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LOS a: Identify and explain the major international accounting standards for each asset and liability category on the balance sheet and the key differences from U.S. generally accepted accounting principles (GAAP).

On January 1, 2004, Cayman Corporation bought manufacturing equipment for $30 million. On December 31, 2006, Cayman determined the equipment was impaired and recognized a $5 million impairment loss in its income statement. As of December 31, 2007, the fair value of the equipment exceeded the book value by $7 million. What amount of the recovery in value can Cayman recognize in its 2007 income statement under U.S. Generally Accepted Accounting Principles (U.S. GAAP) and under International Financial Reporting Standards (IFRS)?

U.S. GAAP does not permit upward valuations of plant and equipment. Under IFRS, the recovery is reported in the income statement to the extent that the previous downward adjustment (loss) was reported in net income. Otherwise, the increase in value is reported as an adjustment to equity. Thus, under IFRS, $5 million will be reported in 2007 net income and $2 million will be directly added to to equity (as an adjustment to equity).

According to International Financial Reporting Standards, how do cash dividends received from trading securities and available-for-sale securities affect net income?

Dividends received from trading securities and available-for-sale securities are recognized in the income statement. The difference in trading and available-for-sale classifications relates to the treatment of any unrealized gains and losses.

During 2007, Big 4 Company’s warehouse was totally destroyed by a tornado. Tornados are very rare in the region where Big 4 is located. The book value of the warehouse at the time of the tornado was

Par-Mac Corporation is a joint venture equally controlled by Parker Company and Macintosh Company. Which method should Macintosh use to account for its ownership interest in Par-Mac according to U.S. Generally Accepted Accounting Principles (U.S. GAAP), and which method recommended for Parker under International Financial Reporting Standards (IFRS)?

Equity method

Proportionate consolidation method

Consolidation method

Proportionate consolidation method

Equity method

Consolidation method

When a firm that reports under U.S. GAAP has joint control over another entity, the equity method of accounting is required. Under IFRS, the proportionate consolidation method is the recommended method; however, the equity method is also permitted.

According to International Financial Reporting Standards (IFRS), the assets and liabilities of an investee are most likely required to be consolidated when the parent company has:

A)	a significant influence over the operating and financial decisions of the investee.

B)	control of more than 50% of the investee.

C)	joint control of the investee.

The consolidation method is required if the parent has control (more than 50% ownership) of the investee. If the parent owns between 20% and 50% of the investee, the parent has a significant influence over its operating and financial decisions and the equity method of accounting is required. Under IFRS, the proportionate consolidation method is recommended when the parent has joint control of the investee. U.S. GAAP does not allow proportionate consolidation and usually requires the equity method for joint ventures.

Which of the following statements about accounting treatments under IFRS and U.S. GAAP are most accurate regarding the periodic valuation of identifiable intangible assets and marketable securities classified as available for sale, respectively?

U.S. GAAP permits upward revaluation

Carried at market value

IFRS permits upward revaluation

Carried at market value

U.S. GAAP permits upward revaluation

Carried at amortized cost

Under IFRS and U.S. GAAP, identifiable intangible assets are reported on the balance sheet at their cost less accumulated amortization. However, a significant difference is that U.S. GAAP does not permit upward revaluations of intangible assets.

The accounting treatment for available-for-sale securities is the same under IFRS and U.S. GAAP. These securities are carried on the balance sheet at their fair market values. Unrealized gains and losses are not recognized on the income statement, but are included in other comprehensive income.