LOS a: Discuss the most important issues, such as the information problem, that arise when investing internationally.

Q1. Which of the following methods of business combinations is the generally preferred method under International Accounting Standards (IAS)?

A)   Purchase method.

B)   Proportional consolidation method.

C)   Pooling method.

Q2. Which of the following items is least likely to have major differences between national accounting standards and International Accounting Standards (IAS)?

A)   Consolidation.

B)   Revenue.

C)   Employee benefits.

Q3. Which of the following methods is NOT a valid method of accounting for goodwill?

A)   Fully deducted against equity immediately.

B)   Subject to a monthly impairment test.

C)   Amortized over a specified period of time.

Q4. Consider the following statements regarding differences between U.S. and international accounting standards:

Statement 1:    The IASB and FASB hope to eliminate most differences between U.S. and foreign accounting by 2010.

Statement 2:    The U.S. accounting standards require the immediate expensing of share-based compensation, but international standards in some cases allow for a delay in expensing.

Statement 3:    U.S. standards for consolidation allow for a variable interest model, while international accounting for consolidation revolves around the concept of control.

Which statement is least accurate?

A)   Statement 3.

B)   Statement 1.

C)   Statement 2.

Q5. Blair Kennedy, CFA, investment director for Sable Capital, is discussing some of the company’s international investments with a client and mentions the “information problem.” Kennedy is most likely referring to:

A)   inconsistencies in financial statements from one country to another.

B)   complexities inherent in adjusting financial statements to reflect different exchange rates.

C)   the difficulty her U.S. analysts have in determining how cultural differences affect investment strategy.

LOS a: Discuss the most important issues, such as the information problem, that arise when investing internationally. fficeffice" />

Q1. Which of the following methods of business combinations is the generally preferred method under International Accounting Standards (IAS)?

A)   Purchase method.

B)   Proportional consolidation method.

C)   Pooling method.

Correct answer is A)

Pooling and uniting of interests are no longer widely used. Proportional consolidation is generally used for joint ventures. Note that IAS 22 requires the use of the purchase method of accounting.

Q2. Which of the following items is least likely to have major differences between national accounting standards and International Accounting Standards (IAS)?

A)   Consolidation.

B)   Revenue.

C)   Employee benefits.

Correct answer is B)

Consolidations and employee benefits are more subject to accounting manipulation and have considerably different treatments amongst different countries.

Q3. Which of the following methods is NOT a valid method of accounting for goodwill?

A)   Fully deducted against equity immediately.

B)   Subject to a monthly impairment test.

C)   Amortized over a specified period of time.

Correct answer is B)

The impairment test is annual, not monthly. Both remaining methods are possible, including not amortizing goodwill if it can be reasonably shown that goodwill has not lost its value (i.e. revenue-generating ability).

Q4. Consider the following statements regarding differences between ffice:smarttags" />U.S. and international accounting standards:

Statement 1:    The IASB and FASB hope to eliminate most differences between U.S. and foreign accounting by 2010.

Statement 2:    The U.S. accounting standards require the immediate expensing of share-based compensation, but international standards in some cases allow for a delay in expensing.

Statement 3:    U.S. standards for consolidation allow for a variable interest model, while international accounting for consolidation revolves around the concept of control.

Which statement is least accurate?

A)   Statement 3.

B)   Statement 1.

C)   Statement 2.

Correct answer is C)

International accounting standards require the immediate expensing of share-based compensation, while intrinsic-value and fair-value estimates allowed by U.S. GAAP can affect both the timing and amount of the expense. The other statements are true.

Q5. Blair Kennedy, CFA, investment director for Sable Capital, is discussing some of the company’s international investments with a client and mentions the “information problem.” Kennedy is most likely referring to:

A)   inconsistencies in financial statements from one country to another.

B)   complexities inherent in adjusting financial statements to reflect different exchange rates.

C)   the difficulty her U.S. analysts have in determining how cultural differences affect investment strategy.

Correct answer is A)

Foreign firms can be tougher to analyze than U.S. firms because of differences in the presentation of financial statements, as well as delays in the release of information and, in some cases, financial statements printed only in the home country’s language. Both of the other answers reflect challenges related to international investing, but are not part of the “information problem.”