Solution Manual For Modern Advanced Accounting in Canada 7th Edition by Hilton

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eu/
Solution Manual for Modern Advanced Accounting in Canada 7th Edition by Hilton
Complete downloadable file at:
https://testbanku.eu/Solution-Manual-for-Modern-Advanced-Accounting-in-Canada-7th-Edition-
by-Hilton
Chapter 1
A Survey of International Accounting
Copyright  2013 McGraw-Hill Ryerson Limited. All rights reserved.

Solutions Manual, Chapter 1 1
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 U.S. GAAP and asked to provide arguments to support the different standards and to
give an opinion on which method is better.
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)
A Canadian company has just acquired a non-controlling interest in a U.S. public company. It
must decide whether to use IFRSs or U.S. GAAP for the U.S. subsidiary. Financial statement
information is provided under IFRSs 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 CICA 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 CICA case. A mining company has just sold one of its operating
divisions. Analysis and recommendations are required for accounting issues related to
discontinued operations, revenue and expense recognition, government grants and pollution
rights, purchase and installation of new information system, revenue recognition, convertible
debentures and doubtful accounts receivable.

2 Modern Advanced Accounting in Canada, Seventh Edition
Full file at https://testbanku.eu/
PROBLEMS
Problem 1-1 (40 min.)
A single asset is acquired, and 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.

Details of a European company that reports using IFRSs are given along with specific details
relating to certain account balances. Students are asked to show how these balances should
be reported under 1) U.S. GAAP, and 2) IFRSs using the facts provided. Students are also
asked to reconcile Net Income and Shareholders` Equity to from IFRSs to U.S. GAAP.

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 IFRSs for impaired loans,
interest costs, actuarial gains, compound financial instrument and income taxes.

A private company plans to convert to IFRS and wants to know the impact on the debt-to-equity
ratio and return on total shareholder’s equity. The major issues pertain to impairment of
intangible assets, revaluation of PP&E, R&D costs and redeemable preferred shares.
WEB-BASED PROBLEMS
Web Problem 1-1
Students are asked to access the financial statements of China Mobile Limited, a public
company incorporated in China and listed on a U.S. stock exchange. The student answers a
series of questions based on the company’s financial statements. The questions are aimed at
highlighting the differences between IFRSs and U.S. GAAP.
Web Problem 1-2

Students are asked to access the financial statements of Dr. Reddy’s Laboratories Limited, a
public company incorporated in India and listed on a U.S. stock exchange. The student answers

a series of questions based on the company’s financial statements. The questions are aimed at
Web Problem 1-3

Students are asked to access the financial statements of Toyota Motor Corporation, a public
company incorporated in Japan and listed on a U.S. stock exchange. The student answers a
series of questions based on the company’s financial statements. The questions are aimed at
Web Problem 1-4

The student analyzes the 2010 and 2011 financial statements of Cenovus, a Canadian oil
company, and answers a series of questions aimed at highlighting the transition from Canadian
GAAP to IFRSs.
Web Problem 1-5

The student analyzes the 2010 and 2011 financial statements of Goldcorp, a Canadian gold
producer, and answers a series of questions aimed at highlighting the transition from Canadian
GAAP to IFRSs
SOLUTIONS TO REVIEW QUESTIONS
1. There are times when 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. Accounting students and professionals need to be aware of the differences between
accounting practices in Canada and in other countries for three reasons. First, as the

financial and capital markets become more and more international, there is a higher
chance that they may need to interpret financial statements from other countries at some
point in their career. Second, they may want to move to another country to further their
careers, and they should have an awareness of the different accounting practices that
may exist. However, the most compelling reason is that the profession is quickly moving
toward harmonization of accounting practices around the world. The convergence of
American accounting standards with IFRSs will likely result in new or revised
international accounting standards. Accounting students and practitioners need to be
aware of the convergence project and the impact it could have on IFRSs.
3. One factor that is causing a shift towards a global capital market is that market-driven
economies are replacing many former communist economies, and the demand for
capital is increasing. As well, many countries are forming agreements with international
allies to increase their competitiveness. Finally, improvements in computer and
communication technology are facilitating international trading and investing and
allowing companies to list their shares on many exchanges throughout the world.
4. Five factors that have affected a particular country's accounting standards are: the role
of taxation; the level of development of capital markets, especially the mix of debt and
equity financing; differing legal systems; the ties, both current and historical, between the
country and other countries; and inflation levels.
5. Countries with highly developed capital markets often have sophisticated investors who
demand current and useful accounting information and full disclosure. This leads to the
establishment of a body of generally accepted accounting principles that investors can
rely upon and that companies must comply with. In countries where capital markets are
not fully developed, there are fewer suppliers of capital and these suppliers demand and
receive whatever information they require from companies. As a result, there is less
need for standardized accounting principles.
6. The assumption underlying many countries' accounting policies is that the monetary unit
is stable. When this is the case, historical costs have meaning and there is no need for
price level adjustments. When the inflation level is sufficiently high in a country to make
historical costs meaningless, accounting adjustments that provide for the impact of

inflation have been made in order to provide information that is useful. In these
countries, we have seen price level adjustments and/or current value accounting as part
of the generally accepted accounting practices being used.
7. In Canada items are usually listed from current to non-current, whereas in some
countries, long-term assets are listed before current assets, and owners’ equity is listed
before liabilities. The statement is often called the Statement of Financial Position rather
than a Balance Sheet.
8. Some of the differences between IFRSs and U.S. GAAP are:

 IFRSs capitalize and amortize development costs (under certain circumstances)
while they are expensed immediately under U.S. GAAP.
 More U.S. companies use the LIFO method to calculate ending inventory and cost of
goods sold, as it is allowable for tax purposes if used in the financial statements.
IFRSs favour weighted average and FIFO, as LIFO is not an acceptable alternative
under IFRSs.
 The impairment tests for inventory and capital assets are different.
9. The IASB works to develop a single set of high-quality, global accounting standards that
will be used uniformly for financial reporting around the world.
10. The convergence project between FASB and the IASB hopes to converge IFRSs and
U.S. standards so that the same or similar standards will be acceptable for use by all
companies required to report under the SEC rules in the United States and by all
companies choosing or required to report under IFRSs. The two organizations have
recently outlined a roadmap towards conversion that could result in U.S. domestic
companies reporting under IFRSs by 2015. Currently, foreign public companies filing on
U.S. stock exchanges are permitted to file their financial statements in accordance with
IFRS without reconciliation to U.S. GAAP.
11. At the end of 2012, 93 countries including Canada required IFRSs for all publicly traded
domestic companies, 5 countries required IFRSs for some companies, 23 countries
permitted but did not require its use, and 30 countries including the United States did not

permit the use of IFRSs. The U.S. could convert as early as 2015 if major differences
between U.S. GAAP and IFRS can be resolved by then.
12. Canada has adopted the IASB standards for use by publicly accountable enterprises
effective for fiscal periods beginning on or after January 1, 2011. The IASB standards
are contained in Part I of the CICA Handbook.
13. Even if all the countries in the world adopt IFRSs, comparability will not completely exist
if preparers do not interpret the standards on a consistent basis. The standards are
broad based and require professional judgment. Also some countries are adding
additional “home-grown standards” to cover local conditions.
14. The main reason the Accounting Standards Board decided to create a separate section
of the CICA 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.
15. There are a few reasons why a private company would want to comply with IFRSs even
though it is not required to do so. It may have plans to become publicly listed at some
point in the future and will then be required to comply with IFRSs. 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.
SOLUTIONS TO CASES
Case 1-1
Students may assume that U.S. GAAP is superior and that all reporting issues can (or should)
be resolved by following U.S. rules. However, the reporting of research and development costs
is a good example of a requirement where many different approaches can be justified and the
U.S. rule might be nothing more than an easy method to apply. In the United States, all such
costs are expensed as incurred because of the difficulty of assessing the future potential of
these projects. IFRSs allow capitalization of development costs when certain criteria are met.
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. In the U.S., the FASB felt that
such decisions were too subjective and 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?
In the U.S., a conservative approach has been taken because of the difficulty of determining
whether an asset has been or will be created. To ensure comparability, all companies are
required to expense all R&D costs. As a result, some discoveries that prove to be very valuable
to a company for years to come are expensed immediately. In other countries, companies will
tend to capitalize a differing array of projects because of flexibility in their guidelines. Do the
benefits of consistency and comparability (each company expenses all costs each year)
outweigh the cost of producing financial statements that might omit valuable assets from the
balance sheet? No definitive answer exists for that question. However, the reader of financial

statements needs to be aware of the fundamental differences in approach that exist in
accounting for research and development costs before making comparisons between
companies from different countries.
Case 1-2
(a) Can any alternative to historical cost provide for fair presentation in financial reports
or are the risks too great? Discuss.
In most countries, when we refer to “fair presentation” or a “true and fair view” 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.
The first Company’s Act which included the phrase “a true and fair view” is now over 150 years
old, and there is still some controversy as to whether the authors of this legislation intended
“historical cost” to be a part of the model. The historical cost principle, as we know it, had not yet
been fully articulated in textbooks and become a firm basis for accounting practice. As a result
of these factors, financial statements may be considered to provide “fair presentation,” whether
prepared in accordance with the historical cost convention, in terms of replacement cost, the
purchasing power units in a general price level adjusted model, or a variety of hybrid models.
Note that U.S. accounting is hardly a pure historical cost model, with many exceptions to
historical cost involved (mostly downward adjustments) in the scheme of asset valuation and
earnings determination. The important issue is that the model employed is known, understood,
and consistently followed.
Arguably, current value (replacement cost) 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 replacement cost, 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 “current costs” of prior periods
may display no relationship to current costs 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 current cost basis
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 current value accounting, and leads many countries to have highly detailed rules for
the preparation, audit, and publication of financial statement asset values under current cost.
Current value accounting and general price level accounting are both responses to the problem
of changing prices and the impact on financial reporting. Current value accounting departs from
the historical cost basis of accounting, whereas general price level adjustment is not a departure
from historical cost. General price level (“GPL”) accounting changes the measuring unit in which
the historical cost is reported, but does not change the underlying basis of valuation for items on
the income statement and balance sheet. Current value accounting changes this underlying
basis of valuation. Historical cost is not restated; new values are determined, based on current
information, for all items on the balance sheet (with the exception of monetary items which are
not restated, as they are already stated at current values).
Current value accounting has many variations, each of which uses a different valuation base. All
of these models bear little relation to historical cost accounting, and in many ways less
relationship to GPL-adjusted amounts. In all cases, the historical cost relationship among
financial statement items is disregarded in favour of the new basis of accountability.
(b) Discuss the relative merits of historical cost accounting and replacement cost
accounting. Consider the question of the achievement of a balance between relevance
and reliability and the provision of a “true and fair view” or “fair presentation” in financial
reporting.
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:
Historical cost accounting has the advantage that it is verifiable, and therefore tends to be more
reliable and free from bias than replacement cost 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.
Replacement cost 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,
current costs are 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 current cost 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. Replacement
cost accounting will alleviate this problem by charging to expense the replacement cost of all
items consumed. With replacement cost 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.
(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. 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
supplementary discussion of financial results and in many cases explanations of accounting
treatments used in a company’s financial statements for the period. Further, it is important to
note that at some point additional information may “overload” the user. Too much information
may achieve the undesired result of making financial statements more difficult to understand.
This must be taken into account when considering supplemental information and explanations.
CASE 1-3
Case Note
Ajax Communications presents the classic case of the conflict among the accounting standards
that are in force in different jurisdictions. Each set of requirements can be seen to be correct,
although dramatically different amounts may be presented on a variety of dimensions.
Certainly, the standard-setters (and, generally, the accounting practitioners) of each jurisdiction
believe that the requirements in place locally are the best requirements available, in that they
present results that are consistent with the prevailing views on a fair presentation of both
financial performance and financial position. Although the conceptual frameworks are very
similar under IFRSs and U.S. GAAP, the actual requirements in place are quite different in some
areas, and there is no guidance in choosing the right set of accounting standards to base
decisions upon. Harmonization efforts are ongoing to resolve these differences, yet regardless
of the changes in accounting standards, there will remain differences in interpretation of the
requirements and differences in the practices that are in place.

Responses to specific questions:
(a) As John McCurdy, outline the initial approach that you will take in order to determine the
reasons for the difference in the numbers.
Items throughout the income statement, from total revenue through net income, differ between
the two sets of financial statements, as do all the aspects of the balance sheet presented.
Although it is not unusual to have some differences between U.S. GAAP and IFRSs, the
magnitude of the differences would not usually be of the size in the Waqaas case. As a start,
McCurdy may be able to determine where some of the difference arises by examining the
summary of significant accounting policies included with the financial statements. This source
will not identify all of the accounting policies in place. More detailed knowledge of the
accounting policies in place could come from the specific notes to the financial statements. In
addition he should search for publications or web sites that discuss differences in accounting
policies among countries. A website provided by Deloitte (www.iasplus.com) could also provide
useful information.
(b) List some of the obvious items that need resolution and indicate some of the possible
causes of the discrepancies.
 Why is total revenue significantly higher under U.S. GAAP for the same period? (Are
their revenue recognition policies the same?)
 Why are operating income and income before extraordinary items higher under IFRSs
for the same period? (Revenue differences would be part of the answer, but are there
also major differences in expenses?)
 What is the nature of the extraordinary item, classified as such in the United States, and
how is it reported under IFRSs?
 What is the nature of the accounting policy differences that have lead to such dramatic
differences in asset valuation between the two sets of financial statements? (Two
possible reasons: (1) consolidation of some investments under IFRSs that would not be
consolidated in the U.S. financial statements; this might explain the differences in the
investments account, and arises because there are different requirements for the
determination of when an investment is classified as a subsidiary and consolidated; and
(2) the use of LIFO in the U.S. and FIFO under IFRSs might produce different results if
there have been major changes in inventory costs during the year.)
 Given the higher asset values under IFRSs, the company may be using the revaluation
option under IFRS.
 What items, if any, have been deferred and are being amortized under IFRSs that are
directly expensed in the U.S. statements? (R&D comes to mind) Does this account for
the difference in intangibles?
 A variety of other specific points could be raised, including, for example, policies
associated with tax allocation.
(c) In your opinion, which GAAP best reflects economic reality? Briefly explain.
Without knowing what has caused the difference, it is hard to determine which GAAP best
reflects economic reality. Although the differences represent a dilemma to the Board of Directors
in this case, neither set of financial statements may be said to be unequivocally superior to the
other for the purpose of making investment decisions. This is the general dilemma of
international comparisons, and a principal reason why accounting harmonization is so
important.
CASE 1-4
Memorandum
To: Partner
From: CA
Re: Roman Systems Inc. Interim Audit Issues
Given that Roman Systems Inc. (RSI) plans to go public within the next year, it should probably
follow IFRS. This will avoid retrospective restatement of the financial statements at a later date.
RSI’s bias is to maximize revenue, net income and shareholder’s equity in order to attract
potential investors.
The major financial reporting issues arising from our interim work are:
I. Accounting for the costs of the new accounting system

II. Revenue recognition
a. Maintenance and contract revenue
b. Product revenue

c. ABM revenue
III. Convertible debentures
IV. Receivable from Mountain Bank
Accounting for new accounting system costs
During fiscal Year 12, RSI implemented a new general ledger package. The new package has
been functioning in parallel with the old system since April 1, Year 12, and will no longer be used
in parallel effective July 1, Year 12. The new package has been used to generate RSI’s
financial results since April.
RSI has incurred $720,000 in third-party costs associated with the new general ledger package,
together with $70,000 of internal salary costs. These costs have all been capitalized in Year 12.
IAS 38 offers guidance as to the costs that may be capitalized when internally developing
intangible assets. In particular:
The cost of an internally generated intangible asset comprises all directly attributable costs
necessary to create, produce, and prepare the asset to be capable of operating in the manner
intended by management. Examples of directly attributable costs are:
(a) costs of materials and services used or consumed in generating the intangible asset; and
(b) costs of employee benefits (as defined in IAS 19) arising from the generation of the
intangible asset;
The following are not components of the cost of an internally generated intangible asset:
(a) selling, administrative and other general overhead expenditure unless this expenditure can
be directly attributed to preparing the asset for use;
(b) identified inefficiencies and initial operating losses incurred before the asset achieves
planned performance; and
(c) expenditures on training staff to operate the asset.
Based on the above:

- Costs of $110,000 related to initial review and recommendations would be considered

business process re-engineering activities and not directly related to the creation of the
new system. These costs should be expensed.
- Costs of $320,000 for new software and implementation costs represent a betterment,
as they extend the life of the accounting system and enhance the service capacity.
They should be capitalized.
- Training costs of $225,000 should be expensed, as the costs are not directly attributable
to the development, betterment, or acquisition of the software.
- The monthly support fee of $25,000 (and all future monthly fees) is an operational cost
of the system and should be expensed.
- The other consulting fees of $40,000 should be reviewed in more detail, but they appear
to be part of the ongoing costs of the new system with no specific value added, and
should likely be expensed.
- The salaries of $70,000 could be capitalized if they are directly attributable to the
implementation of the new software package. Since only two additional individuals
were hired to handle the work previously done by the four employees, it is questionable
whether the four employees were 100% dedicated to the task of implementing the new
software. Only the costs related to the implementation should be capitalized.
Effective July 1, RSI should start amortizing the new system and effective June 30, Year 12, it
should write off the remaining carrying amount of the old system.
Revenue Recognition
Product Revenue
Product revenue is recognized at the time of delivery and installation. Customer acceptance is
evidenced by customer sign-off once installation is complete. It is RSI’s standard practice to
obtain such evidence of acceptance. It would therefore be inappropriate to recognize revenue
without such evidence of customer acceptance.
In performing the interim work, we determined that revenue of $640,000 was recorded prior to
obtaining customer sign-off. This has not been an issue in the past and may be an isolated
case related to new employees who may be unfamiliar with RSI’s standard procedures. We
need to ensure that Marge communicated the policy to all staff members and ensure that
customer sign-off is obtained for all installations prior to year-end. Since it is early June, Marge
would have a month to ensure that there are no issues at year-end.
Maintenance contracts
During the year, the company changed its revenue recognition policy on maintenance contracts.
Assuming that the company previously recognized maintenance revenue on a straight-line basis
over the course of the contract, the new method will recognize a greater proportion of the
revenue earlier in the contract life. This new method recognizes 25% of the revenue in each of
the first two months and may not be appropriate. Maintenance services must be provided over
the full life of the contract. The preventive maintenance is entirely at the discretion of the
company. It may not be continued in the future and may not consistently reduce future service
calls. As well, the study serving as a basis for the policy is two years old, and may no longer be
an accurate reflection of the pattern of maintenance calls. Revenue recognition for service
contracts should be based on the service obligation over the term of the contract.
ABM business
RSI began selling ABMs in fiscal Year 12. The machines are purchased from an electronic
manufacturer and resold at margins of 5%. It is important to consider whether RSI is recording
revenue on a gross or net basis.
Recognizing revenue on a gross basis is appropriate if RSI bears the risk of selling the product.
Recognizing revenue on a net basis is more appropriate if RSI is simply fulfilling orders obtained
by the manufacturer, for a fee. It is important to better understand the relationship between RSI,
the manufacturer, and the end-party customer in order to recommend an appropriate revenue
recognition policy.
Transaction fee revenue
The company has begun a new line of business related to transaction fee revenue generated
from the sale of ABM machines. A total of 2,830,000 ABM transactions were processed at a fee
of $1.50 per transaction, for a total of $4,245,000. RSI’s share of this fee is 40%. RSI is
currently recording the transaction fee revenue on a gross basis, with an associated expense for
the 60% attributable to other parties.
The following factors suggest that the ABM transaction fee revenue should be recorded on a net
basis:
- RSI has no ownership of the ABM machines;
- RSI has no responsibility for stocking or emptying the machines;
- RSI has no responsibility for cash collection;
- RSI is being paid on a net basis;
- RSI does not have responsibility for maintenance of the ABMs, and
- RSI cannot set the transaction fee amount.
On this basis, it would be appropriate for the ABM transaction fee revenue to be recorded on a
net basis i.e. record revenue of $1,698,000 (40% x 4,245,000) and no expenses. This will
reduce revenue and expenses by $2,547,000 but will have no impact of net income or
shareholders’ equity.
Convertible debentures
The debentures are currently classified as long-term debt. Since they are convertible into
common shares, RSI should consider the reclassification of a portion of the debentures based
on the fair value of the conversion feature. This reclassification will result in higher charges to
the income statement through the addition of the debt discount. The reclassification is currently
not required since RSI is not a public company. Marge Roman should be made aware that if
RSI is going public, a detailed analysis should be done related to the split between debt and
equity. The financial statements in an offering document would have to be modified to split the
debenture between debt and equity. The debt is repayable on demand should RSI not go public
by June 30, Year 13. The debt may therefore have to be reclassified as a short-term item in the
current financial statements. While there are plans to go public and negotiations have begun
(which supports a long-term classification), there is no document such as terms of agreement or
a memorandum of understanding providing evidence that this will likely occur. Also, the ability
to issue the IPO is beyond the strict control of the company. Reclassifying the debentures as
short-term appears to be the more appropriate form of presentation.
Receivable from Mountain Bank
In reviewing the aged accounts received at April 30, Year 12 we determined that there was a
balance of $835,000 from Mountain Bank, which was overdue by more than 120 days. On June
1, $450,000 was received from the customer and the balance remains outstanding. There are
between five and ten sites where the Bank is not completely satisfied with the way the cameras
were installed.
Two issues arise which must be analyzed in succession. First, is it appropriate to recognize
revenue upon delivery, installation, and sign off by the customer? And second, if revenue
recognition is appropriate, is collection of the remaining accounts receivable doubtful?
On the issue of revenue recognition, IAS 8 par .14 says that revenue from the sale of goods can
be recognized when all of the following conditions have been met:
(a) the entity has transferred to the buyer the significant risks and rewards of ownership of the
goods;
(b) the entity retains neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the goods sold;
(c) the amount of revenue can be measured reliably;
(d) it is probable that the economic benefits associated with the transaction will flow to the
entity; and
(e) the costs incurred or to be incurred in respect of the transaction can be measured reliably.
In this case all of the above conditions were met upon delivery and installation of the cameras.
Revenue may be held back, however, to the extent that a customer acceptance term exists in
the arrangement. Although no terms exists in the contract with Mountain that requires the client
to come back and adjust the installation of the cameras, it could be argued that such a term
exists implicitly since the client has been willing to do so and has accommodated the customer.
The question then becomes whether this implicit acceptance is material such that it could be
argued that the delivery criterion has not been met. In this case I believe the answer is no. The
work required to complete the adjustments is minimal and within the control of RSI, and has
nothing to do with the quality of the product. On this basis, it appears that revenue recognition
was appropriate.
On the issue regarding collectibility, it must be determined whether collectibility is reasonably

assured. In this case, there is evidence that the customer is willing to pay once the minor fixes
are complete given the $450,000 payment that was made in June. It appears unlikely that the
customer will not pay. We should examine Mountain’s payment history a little closer to
determine whether amounts were unpaid regarding prior work/product sold and whether any
amounts were written off/forgiven. In the absence of either, it would appear supportable that the
accounts receivable related to this sale are collectible and do not need to written down/off.
Overall Impact
Based on the recommendations above, RSI’s revenue, net income and shareholder’s equity will
decrease. RSI will not like these adjustments because they worsen the key financial metrics.
The adjustments are appropriate as they better reflect the results of operations and financial
position of RSI in accordance with GAAP.
CASE 1-5
Memo to: Manager in charge of the audit of Minink Limited (ML)
From: CA
Subject: Accounting matters related to the Year 4 audit of ML
Overview
The objective of the parent company of Minink Limited (ML) is to present strong statements
since it plans to issue shares in the near future. Since ML's financial statements are material to
its parent's financial statements, ML is likely to share that objective. We will have to keep this
possible bias in mind during the audit of ML to ensure that income and asset accounts are not
overstated and liability accounts are not understated.

The balance of this memo analyzes the major accounting issues facing ML in Year 4.
Sale of Processing Division
Based on the information provided to date, a preliminary calculation of the gain on sale of the
Ladium Processing Division's (processing's) operating assets yields a figure of approximately
$332.59 million, calculated as follows:
(in millions)
Proceeds $ 398.600
Less: Selling costs (6.700)
Carrying amount of assets sold (23.454+17.846+18.010 for Exhibit III) (59.310)
Preliminary gain $ 332.590
The above calculation uses the carrying amount of the assets at July 31, Year 4. However, the
carrying amount at August 15, Year 4, the closing date for the sale, should be used to calculate
the gain for accounting purposes.
The selling price of ladium under the long-term supply agreement with Donaz Integrated Limited
(DIL) is $3,450 per tonne. This price is below the transfer price of $3,700 used in the Year 4/5
budget, which contemplated the Ladium Extraction Division (Extraction) selling to Processing. It
thus appears that the Extraction division will incur losses on the sale of ladium over the life of
the long-term contract. Although ML has a current accounting gain of $332.59 million as a result
of accepting Offer 1, there are future losses of $167.778 million as shown in Appendix 1.
There are two options for dealing with the anticipated loss. Under option 1, the $167.778 million
loss would reduce the amount of the gain recognized on the sale of the Processing Division.
The gain on sale would be $164.812 million (332.590 – 167.778) at the time of sale. The
$167.778 million would be set up as deferred revenue, which would be brought into income as
sales of ladium were made to Donaz Integrated Limited (DIL). In so doing, Extraction's
revenues for sale of the ladium would reflect a more realistic value for each tonne of ladium
being sold.
Under the second option, the $167.778 million loss would be recognized as a loss and deferred
credit at the time of the sale of the Processing division. The loss would be matched against the

full gain of $332.590 million. The deferred credit would be brought into income as sales of
ladium were made to DIL as in option 1. It seems reasonable to view the sale and long-term
supply agreement together, and the accounting for the gain and future losses should therefore
occur in the same period. ML's parent probably pushed ML to accept Offer 1 in order to
recognize the large gain without giving consideration to the future losses. The other offer would
not have shown as large a gain upfront, but there would not have been future losses.
From an accounting perspective, since all of the revenue recognition criteria are met (e.g.,
collectibility, measurement of consideration, transfer of risks and rewards), a gain on sale of the
Processing Division should be recorded, but a separate loss (on the long-term supply
agreement) must be accrued. This loss on the agreement is an unusual item and should be
disclosed separately in the financial statements. In the future, costs will be recorded as
incurred, and the deferred credit that was set up to offset the loss will be taken into income
(thus offsetting the costs).
The sale of Processing's operations leads to a discontinued operation. Thus, the gain on sale
will be disclosed as a gain on discontinued operations and will be presented net of taxes. The
operations of Processing will be disclosed separately as income from discontinued operations
as per IFRS 5.
The details of the long-term supply agreement, which has been agreed to, should be disclosed.
Accounting for the carrying amount of Extraction's assets also needs to be considered. It has
been shown that Extraction will be losing money over the nine-year contract. Therefore, an
impairment test should be performed at the end of the year. The assets should be written down
to the higher of fair value less costs of disposal and present value of future cash flows from
continuing to use the assets.
Crushones inventory issues
We must determine the appropriate accounting treatment and presentation for the funding
received for the Crushones. The alternatives are treating the funding as a loan or treating it as
government assistance. If the finding is treated as a loan, the gross value of the inventory will
be shown with a corresponding liability for 90% of the costs. If the funding is treated as
government assistance, the inventory will be presented net of the funding. Whichever method is

used, the net carrying amount is $16.5 million, and it must be decided whether the net amount
or the gross amounts should be shown. Since ML's parent wants to issue shares in the near
future, it will probably want to minimize its debt. Therefore, the preferred alternative is to treat
the funding as government assistance, to allow the debt to be offset against the Crushones
inventory.
Full disclosure of the terms of the funding must be made in the notes to the financial statements
regardless of the treatment that is used. The Crushones should be classified as long-term
inventory since they are not expected to be sold for several years.
Other government funding
The $21 million ($3 million per month for 7 months) in funding received by August 31 should be
deferred rather than recognized in income since the related work has not yet commenced. The
grant should be recognized in income when the related expense (amortization of capitalized
development costs or research costs expensed directly) affects the income statement.
Disclosure of the terms of the funding is required.
Pollution rights
ML's management has requested advice from us on how to account for the pollution rights that
the government will start granting in Year 5. On the face of it, the treatment would be to
recognize revenue on sale of the pollution rights. The machinery would be set up at cost and
depreciated as usual.
The substance of the transaction is that the increased cost of the equipment allows the
company to sell the pollution rights. Therefore, it could be argued that the revenue stream from
pollution rights should be tied to the incremental cost of the machinery. That is, the revenue
from the sale of pollution rights should be used to offset the depreciation charge or,
alternatively, it should offset the machinery purchased. This could be accomplished by deferring
the amount received and amortizing that credit in the same manner as that is being used to
amortize the machinery. This approach would amount to treating the revenues from the sale of
pollution rights in the same manner as government assistance. Once equipment no longer
generates a revenue stream from pollution rights, it is written down to net recoverable amount.
ML has to decide whether the rights should be recognized as revenue/deferred revenue when
the right are sold or set up as inventory when received. There is no "cost" to the rights, as the
government assigned them. On the other hand, the depreciation charge related to the
incremental cost of the machinery could be seen as being similar to fixed overhead that is
included in inventory. Thus, the depreciation could be set up as the cost of the pollution rights.
However, there is no assurance that a market exists for these rights. Whether a market exists
depends on how many other companies in the industry have emissions that are greater than
the level permitted and how many companies have emissions that are lower.
Even if there is a market, ML may not have any pollution rights to sell. The government will
calculate the industry wide quota on the basis of the calendar year. Therefore, at the August 31
year end it will not be certain whether ML will be able to sell any rights since the total emissions
until December 31 must be known. Thus the difference between the calendar year and the
fiscal year of ML makes it difficult to determine whether ML will have any rights to sell and what
the market price for the rights will be at the time of their sale (before March 31 of the following
year). Therefore, no asset should be set up.
If, on the other hand, it is known that ML has exceeded its pollution rights (or will do so by
December 31), then a liability must be set up. If the value is not determinable (which is likely for
the first few years), then the existence of the liability must be disclosed.
APPENDIX I
Minink Limited
Calculation of Losses on Long-term Supply Agreement
Millions
Annual volume times selling price [$3,450 x 102,000 tonnes] (Note 1) $351.900
Less:
Cost of sales ($3,400 x 102,000 tonnes) 346.800
Fixed costs - no change 9.610
Head office charges (Note 2) 0
Incremental extraction costs [$562 x (102,000-90,000) tonnes] 6.744
Loss per year $ 11.254
Loss over 9 years ($11.254 x 9) $101.286

By selling Processing's operations and entering into the long-term supply agreement, ML has
committed itself to a minimum loss of $101 million over the next nine years, if costs remain the
same.
In fact, the loss will be even greater since, in order to meet the minimum levels expected,
extraction equipment that costs $58 million would be required. Further, since the equipment has
a life of only 5 years, a second purchase will be needed before the nine-year contract expires.
Thus, on top of the $101 million loss, an additional $116 million will have to be spent, for a total
loss of$217 million. Since the contract is for only 9 years, it could be argued that 1/5 of the cost
of the second purchase does not have to be included in the calculation of the loss on the
contract. However, if we do not have assurance that the equipment will be used in the tenth
year, then the full cost should be included in the expected loss on the contract.
The losses could be discounted over the nine years, rather than using the total gross amount of
the loss. Therefore, the present value of the total loss would be $167.778 million, as outlined
below.
Millions
Yearly loss of $11.254 million x 6.25
(assuming 8% interest, 9 years) $70.338
Extraction equipment purchased immediately 58.000
Extraction equipment purchased at the beginning of the sixth year
($58 million x .68) (assuming 8% interest) 39.440
Discounted loss over 9 years $167.778
Conclusion
By selling Processing's operations and agreeing to the long-term supply agreement, ML will
incur a loss of $167.778 million.
Notes:
1. The minimum volume in the agreement of 102,000 tonnes was used since at higher
volumes the loss would be even greater (an additional loss of $512 per tonne). ML likely

does not want to accrue a loss and, if required to, would accrue the least amount
possible.
2. If Extraction ceases to operate and head office charges do not change as a result, then
the head office charges are irrelevant to the calculation. However, if some costs are
specifically traceable to Extraction, then they should be considered in the calculation.
SOLUTIONS TO PROBLEMS
Problem 1-1
Historical Current
Cost Value
(U.S. GAAP) (IAS 16)
Jan 1 /1 Asset cost 10,000,000 10,000,000
Year 1 Depreciation 500,000 500,000
Dec 31/1 Balance 9,500,000 9,500,000
Dec 31/2 Balance 9,000,000 9,000,000
Jan 2/3 Appraisal 12,000,000
Dec 31/3 Balance 8,500,000 11,333,333
Dec 31/4 Balance 8,000,000 10,666,666
(a) Year 2 Year 3 Year 4

1. IAS 16 500,000 666,667 666,667
2. U.S. GAAP 500,000 500,000 500,000
(b) Jan 2/3 Dec 31/3 Dec 31/4

1. IAS 16 12,000,000 11,333,333 10,666,666
2. U.S. GAAP 9,000,000 8,500,000 8,000,000
(c) IAS 16 Total depreciation over 20 years

Years 1 & 2 1,000,000
Next 18 years 12,000,000 13,000,000
U.S. GAAP Total depreciation over 20 years 10,000,000
Profit U.S. GAAP > IAS 16 3,000,000
There would be no difference in shareholders’ equity at the end of 20 years
During the first two years the reduction in shareholders’ equity is the same under the two
alternatives (2 x 500,000 = 1,000,000)
During the last 18 years
depreciation IAS 16 > U.S. GAAP (18 x 166,667) 3,000,000
Offset by appraisal surplus through OCI 3,000,000
Difference in shareholders’ equity 0
Problem 1-2
(a) (i)
IFRS1 U.S. GAAP2
Inventory @ Dec 31, Yr 2 $98,000 $95,000
1
Under IFRS (IAS 2), inventory is stated at the lower of cost or market. Net realizable value is
used as the market value. Thus, inventory should be stated at the lower of $100,000, and
$98,000, which is the net realizable value (market value).
2
Under U.S. GAAP, inventory is stated at the lower of cost or market. However, under U.S.
GAAP the market value is the replacement cost ($95,000), but is not greater than net
realizable value ($98,000) and is not less than net realizable value less normal profit margin
($98,000 - .20 x $100,000 = $78,000).
(ii) IFRS3 U.S. GAAP4

R&D @ Dec 31, Yr 2 $135,000 $0
3
$500,000*.30 - ($500,000*.30)/10 = $135,000 – only development costs are capitalized. (IAS
38)
4
R&D costs are expensed under U.S. GAAP.
(iii) IFRS5 U.S. GAAP6

Deferred gain on lease @ Dec 31, Yr 2 $0 $30,000
5
Under IFRS (IAS 17), a gain on sale-leaseback is recognized immediately in income if the
lease qualifies as an operating lease.
6
Under U.S. GAAP, if the lessee does not relinquish more than a minor part of the right to use
the asset, the gain is deferred and amortized over the lease term. ($50,000 – ($50,000/5)*2 =
$30,000)
(iv) IFRS7 U.S. GAAP8

Equipment @ Dec 31, Yr 2 $56,250 $60,000
7
Under IFRS (IAS 36), an asset is impaired if the carrying amount exceeds the higher of assets
value in use (discounted cash flows = $75,000 at Dec 31, Yr 1) and its FV less costs to dispose
($72,000). If impaired, the asset is written down to its value in use. The balance at Dec 31, Yr
2 is therefore determined using the $75,000 value in use at Dec 31, Yr 1 less one year of
depreciation ($75,000/4 = $18,750).
8
Under U.S. GAAP, there is no indicator of impairment if the undiscounted cash flows from its
use ($85,000) are greater than the carrying amount ($80,000 = $100,000 - $20,000 at Dec 31,
Yr 1). The balance under U.S. GAAP at Dec 31, Yr 2 is therefore $100,000 less two years of
depreciation ($20,000 per year).
(b)
Net Income Year 2 under IFRS $200,000
Less: additional write-down of inv ($98,000-$95,000) (3,000)
additional depreciation under U.S. GAAP ($20,000 - $18,750) (1,250)
Add: development cost amort, not recognized under U.S. GAAP 15,000
Lease gain amort under U.S. GAAP 10,000
Net Income Year 2 under U.S. GAAP $220,750
S/E Dec 31 Year 2 under IFRS $1,800,000

Less: additional write-down of inv ($98,000-$95,000) (3,000)
development cost not capitalized under U.S. GAAP (135,000)
additional depreciation under U.S. GAAP ($20,000 - $18,750) (1,250)
lease gain deferred under U.S. GAAP (30,000)
Add: impairment on equipment not recognized in Year 1 under U.S. GAAP 5,000
S/E @ Dec 31, Year 2 under U.S. GAAP $1,635,750
Problem 1-3
Net income Shareholders’ equity
Description ASPE IFRSs ASPE IFRSs
Preliminary financial statements $400,000 $400,000 $3,500,000 $3,500,000
Loan impairment (#1) (5,629) (12,218) (5,629) (12,218)
Accrued interest payable (#2) (15,600) (15,600)
Actuarial gains (#3) 3,000 3,000 3,000 3,000
Equity portion of compound instrument (#4) 50,000 50,000
Future tax liability (#5) (40,000) (40,000) (40,000) (40,000)
Revised values $341,771 $350,782 $3,491,771 $3,500,782
Notes:
1. Impaired loans – must determine present value of future cash flows. Must use market
interest rate of 6% under ASPE and original interest rate of 8% under IFRSs.
2. Interest costs – Can capitalize or expense under ASPE; would expense in order to
minimize ROE. Must capitalize under IFRSs.
3. Actuarial gains – Can recognize immediately in net income or defer and amortize in net
income under ASPE; would defer and amortize in net income in order to minimize the
positive affect on net income. Can defer and amortize in net income or recognize
immediately in OCI under IFRSs; would defer and amortize in net income in order to
positively affect net income.
4. Compound financial instrument – Can recognize a portion or nothing as equity under
ASPE; would recognize a portion as equity and thereby increase denominator for ROE
calculation and thereby reduce ROE. Must recognize a portion as equity under IFRSs.
5. Income Tax – any adjustments for items 1 to 3 above need to be multiplied by .6, which
is 1 – tax rate of 40%. Can use taxes payable or future income tax method under ASPE;
would use future income tax in order to reduce net income. Must use future income tax
method under IFRSs.

Calculations: ASPE IFRSs
1. Loan receivable
Carrying amount $220,000 $220,000
Present value of future cash flows at
6% 210,618
8% 199,636
Impairment loss before tax 9,382 20,364
Impairment loss after tax (x .6) 5,629 12,218
2. Interest costs
March to September (400,000 x 6% x 7/12) 14,000 14,000
October to December (800,000 x 6% x 3/12) 12,000 12,000
Accrued interest expensed 26,000
Accrued interest capitalized 26,000
After tax expense (x .6) 15,600
3. Actuarial gains
Defer and amortize (150,000 / 15 x 6/12) 5,000 5,000
After tax gain (x .6) 3,000 3,000
4. Compound financial instrument
Equity portion (1,000,000 – 950,000) 50,000 50,000
Not taxable since it does not affect net income
5. Income tax
Future income tax expense for Year 5 (340,000 – 300,000) 40,000 40,000
Future income tax expense for all years 340,000 340,000
Problem 1-4
a)
Description Net income Debt Equity
Per ASPE $3,000 $25,200 $21,800
Impairment of intangible assets (100)1 (400)2
Revaluation of PP&E 803
Depreciation of appraisal increment (10)4 (10)4
R & D expense (200)5
Redeemable preferred shares 1,8006 (1,800)6
Per IFRSs $2,890 $27,000 $19,470
ASPE IFRS
Return on total equityNet income 3,000 = 13.76% = 14.84%
Total equity 21,800 19,470
Debt to equity Debt 25,200 = 1.16 27,000 = 1.39

Equity 21,800 19,470
Notes:
Net income captures the change in equity during one period i.e. Year 6. Debt is
measured at a point in time i.e. end of Year 6. Equity is the difference between assets
and liabilities at a point in time i.e. end of Year 6; it also captures the cumulative effect of
net income and dividends for all years.
1. Intangible assets decreased during the year by (9,800 – 9,400) – (12,000 –
11,700) = 100
2. Intangible assets decreased at end of the year by (9,800 – 9,400) = 400
3. PP& E
Cost 1,250
Accumulated depreciation to end of Year 5
[(1,250 – 50) / 10 x 2] 240
Carrying amount, January 1, Year 6 1,010
Appraised value, January 1, Year 6 1,090
Appraisal increment, January 1, Year 6 80
4. Depreciation on appraisal increment for Year 6 (80 / 8) 10
5. R& D costs capitalized under ASPE in order to maximize net income. R&D
costs must be expensed under IFRS.
6. Under IFRSs, the preferred shares are reported as debt at the redemption
value of 1,800 instead of being reported as equity at the assigned value of
100. The difference between the redemption value and assigned value of the

preferred shares is charged to retained earnings as a deemed dividend.
b)
The debt to equity ratio increased, which means that solvency looks worse under IFRS.
The return on total equity increased, which makes profitability look better under IFRS.
SOLUTIONS TO WEB-BASED PROBLEMS

Web Problem 1-1
(a) The financial statements are presented in Reinminbi (Chinese Yuan). This is disclosed
on the face of the financial statements.
(b) The financial statements are prepared in accordance with International Financial
Reporting Standards. This is disclosed in the statement of compliance in Note 1 on
page F-13.
(c) There is no reconciliation provided between IFRS and U.S. GAAP because the SEC, in
2007, approved the use of IFRS without reconciliation for all foreign companies listed on
U.S. exchanges.
(d) Current ratio 2011 = 382,685 / 273,244 = 1.40:1, 2010 = 321,832 / 255,630 = 1.26:1.
The increase in the 2011 current ratio over that of 2010 indicates an improvement in the
liquidity position of the company during the year. Current assets increased by 60,853
while current liabilities only increased by 17,614. The majority of the increase in current
assets is attributable to the increase in the line item “Deposits with banks”.
(e) Debt/equity 2011 = (273,244 + 28,895) / 650,419 = .46:1, 2010 = (255,630 + 28,902) /
577,403 = .49:1. The decrease in the 2011 debt/equity ratio over that of 2010 indicates
an improvement in the solvency of the company during the year.
(f) Profit increased slightly from the previous year. The biggest item contributing to this
increase was operating revenues from voice services.
Web Problem 1-2

(a) As per note 2(d), the consolidated financial statements have been prepared in Indian
rupees for 2011 and 2012 figures. Solely for the convenience of the reader, the 2012

figures are also presented in United States dollars using the exchange rate at the end of
the year.
(b) The financial statements were prepared in accordance with International Financial
Reporting Standards. This is disclosed in note 2(a).
(c) There is no reconciliation provided between IFRS and U.S. GAAP because the SEC, in
2007, approved the use of IFRS without reconciliation for all foreign companies listed on
U.S. exchanges.
(d) Current ratio 2012 = 69,952 / 43,460 = 1.61:1, 2011 = 47,593 / 41,015 = 1.16:1. Since
the current ratio and the working capital position increased during the year, the liquidity
position of the company improved during the year.
(e) Debt/equity 2012 = 62,033 / 57,444 = 1.08:1, 2011 = 49,015 / 45,990 = 1.07:1. Since
the debt-to-equity ratio increased, the solvency of the company weakened during the
year.
(f) Profit increased from 11,040 in 2011 to 14,262 in 2012. The biggest item affecting the
change in profit was an increase in revenues from 74,693 in 2011 to 96,737 in 2012,
which caused an increase in gross profit from 40,263 in 2011 to 53,305 in 2012.
Web Problem 1-3

(a) As per the title of each statement, the consolidated financial statements have been
prepared in Japanese yen for both the 2012 and 2011 figures. However, the 2012 figures
are also presented in United States dollars.
(b) As per note 2, the parent company and its subsidiaries in Japan and its foreign
subsidiaries prepare their financial statements in accordance with accounting principles
generally accepted in Japan, and those of their countries of domicile. Certain
adjustments and reclassifications have been incorporated in the consolidated financial
statements to conform to U.S. GAAP. As such, the financial statements are ultimately
presented in accordance with U.S. GAAP.
(c) There is no reconciliation of net income as reported to net income under U.S. GAAP
because the company effectively reports in accordance with U.S. GAAP.
(d) Current ratio 2012 = 12,321,189 / 11,781,574 = 1.05:1, 2011 = 11,829,755 / 10,790,990
= 1.10:1. The current ratio has decreased; therefore, the liquidity position of the
company weakened during the year. Current assets increased by 491,434 but current
liabilities increased by more than twice that amount, going up by 990,584. The majority
of the increase in current liabilities is attributable to the increase in Accounts payable.
(e) Debt/equity 2012 = (11,781,574 + 7,802,913) / 11,066,478 = 1.77:1, 2011 = (10,790,990
+ 8,107,152) / 10,920,024 = 1.73:1. The debt to equity ratio increased. Therefore, the
solvency of the company weakened during the year.
(f) Net income decreased from the previous year. The biggest item contributing to this
decrease was a decline in sales of products, which reduced the gross margin on sales of
products from 1,834,737, in 2011 to 1,715,998 in 2012.
Web Problem 1-4

(a) The financial statements are presented in Canadian dollars for 2010 and 2011. This is
disclosed on the cover page of the financial statements and in Note 2 to the financial
statements.
(b) The financial statements for 2010 were prepared in accordance with Canadian GAAP
as per Note 4. The financial statements for 2011 were prepared in accordance with
IFRSs as per Note 2.
(c) Net earnings for 2010 under Canadian GAAP were $993 million. Under U.S. GAAP, net
earnings for 2010 would have been $1,033 million. This represents a 4.0% difference.
This is disclosed in Note 24 to the financial statements. In 2011, the company did not
prepare a reconciliation between IFRS and U.S. GAAP because the SEC allows the use
of IFRS without reconciliation for all foreign companies listed on U.S. exchanges.
(d) As per Note 24, the three items causing the biggest change in net earnings between the
two different GAAPS were Operating expense; Depreciation, depletion and amortization
expense; and General and administrative expense in 2010. A reconciliation was not
provided for 2011.
(e) If a reconciliation of to U.S. GAAP were not provided, a financial analyst would have to
read and understand the significant accounting policies of the company under Canadian
GAAP, and compare accounting policy selections to what treatments would be allowable
under U.S. GAAP in order to determine what the potential differences might be. In some
cases, quantifying the difference may be difficult to the extent that specific figures are not
presented that would be necessary to reconcile to U.S. GAAP treatments. This highlights
the benefit of having a consistent set of standards that is followed by all publicly
accountable entities as it greatly improves comparability.
(f) Net earnings for 2010 under Canadian GAAP were $993 million. Under IFRSs, net
earnings for 2010 would have been $1,081 million. This represents a 8.9% difference.

This is disclosed in Note 34 to the financial statements. In 2011, the company did not
prepare a reconciliation between IFRS and U.S. GAAP because the SEC allows the use of
IFRS without reconciliation for all foreign companies listed on U.S. exchanges.
(g) The three items causing the biggest change in net earnings between the two different
GAAPS were gross sales, finance costs and gains on risk management in 2010. This is
disclosed in Note 34 to the financial statements. A reconciliation was not provided for
2011.
Web Problem 1-5

(a) The financial statements are presented in U.S. dollars for 2010 and 2011. This is
disclosed on the top of each page of the financial statements.
(b) The financial statements for 2010 were prepared in accordance with Canadian GAAP
as per Note 2. The financial statements for 2011 were prepared in accordance with
IFRSs as per Note 2.
(c) Shareholders’ equity at the end of 2010 under Canadian GAAP was $20,194 million.
Under U.S. GAAP, shareholders’ equity at the end of 2010 would have been $19,274
million. This represents a 4.6% difference. This is disclosed in Note 29 to the financial
statements. In 2011, the company did not prepare a reconciliation between IFRSs and
U.S. GAAP because the SEC allows the use of IFRS without reconciliation for all foreign
companies listed on U.S. exchanges.
(d) As per Note 29, the three items causing the biggest change in shareholders’ equity
between the two different GAAPS at the end of 2010 were Share purchase warrants,
Peñasquito revenues and expenses and Expensing of exploration and development
costs. A reconciliation was not provided for 2011.
(e) If a reconciliation to U.S. GAAP were not provided, a financial analyst would have to
read and understand the significant accounting policies of the company under IFRS, and
compare accounting policy selections to what treatments would be allowable under U.S.
GAAP in order to determine what the potential differences might be. In some cases,
quantifying the difference may be difficult to the extent that specific figures are not
presented that would be necessary to reconcile to U.S. GAAP treatments. This
highlights the benefit of having a consistent set of standards that is followed by all
publicly accountable entities as it greatly improves comparability.
(f) Shareholders’ equity at the end of 2010 under Canadian GAAP was $15,493 million.
Under IFRSs, Shareholders’ equity at the end of 2010 would have been $14,375 million.
This represents a 7.2% difference. This is disclosed in Note 35 to the financial
statements. In 2011, the company did not prepare a reconciliation between IFRS and
U.S. GAAP because the SEC allows the use of IFRS without reconciliation for all foreign
companies listed on U.S. exchanges.
(g) The three items causing the biggest change in shareholders’ equity at the end of 2010
between the two different GAAPS were gross sales, finance costs and gains on risk
management. A reconciliation was not provided for 2011. This is disclosed in Note 35 to
the financial statements.


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A Survey of International Accounting

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Problem 1-2 (40 min.)

Problem 1-3 (50 min.)

Problem 1-4 (40 min.)

Web Problem 1-2

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Web Problem 1-3

Web Problem 1-4

Web Problem 1-5

SOLUTIONS TO REVIEW QUESTIONS

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8. Some of the differences between IFRSs and U.S. GAAP are:

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Additional explanations might be of three types:

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I. Accounting for the costs of the new accounting system

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Accounting for new accounting system costs

Based on the above:

- Costs of $110,000 related to initial review and recommendations would be considered

Transaction fee revenue

(c) the amount of revenue can be measured reliably;

On the issue regarding collectibility, it must be determined whether collectibility is reasonably

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Sale of Processing Division

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Crushones inventory issues

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Other government funding

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(a) Year 2 Year 3 Year 4

(b) Jan 2/3 Dec 31/3 Dec 31/4

(c) IAS 16 Total depreciation over 20 years

(ii) IFRS3 U.S. GAAP4

(iii) IFRS5 U.S. GAAP6

(iv) IFRS7 U.S. GAAP8

S/E Dec 31 Year 2 under IFRS $1,800,000

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Debt to equity Debt 25,200 = 1.16 27,000 = 1.39

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SOLUTIONS TO WEB-BASED PROBLEMS

Web Problem 1-2

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Web Problem 1-3

Web Problem 1-4

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Web Problem 1-5

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