Moderate 10–15
qualitative characteristics
E2.3 Qualitative characteristics Moderate 15–20
E2.4 Qualitative characteristics Simple 15–20
E2.5 Elements of financial statements Simple 10–15
E2.6 Assumptions, principles, and constraint Simple 15–20
E2.7 Assumptions, principles, and constraint Moderate 20–25
E2.8 Full disclosure principle Complex 20–25
E2.9 Accounting principles–comprehensive Moderate 20–25
E2.10 Accounting principles–comprehensive Moderate 20–25
CA2.1 Conceptual framework–general Simple 20–25

CA2.2 Conceptual framework–general Simple 25–35
CA2.3 Objective of financial reporting Moderate 25–35
CA2.4 Qualitative characteristics Moderate 30–35
CA2.5 Revenue recognition principle Complex 25–30
CA2.6 Expense recognition principle Complex 20–25
CA2.7 Expense recognition principle Moderate 20–30
CA2.8 Qualitative characteristics Moderate 20–30
CA2.9 Expense recognition principle Moderate 20–25
CA2.10 Cost-constraint Moderate 30–35
ANSWERS TO QUESTIONS
1. A conceptual framework is a coherent system of concepts that flow from an objective. The
objective identifies the purpose of financial reporting. The other concepts provide guidance on
(1) identifying the boundaries of financial reporting, (2) selecting the transactions, other events,
and circumstances to be represented, (3) how they should be recognized and measured, and (4)
how they should be summarized and reported. A conceptual framework is necessary in financial
accounting for the following reasons:
(1) It will enable the IASB to issue more useful and consistent standards in the future.
(2) New issues will be more quickly solvable by reference to an existing framework of basic
theory.
(3) It will increase financial statement users‘ understanding of and confidence in financial
reporting.
(4) It will enhance comparability among companies‘ financial statements.
2. The primary objective of financial reporting is as follows:

The objective of general purpose financial reporting is to provide financial information about the
reporting entity that is useful to present and potential equity investors, lenders, and
other creditors in making decisions about providing resources to the entity.
Information that is decision useful to capital providers may also be useful to other users of financial
reporting who are not capital providers.
3. Yes. Management stewardship is how well management uses entity resources to create and
sustain value. To evaluate stewardship, companies should provide information about their financial
position, changes in financial position, and performance. They should also show how efficiently
and effectively management and the board of directors have discharged their responsibilities to
use the entity‘s resources wisely. Therefore, information that is useful in assessing stewardship
can also be useful for assessing a company‘s prospects for future net cash inflows.
4. The IASB identified the qualitative characteristics of accounting information that distinguish better
(more useful) information from inferior (less useful) information for decision-making purposes.
The characteristics involve determining which alternative provides the most useful information for
decision-making purposes (decision-usefulness). The fundamental qualitative characteristics are
relevance and faithful representation.
5. Relevance and faithful representation are the two fundamental qualities that make accounting
information useful for decision-making. To be relevant, accounting information must be capable of
making a difference in a decision. Information with no bearing on a decision is irrelevant. Financial
information is capable of making a difference when it has predictive value, confirmatory value, or
both. Faithful representation means that the item is representative of the real-world phenomenon
that it purports to represent. Faithful representation is a necessity because most users have
neither the time nor the expertise to evaluate the factual content of the information. In other words,
faithful representation means that the numbers and descriptions match what really existed or
happened. To be a faithful representation, information must be complete, neutral, and free of
material error.
6. Materiality refers to the relative significance of an amount, activity, or item to informative disclosure
and a proper presentation of financial position and the results of operations. Materiality has
qualitative and quantitative aspects; both the nature of the item and its relative size enter into its
evaluation.
Materiality is a company-specific aspect of relevance. Information is material if omitting it or
misstating it could influence decisions that users make on the basis of the reported financial
information. An individual company determines whether information is material because both the
nature and/or magnitude of the item(s) to which the information relates must be considered in the
context of an individual company‘s financial report. Information is immaterial, and therefore
irrelevant, if it would have no impact on a decision-maker. In short, it must make a difference or a
company need not disclose it. Assessing materiality is one of the more challenging aspects of
accounting because it requires evaluating both the relative size and importance of an item.
However, it is difficult to provide firm guidelines in judging when a given item is or is not material.
Materiality varies both with relative amount and with relative importance.
One should consider the importance of the relative size of an item in determining its materiality. It
is generally not feasible to specify uniform quantitative thresholds at which an item becomes
material. Rather, materiality judgments should be made in the context of the nature and the
amount of an item. Materiality factors into a great many internal accounting decisions. Only by the
exercise of good judgment and professional expertise can reasonable and appropriate answers be
found, which is the materiality concept sensibly applied.
LO: 2, Bloom: C, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
7. Disagree. The IASB indicates that neutrality is supported by the exercise of prudence. Prudence is
the exercise of caution when making judgements under conditions of uncertainty. That is, the
exercise of prudence means that assets and income are not overstated and liabilities and expenses
are not understated. Furthermore, exercising prudence does not mean primacy to the
understatement of assets or income or the overstatement of liabilities or expenses. Such
misstatements can lead to the overstatement or understatement of income or expenses in future
periods. Similarly, exercising prudence need not be biased against recognition of assets or income
relative to recognition of liabilities or expenses. Such bias is inconsistent with neutrality – the
attribute that supports faithful representation and useful information.
8. The enhancing qualitative characteristics are comparability, verifiability, timeliness, and

understandability. These characteristics enhance the decision usefulness of financial reporting
information that is relevant and faithfully represented. Enhancing qualitative characteristics are
complementary to the fundamental qualitative characteristics. Enhancing qualitative characteristics
distinguish more-useful information from less-useful information.
9. Decision-makers vary widely in the types of decisions they make, how they make decisions, the
information they already possess or can obtain from other sources, and their ability to process the
information. For information to be useful, there must be a connection (linkage) between these
users and the decisions they make. This link, understandability, is the quality of information that
lets reasonably informed users see its significance. Understandability is enhanced when
information is classified, characterized, and presented clearly and concisely.
Users of financial reports are assumed to have a reasonable knowledge of business and economic
activities. In making decisions, users also should review and analyze the information with
reasonable diligence. Information that is relevant and faithfully represented should not be excluded
from financial reports solely because it is too complex or difficult for some users to understand
without assistance.
10. Information that is measured and reported in a similar manner for different companies is
considered comparable. Comparability enables users to identify the real similarities and
differences in economic events between companies. Another type of comparability, consistency,
is present when a company applies the same accounting treatment to similar events, from period
to period. Through such application, the company shows consistent use of accounting standards.
11. An important aspect of developing any theoretical structure is the body of basic elements or
definitions to be included in it. Accounting uses many terms with distinctive and specific meanings.
These terms constitute the language of business or the jargon of accounting. One such term is
asset. Is it merely something we own? Or is an asset something we have the right to use, as in the
case of leased equipment? Or is it anything of value used by a company to generate revenues—in
which case, should we also consider the managers of a company as an asset?
12. The IASB classifies the elements into two distinct groups. The first group of three elements—
assets, liabilities, and equity—describes amounts of resources and claims to resources at a
moment in time. The second group of two elements describes transactions, events, and
circumstances that affect a company during a period of time. The first group, affected by elements
of the second group, provides at any time the cumulative result of all changes. This interaction is
referred to as ―articulation.‖ That is, key figures in one financial statement correspond to balances
in another.
13. The five basic assumptions that underlie the financial accounting structure are:
(1) An economic entity assumption.
(2) A going concern assumption.
(3) A monetary unit assumption.
(4) A periodicity assumption.
(5) Accrual-basis assumption.
14. a) Users need to know a company‘s performance and economic status on a timely basis so that
they can evaluate and compare companies, and take appropriate actions. Therefore,
companies must report information periodically. The periodicity (or time period) assumption
implies that a company can divide its economic activities into artificial time periods. These
time periods vary, but the most common are monthly, quarterly, and yearly. The shorter the
time period, the more difficult it is to determine the proper net income for the period. A
month‘s results usually prove less reliable than a quarter‘s results, and a quarter‘s results are
likely to be less reliable than a year‘s results. Investors desire and demand that a company
quickly process and disseminate information. Yet the quicker a company releases the
information, the more likely the information will include errors. This phenomenon provides an
interesting example of the trade-off between relevance and faithful representation in preparing
financial data. The problem of defining the time period becomes more serious as product
cycles shorten and products become obsolete more quickly. Many believe that, given
technology advances, companies need to provide more online, real-time financial information
to ensure the availability of relevant information.
b) Companies prepare financial statements using the accrual basis of accounting. Accrual-basis
accounting means that transactions that change a company‘s financial statements are recorded
in the periods in which the events occur. For example, using the accrual basis means that
companies recognize revenues when it satisfies a performance obligation (the revenue
recognition principle). This is in contrast to recognition based on receipt of cash. Likewise,
under the accrual basis, companies recognize expenses when incurred (the expense
recognition principle) rather than when paid. Financial statements prepared on the accrual
basis inform users not only of past transactions involving the payment and receipt of cash but
also of obligations to pay cash in the future and of resources that represent cash to be received
in the future. Hence, they provide the type of information about past transactions and other
events that is most useful in making economic decisions.
15. The monetary unit assumption assumes that the unit of measure remains reasonably stable so
that Euros, Yen, or dollars of different years can be added without any adjustment. When the value
of the currency fluctuates greatly over time, the monetary unit assumption loses its validity.
The IASB indicated that it expects the currency unadjusted for inflation or deflation to be used to
measure items recognized in financial statements. Only if circumstances change dramatically will
the Board consider a more stable measurement unit.
16. Some of the arguments which might be used are outlined below:
(1) Cost is definite and reliable; other values would have to be determined somewhat arbitrarily
and there would be considerable disagreement as to the amounts to be used.
(2) Amounts determined by other bases would have to be revised frequently.
(3) Comparison with other companies is aided if cost is employed.
(4) The costs of obtaining fair values could outweigh the benefits derived.
17. Current value bases include:

1. fair value,
2. value in use for assets and fulfilment value for liabilities and,
3. current cost.
Fair value is defined as ―the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date.‖ Fair value
is therefore a market-based measure. Recently, IFRS has increasingly called for use of fair value
measurements in the financial statements. This is often referred to as the fair value principle. Fair
value information may be more useful than historical cost for certain types of assets and liabilities
and in certain industries. For example, companies report many financial instruments, including
derivatives, at fair value.
Value in Use / Fulfillment Value Value in use is the present value of the cash flows, or other
economic benefits that a company expects to derive from the use of an asset and from its ultimate
disposal. Fulfilment value is the present value of the cash, or other economic resources, that a
company expects to be obliged to transfer as it fulfils a liability. Value in use and fulfilment value
cannot be observed directly and are determined using cash-flow-based measurement techniques.
Value in use and fulfilment value reflect the same factors described for fair value, but from a
company-specific perspective rather than from a market-participant perspective.
Current Cost The current cost of an asset is the cost of an equivalent asset at the measurement
date, comprising the consideration that would be paid at the measurement date plus the
transaction costs that would be incurred at that date. The current cost of a liability is the
consideration that would be received for an equivalent liability at the measurement date minus the
transaction costs that would be incurred at that date. Similar to historical cost, current cost is an
entry value: it reflects prices in the market in which the company would acquire the asset or would
incur the liability. As a result, current cost is distinguished from fair value, value in use and
fulfilment value, which are exit values. However, unlike historical cost, current cost reflects
conditions at the measurement date. Current cost frequently cannot be determined directly by
observing prices in an active market and must be determined indirectly by other means.
18. Fair value is defined as ―the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date.‖ Fair value
is therefore a market-based measure.
19. The fair value option gives companies the option to use fair value as the basis for measurement of
financial assets and financial liabilities. The Board believes that fair value measurement for financial
assets and financial liabilities provides more relevant and understandable information than
historical cost. It considers fair value to be more relevant because it reflects the current cash
equivalent value of financial assets and financial liabilities. As a result, companies now have the
option to record fair value in their accounts for most financial assets and financial liabilities,
including such items as receivables, investments, and debt securities.
20. The fair value hierarchy provides insight into the priority of valuation techniques that are used to
determine fair value. The fair value hierarchy is divided into three broad levels.
Fair Value Hierarchy
Level 1: Observable inputs that reflect quoted prices for Least Subjective
identical assets or liabilities in active markets.
Level 2: Inputs other than quoted prices included in Level 1 that

are observable for the asset or liability either directly or
through corroboration with observable data.
Level 3: Unobservable inputs (for example, a company‘s own Most Subjective

data or assumptions).
As indicated, Level 1 is the most reliable because it is based on quoted prices, like a closing stock
price in the Wall Street Journal. Level 2 is the next most reliable and would rely on evaluating
similar assets or liabilities in active markets. At the least-reliable level, Level 3, much judgment is
needed based on the best information available to arrive at a relevant and reliable fair value
measurement.
21. The revenue recognition principle requires that companies recognize revenue in the accounting
period in which the performance obligation is satisfied. In the case of services, revenue is recognized
when the services are performed. In the case of selling a product, the performance obligation is
met when the product is delivered. Companies follow a five-step process to analyze revenue
arrangements to determine when revenue should be recognized: (1) Identify the contract(s) with
the customer; (2) Identify the separate performance obligations in the contract; (3) Determine the
transaction price; (4) Allocate the transaction price to separate performance obligations; and (5)
Recognize revenue when each performance obligation is satisfied.
22. A performance obligation is a promise to deliver a product or provide a service to a customer. The
revenue recognition principle requires that companies recognize revenue in the accounting period
in which the performance obligation is satisfied. In the case of services, revenue is recognized
when the services are performed. In the case of selling a product, the performance obligation is
met when the product is delivered.
23. The five steps in the revenue recognition process are:
Step 1. Identify the contract with the customer. A contract is an agreement between
two parties that creates enforceable rights or obligations.
Step 2. Identify the separate performance obligations in the contract. A performance

obligation is either a promise to provide a service or deliver a product, or both.
Step 3. Determine the transaction price. Transaction price is the amount of consideration
that a company expects to receive from a customer in exchange for transferring a good
or service.
Step 4. Allocate the transaction price to separate the performance obligations. This
is usually done by estimating the value of consideration attributable to each product
or service.
Step 5. Recognize revenue when each performance obligation is satisfied. This occurs
when the service is provided or the product is delivered.
Note that many revenue transactions pose few problems because the transaction is initiated and
completed at the same time.
24. Revenues are recognized when a performance obligation is met. The most common time at which
these two conditions are met is when the product or merchandise is delivered or services are
rendered to customers. Therefore, revenue for Selane Eatery should be recognized at the time the
luncheon is served.
25. The president means that the ―gain‖ should be recorded in the books. This item should not be
entered in the accounts, however, because a reliable measurement of the revenue is
questionable.
26. The cause and effect relationship can seldom be conclusively demonstrated, but many costs
appear to be related to particular revenues and recognizing them as expenses accompanies
recognition of the revenue. Examples of expenses that are recognized by associating cause and
effect are sales commissions and cost of products sold or services provided.
Systematic and rational allocation means that in the absence of a direct means of associating
cause and effect, and where the asset provides benefits for several periods, its cost should be
allocated to the periods in a systematic and rational manner. Examples of expenses that are
recognized in a systematic and rational manner are depreciation of plant assets, amortization of
intangible assets, and allocation of rent and insurance.
Some costs are immediately expensed because the costs have no discernible future benefits or
the allocation among several accounting periods is not considered to serve any useful purpose.
Examples include officers‘ salaries, most selling costs, amounts paid to settle lawsuits, and costs
of resources used in unsuccessful efforts.
27. An item that meets the definition of an element should be recognized if: (a) it is probable that any
future economic benefit associated with the item will flow to or from the entity; and (b) the item has
a cost or value that can be measured with reliability.
28. (a) To be recognized in the main body of financial statements, an item must meet the definition of
an element. In addition, the item must have been measured, recorded in the books, and
passed through the double-entry system of accounting.
(b) Information provided in the notes to the financial statements amplifies or explains the items
presented in the main body of the statements and is essential to an understanding of the per-
formance and position of the enterprise. Information in the notes does not have to be quanti-
fiable, nor does it need to qualify as an element.
(c) Supplementary information includes information that presents a different perspective from that
adopted in the financial statements. It also includes management‘s explanation of the financial
information and a discussion of the significance of that information.
29. The general guide followed with regard to the full disclosure principle is to disclose in the financial
statements any facts of sufficient importance to influence the judgment of an informed reader.
The fact that the amount of outstanding common shares doubled in January of the subsequent
reporting period probably should be disclosed because such a situation is of importance to present
shareholders. Even though the event occurred after December 31, 2022, it should be disclosed on
in the notes to the financial statements as of December 31, 2022, in order to make adequate
disclosure. (The major point that should be emphasized throughout the entire discussion on full
disclosure is that there is normally no ―black‖ or ―white‖ but varying shades of grey and it takes
experience and good judgment to arrive at an appropriate answer.)
30. Accounting information is subject to the cost constraint. Information is not worth providing unless
the benefits it provides exceed the costs of preparing it.
31. The costs of providing accounting information are paid primarily to highly trained accountants who
design and implement information systems, retrieve and analyze large amounts of data, prepare
financial statements in accordance with authoritative pronouncements, and audit the information
presented. These activities are time-consuming and costly. The benefits of providing accounting
information are experienced by society in general, since informed financial decisions help allocate
scarce resources to the most effective enterprises. Occasionally new accounting standards require
presentation of information that is not readily assembled by the accounting systems of most
companies. A determination should be made as to whether the incremental or additional costs of
providing the proposed information exceed the incremental benefits to be obtained. This deter-
mination requires careful judgment since the benefits of the proposed information may not be
readily apparent.
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 2.1
(a) Comparability
(b) Timeliness
(c) Predictive value
(d) Relevance
(e) Neutrality
BRIEF EXERCISE 2.2
(a) Faithful representation

(b) Confirmatory value
(c) Free from error
(d) Completeness
(e) Understandability
BRIEF EXERCISE 2.3
(a) If the company changed its method for inventory valuation, the
consistency, and therefore the comparability, of the financial
statements have been affected by a change in the method of
applying the accounting principles employed. The change would
require comment in the auditor‘s report in an explanatory
paragraph.
(b) If the company disposed of one of its two subsidiaries that had
been included in its consolidated statements for prior years, no
comment as to consistency needs to be made in the auditor‘s
report. The comparability of the financial statements has been
affected by a business transaction, but there has been no change
in any accounting principle employed or in the method of its
application. (The transaction would probably require informative
disclosure in the financial statements.)
BRIEF EXERCISE 2.3 (Continued)
(c) If the company reduced the estimated remaining useful life of

plant property because of obsolescence, the comparability of the
financial statements has been affected. The change is a matter of
consistency; it is a change in accounting estimate which leads
to a change in accounting principles employed or in their method
of application. The change would require comment in the
auditor‘s report in an explanatory paragraph.
(d) If the company is using a different inventory valuation method

from all other companies in its industry, no comment as to
consistency need be made in the CPA‘s audit report. Consistency
refers to a given company following consistent accounting
principles from one period to another; it does not mean following
the same accounting principles as other companies in the same
industry.
BRIEF EXERCISE 2.4

(a) Verifiability
(b) Comparability
(c) Consistency
(d) Timeliness
BRIEF EXERCISE 2.5
(a) Should be debited to the Land account, as it is a cost incurred

in acquiring land.
(b) As an asset, preferably to a Land Improvements account. The

driveway will last for many years, and therefore it should be
capitalized and depreciated.
(c) Probably an asset, as it will last for a number of years and

therefore will contribute to operations of those years.
BRIEF EXERCISE 2.5 (Continued)
(d) If the fiscal year ends December 31, this will all be an expense of
the current year that can be charged to an expense account. If
statements are to be prepared on some date before December 31,
part of this cost would be expense and part asset. Depending upon
the circumstances, the original entry as well as the adjusting
entry for statement purposes should take the statement date into
account.
(e) Should be debited to the Building account; Depreciation

Expense during the life of building will include these costs.
(f) As an expense, as the service has already been received; the

contri- bution to operations occurred in this period.
LO: 2, Bloom: AP, Difficulty: Moderate, Time: 5-7, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
BRIEF EXERCISE 2.6
(a) Equity
(b) Income
(c) Equity
(d) Assets
(e) Expenses
(f) Expenses
(g) Liabilities
(h) Equity
(i) Income
(j) Equity
BRIEF EXERCISE 2.7
(a) Fair value if the land is held for sale.

(b) Would not be disclosed. Depreciation would be inappropriate if
the going concern assumption no longer applies.
(c) Fair value, or selling price less costs to complete and sell.
(d) Fair value (i.e., refund value).
Note: In each of these cases, historical cost or fair value valuation

might be abandoned if the company will not continue on

indefinitely.
BRIEF EXERCISE 2.8
(a) Periodicity
(b) Monetary unit
(c) Going concern
(d) Economic entity
BRIEF EXERCISE 2.9
(a) Revenue recognition

(b) Expense recognition
(c) Full disclosure
(d) Historical cost principle
BRIEF EXERCISE 2.10
Investment 1—Most subjective.

Investment 2—Least subjective.
Investment 3—Intermediate
subjectivity.
BRIEF EXERCISE 2.11
(a) Material; although amount is small the change affects the trend.
(b) Material; netting obscures the information on the gain and loss.
(c) Likely not material; the amount of depreciation expense, if
capitalized would not have a significant impact on income.
BRIEF EXERCISE 2.12
(a) Accrual basis (Expense recognition principle)

(b) Full disclosure
(c) Expense recognition principle
(d) Historical cost principle

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2 Conceptual Framework for Financial Reporting 2-1

3 The Accounting Information System 3-1

4 Income Statement and Related Information 4-1

5 Statement of Financial Position and Statement of Cash Flows 5-1

6 Accounting and the Time Value of Money 6-1

7 Cash and Receivables 7-1

8 Valuation of Inventories: A Cost-Basis Approach 8-1

9 Inventories: Additional Valuation Issues 9-1

10 Acquisition and Disposition of Property, Plant, and Equipment 10-1

11 Depreciation, Impairments, and Depletion 11-1

12 Intangible Assets 12-1

13 Current Liabilities, Provisions, and Contingencies 13-1

14 Non-Current Liabilities 14-1

16 Dilutive Securities and Earnings per Share 16-1

18 Revenue Recognition 18-1

19 Accounting for Income Taxes 19-1

20 Accounting for Pensions and Postretirement Benefits 20-1

21 Accounting for Leases 21-1

22 Accounting Changes and Error Analysis 22-1

23 Statement of Cash Flows 23-1

24 Presentation and Disclosure in Financial Reporting 24-1

ASSIGNMENT CLASSIFICATION TABLE

Topics Questions Concepts for

1. Global markets and financial reporting. 1, 2, 3, 4 4

3. Standard-setting organizations. 11, 12, 13, 14, 1, 2, 3, 5, 6, 8, 9,

4. Financial reporting challenges. 19, 20, 21, 3, 7, 8, 10, 11, 12

CA1.1 IFRS and standard-setting. Simple 5–10

7. General-purpose financial statements provide financial reporting information to a wide variety of

12. IOSCO (International Organization of Securities Commissions) is an association of organizations

Questions Chapter 1 (Continued)

TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS

CA 1.1 (Time 5–10 minutes)

CA 1.2 (Time 5–10 minutes)

CA 1.3 (Time 15–20 minutes)

CA 1.4 (Time 15–20 minutes)

CA 1.5 (Time 15–20 minutes)

CA 1.6 (Time 15–20 minutes)

CA 1.7 (Time 10–15 minutes)

CA 1.8 (Time 15–20 minutes)

CA 1.9 (Time 10–15 minutes)

CA 1.10 (Time 10–15 minutes)

CA 1.11 (Time 20–25 minutes)

CA 1.12 (Time 25–35 minutes)

Interpretations issued by the International Financial Reporting Standards Interpretations Committee

(b) Arguments against the politicization of the accounting standard-setting process:

FINANCIAL REPORTING PROBLEM

(a) The two organizations involved in international standard-setting

(b) Different authoritative literature pertaining to methods of

FINANCIAL REPORTING CASE

(a) The International Accounting Standards Board is an independent,

inter- national comparisons for investment decisions.

(c) The fundamental argument against convergence is that, to the

The most obvious obstacle to convergence is the sheer size and

ACCOUNTING, ANALYSIS AND PRINCIPLES

(a) The requirements will depend on the jurisdiction in which they

(a) Decision-usefulness involves providing investors interested in

(b) The financial statements provide information on company

The hierarchy of IFRS to determine what recognition, valuation,