Reading 43: International Standards Convergence-LOS b 习题精 2011, national, between, center, style

1215

Session 10: Financial Reporting and Analysis: Applications and International Standards Convergence
Reading 43: International Standards Convergence

LOS b: Identify and explain the major international accounting standards for major revenue and expense categories on the income statement and the key differences from U.S. GAAP.

 

 

Are changes in accounting principles and extraordinary items treated similarly in accordance with U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards?

Accounting principles

Extraordinary items

A) No No

B) Yes Yes

C) Yes No

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Treatment of a change in an accounting principle is similar under U.S. GAAP and IFRS. Under both standards, a change in accounting principle is made retrospectively. The treatment of extraordinary items differs between U.S. GAAP and IFRS. Under U.S. GAAP, extraordinary items are reported net of tax below income from continuing operations. IFRS does not permit firms to treat transactions as extraordinary in the income statement.

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At the beginning of 2007, Thunderbird Company started a 3-year construction project. The following data relates to the project:

Contract price	$100 million
Costs incurred in 2007	$50 million
Progress billings	$40 million
Collection of progress billings	$37 million

Because of cost overruns, Thunderbird cannot reliably estimate the total cost of the project. However, Thunderbird expects that its costs incurred so far are recoverable. What amount of revenue should Thunderbird recognize for the year ended 2007 under U.S. Generally Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting Standards (IFRS)?

U.S. GAAP

IFRS

A) $0 $0

B) $37 million $40 million

C) $0 $50 million

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The completed-contract method must be used under U.S. GAAP since Thunderbird cannot reliably estimate the project’s cost. Under the completed-contract method, no revenue is recognized until the project is complete. Under IFRS, when total cost cannot be reliably estimated, revenue is recognized to the extent that recovering contract costs is probable. Since Thunderbird incurred $50 million of cost in 2007, $50 million of revenue is recognized.

1215

Lincoln Corporation and Continental Incorporated are identical companies except that Lincoln complies with U.S. Generally Accepted Accounting Principles and Continental complies with International Financial Reporting Standards. Assuming an inflationary environment and stable inventory quantities, which permissible cost flow assumption will minimize each firm’s pre-tax financial income?

Lincoln Corporation

Continental Incorporated

A) Last-in, first-out Last-in, first-out

B) First-in, first-out First-in, first-out

C) Last-in, first-out Average cost

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LIFO will result in the lowest pre-tax financial income and FIFO will result in the highest pre-tax income. Average cost pre-tax financial income will fall in the middle. LIFO is allowed under U.S. GAAP but is not allowed under IFRS. Thus, Lincoln should choose LIFO and Continental should choose average cost in order to minimize pre-tax financial income.