Example Test Questions

Chapter 3

Multiple Choice

1. Which of the following is not an environmental actor that could impact on the development of a country’s accounting system?a. Level of education\b. Political systemc. Geographic locationd. Legal system

Answer c

2. What is the current acronym for the body most responsible for issuing international accounting standards?a. IASBb. SECc. FASBd. IASC

Answer a

3. How many trustees serve on the IASC Foundation?a. 14b. 18c. 20d. 22

Answer d

4. How many members serve on the IASB?a. 14b. 18c. 20d. 22

Answer a

5. Which of the following bodies has the responsibility to issue international financial reporting standards (IFRS)

a. The International Financial Reporting Interpretations Committeeb. The International Standards Advisory Council

c. The IASC Foundationd. The International Accounting Standards Board

Answer d

6. Which of the following is not a use of international accounting standards?

a. As national requirements.b. As standards to be violated to improve intercountry comparability..c. As an international benchmark for those countries that develop their own requirements.d. By regulatory authorities for domestic and foreign companies

Answer b

7. How does the IASC enforce its standards?a. Through , the International Organization of Securities Commissionb. Through the concept of best endeavorsc. Through the Securities and Exchange Commissiond. Through the Financial Accounting Standards Board

Answer b

8. What is the name given to the agreement between the FASB and IASC to harmonize accounting standards?a. The Norwalk Agreementb. The London agreementc. The Washing ton D C agreementd. The Paris Accords

Answer a

9. What is the title of the form that foreign companies have used to reconcile their financial statements to U. S. GAAP?a. Form 10-Kb. Form 10-Qc. Form SXd. Form20-F

Answer d

10. Which of the following is not a qualitative characteristic contained in the IASB’s Framework for the Preparation of Financial Statements?a. Understandabilityb. Timelinessc. Relevance d. Reliability

Answer b

11. Which of the following is not an element of financial statements contained in the IASB’s Framework for the Preparation of Financial Statements?

a. Gainb. Incomec. Expensed. Asset

Answer a

12. Which of the following is seen as a pervasive difference between IASB’s and FASB’s Conceptual Frameworks?a. Definition of elementsb. Number of qualitative characteristicsc. Scope of authorityd. Level of detail

Answer d

13. Which of the following concepts is contained in the FASB’s conceptual framework but not in the IASC’sa. Expenseb. Comprehensive incomec. Assetd. Liability

Answer b

Essay

1.Discuss the environmental factors that impact on the development of a country’s accounting system.

Financial accounting is influenced by the environment in which it operates. Nations have different histories, values, cultures, and political and economic systems, and they are also in various stages of economic development. These national influences interact with each other and, in turn, influence the development and application of financial accounting practices and reporting procedures

Level of EducationThere tends to be a direct correlation between the level of education obtained by a country’s citizens and the development of the financial accounting reporting practices in that country. The characteristics comprising these environmental factors include (1) the degree of literacy in a country; (2) the percentage of the population that has completed grade school, high school, and college; (3) the orientation of the educational system (vocational, professional, etc.); and (4) the appropriateness of the educational system to the country’s economic and social needs. Countries with better educated populations are associated with more advanced financial accounting systems.

Political SystemThe type of political system (socialist, democratic, totalitarian, etc.) can influence the development of accounting standards and procedures. The accounting system in a country with a centrally controlled economy will be different from the accounting system in a market-oriented economy. For example, companies in a socialist country may be required to provide information

on social impact and cost–benefit analysis in addition to information on profitability and financial position.

Legal SystemThe extent to which a country’s laws determine accounting practice influences the strengths of that country’s accounting profession. When governments prescribe accounting practices and procedures, the authority of the accounting profession is usually weak. Conversely, the nonlegalistic establishment of accounting policies by professional organizations is a characteristic of common-law countries.

Economic DevelopmentThe level of a country’s economic development influences both the development and application of its financial reporting practices. Countries with low levels of economic development will have relatively less need for a sophisticated accounting system than countries with high levels of economic development

2. Discuss the approaches a company might take when issuing financial reports to users in foreign countries.

A company issuing financial reports to users in foreign countries may take one of several approaches in the preparation of its financial statements:

1. Send the same set of financial statements to all users (domestic or foreign).2. Translate the financial statements sent to foreign users into the language of the foreign

nation’s users.3. Translate the financial statements sent to foreign users into the foreign nation’s language

and currency.4. Prepare two sets of financial statements, one using the home country language, currency,

and accounting principles, the second using the language, currency, and accounting principles of the foreign country’s users.

5. Prepare one set of financial statements based on worldwide accepted accounting principles

3. What is the purpose of the International Accounting Standards Board?

The International Accounting Standards Committee (IASC) was formed in 1973 to develop worldwide accounting standards. It was an independent private-sector body, whose objective was to achieve uniformity in accounting principles that are used for worldwide financial reporting. In 2001 the IASC was replaced by the International Accounting Standards Board which retained the same objective.

4. Discuss the factors that have contributed to the need for new approaches to international standard setting.

The factors that have contributed to the need for new approaches to international standard setting include:

1. A rapid growth in international capital markets, combined with an increase in cross-border listings and cross-border investment. These issues have led to efforts by securities regulators to develop a common “passport” for cross-border securities listings and to achieve greater comparability in financial reporting.

2. The efforts of global organizations (such as the World Trade Organization) and regional bodies (such as the European Union, NAFTA, MERCOSUR [the southern common market countries of Argentina, Brazil, Paraguay, and Uruguay], and Asia-Pacific Economic Cooperation) to dismantle barriers to international trade.

3. A trend toward the internationalization of business regulation.4. The increasing influence of international accounting standards on national accounting

requirements and practice.5. The acceleration of innovation in business transactions.6. Users’ increasing demands for new types of financial and other performance information.7. New developments in the electronic distribution of financial and other performance

information.8. A growing need for relevant and reliable financial and other performance information both in

countries in transition from planned economies to market economies and in developing newly industrialized economies

5. Discuss the IASB’s annual improvements project..

In July, 2006 the IASB announced that it was beginning an annual improvements project. The Board stated: “Changes to standards, however small, are time-consuming for the Board and burdensome for others. The IASB has adopted an annual process to deal with non-urgent but necessary amendments to IFRSs. Issues dealt with in this process arise from matters raised by the IFRIC and suggestions from staff or practitioners, and focus on areas of inconsistency in IFRSs or where clarification of wording is required. As a result, the Board evaluates whether an amendment is appropriate to address the identified issue in this project the same way as it evaluates all other technical agenda decisions which requires judgment. The adopted improvements are published in a single omnibus exposure draft in the third or fourth quarter of each year.

6. Discuss the composition and role of The International Accounting Standards Board..

The IASB consists of fourteen individuals (twelve full time and two part-time) appointed by the trustees. The key qualification for board membership is technical expertise. The trustees also must ensure that the Board is not dominated by any particular constituency or regional interest; consequently, the following guidelines have been established:

1. A minimum of five will have a background as practicing auditors.2. A minimum of three will have a background in the preparation of financial statements.3. A minimum of three will have a background as users of financial statements.4. At least one member will have an academic background.

5. Seven of the full-time members will be expected to have formal liaison responsibilities with national standards setters in order to promote the convergence of national accounting standards and the IAS.

The Board’s principal responsibilities are to develop and issue international financial reporting standards (IFRS) and exposure drafts and approve interpretations developed by the International Financial Reporting Interpretations Committee (IFRIC). Standards are adopted after consultation with the SAC and national standard setters.

7. Discuss the duties of the trustees of the International Accounting Standards Committee Foundation.

The trustees duties include: 1. Appointing the members of the Board, including those who will serve in liaison

capacities with national standard setters, and establish their contracts of service and performance criteria.

2. Appointing the members of the Standing Interpretations Committee and the Standards Advisory Council.

3. Reviewing annually the strategy of the IASB and its effectiveness.4. Approving annually the budget of the IASB and determine the basis for funding.5. Reviewing broad strategic issues affecting accounting standards, promote IASB and its

work, and promote the objective of rigorous application of International Accounting Standards, provided that the trustees shall be excluded from involvement in technical matters relating to accounting standards.

6. Establishing and amending operating procedures for the Board, the Standing Interpretations Committee, and the Standards Advisory Council (SAC).

7. Approving amendments to this constitution after following a due process, including consultation with the SAC and publication of an exposure draft for public comment.

8. Discuss the role of The International Financial Reporting Interpretations Committee

The IASC originally did not issue interpretations of its standards, however, after noting criticism it began issuing interpretations of its standards, beginning in 1997. Later the IASB established the International Financial Reporting Interpretations Committee (IFRIC).The role of the IFRIC has evolved and was clarified by the publication of the IFRIC handbook in 2007. The IFRIC is comprised of twelve members, appointed by the trustees of the IASB for renewable terms of three years. The trustees appoint a member of the IASB, the director of technical activities or another senior member of the IASB staff, or another appropriately qualified individual, to chair the committee. The chair has the right to speak about the technical issues being considered but not to vote. The trustees also may appoint as nonvoting observers representatives of regulatory organizations, who have the right to attend and speak at meetings.The committee (a) interprets the application of International Accounting Standards (IASs) and International Financial Reporting Standards (IFRSs) and provides timely guidance on financial reporting issues not specifically addressed in IASs and IFRSs, in the context of the IASB Framework, and undertakes other tasks at the request of the IASB; (b) in carrying out its work under (a) above, it must have regard to the IASB’s objective of working actively with national standard setters to bring about convergence of national accounting standards and IASs and IFRSs to high-quality solutions; (c) publish after clearance by the IASB the draft Interpretations for public comment and consider comments made within a reasonable period before finalizing an Interpretation; and (d) report to the IASB and obtain its approval for final Interpretations.

9. How are IASB standards used by various countries?International accounting standards are used in a variety of ways. The IASB noted that its standards are used:1. As national requirements.2. As the basis for some or all national requirements.3. As an international benchmark for those countries that develop their own requirements.

4. By regulatory authorities for domestic and foreign companies.5. By companies themselves.

In addition, the International Organization of Securities Commissions (IOSCO) looks to the IASB to provide International Accounting Standards that can be used in multinational securities offerings. Currently, several stock exchanges in different countries require or allow issuers to prepare financial statements in accordance with International Accounting Standards

10. Discuss the Short-term International Convergence Project

The goal of the FASB’s Short-term International Convergence Project is to remove a variety of individual differences between U.S. GAAP and International Financial Reporting Standards that are not within the scope of other major projects. The project’s scope is limited to those differences in which convergence around a high-quality solution would appear to be achievable in the short term, usually by selecting between existing IFRS and U.S. GAAP.The FASB intends to analyze each of the differences within the scope and either (1) amend applicable U.S. GAAP literature to reduce or eliminate the difference or (2) communicate to the IASB the Board’s rationale for electing not to change U.S. GAAP. Concurrently, the IASB will review IFRS and make similar determinations of whether to amend applicable IFRS or communicate its rationale to the FASB for electing not to change the IASB’s GAAP. The FASB set September 30, 2004, as the target date for issuing final statements covering some, if not all, of the identified differences. This target date was set to allow sufficient time for due process to be completed while providing sufficient time in advance of the 2005 date established by the European Commission for adoption of IAS by all EU listed companies. It is important to note that the short-term convergence project only addressed differences that meet the criteria for inclusion in the project scope. Differences that are associated with issues requiring comprehensive reconsideration were not addressed by the short-term convergence project and will be addressed over a longer term in the Roadmap to Convergence project.

11. Discuss the IASB-FASB Norwalk agreement.

The FASB and the IASB held a joint meeting in Norwalk, Connecticut, on September 18, 2002. Both standard-setting bodies acknowledged their commitment to the development of high-quality compatible accounting standards that can be used for both domestic and cross-border financial reporting. They also promised to use their best efforts to make their existing financial reporting standards compatible as soon as practicable and to coordinate their future work programs to maintain compatibility.To this end, both Boards agreed to: 1. Undertake a short-term project aimed at removing a variety of differences between U.S.

GAAP and IFRSs.2. Remove any other differences between IFRSs and U.S. GAAP that remained on January 1,

2005, by undertaking projects that both Boards would address concurrently.3. Continue the progress on the joint projects currently underway.4. Encourage their respective interpretative bodies to coordinate their activities.

The goal of this project is to achieve compatibility by identifying common high-quality solutions.

12. List the milestones contained in the FASB-IASB Roadmap Convergence Project.

a. Improvements to accounting standards - whether the standards are high in quality and sufficiently comprehensive, whether the standard-setting process is robust and independent

with input and consideration of views from investors and other affected parties, and whether the standards, when implemented, are capable of improving the effectiveness of financial reporting and providing financial information useful to investors

b. Funding of the International Accounting Standards Committee Foundation - the SEC will consider the degree to which the Foundation has a secure, stable, and equitable funding mechanism that allows the IASB to function independently of any specific constituent group. The SEC would also consider how effectively regulators oversee the Foundation.

c. Improved ability to use interactive data for IFRS reporting - the SEC has proposed rules that would require public companies to provide financial information formatted in the XBRL computer language. The level of detail in the existing IFRS XBRL taxonomy would have to be improved, according to the proposal, in order to realize the benefits of IFRS reporting in XBRL.

d. Improved education and training in the US - a significant investment in preparing investors, management and financial-statement preparers, auditors, audit committees, specialists (such as actuaries and valuation professionals), and regulators would be needed before IFRS is widely understood in the U.S. College and university curricula would need to incorporate IFRS, and the CPA and other relevant professional exams would need to cover IFRS.

e. Limited use in a narrow group of companies (i.e. December 31, 2009) f. SEC to determine in 2011 whether mandatory adoption of IFRS is feasible based on the

progress in the first five milestones g. Mandatory use – If decided to go full steam ahead (as discussed in milestone 6) then large

accelerated, accelerated and non-accelerated filers would be required to adopt IFRS beginning with their years ending on or after December 15, 2014, 2015 and 2016, respectively.

13. What is the objective of the joint FASB-IASB Convergence Project?

The objective of convergence of accounting standards is to have companies in different countries use the same accounting procedures to measure and report their financial position and results of operations.

14. Under rules enacted prior to 2007, how could a foreign company list its securities for sale in U. S. capital markets? How did this rule change?

Prior to 2007, foreign companies seeking to list on a U.S. stock exchange must have recast their financial statements to reflect then current GAAP. This reconciliation was made by filing Form 20-F with the SEC within six months of the company’s fiscal year-end. In 2007, the SEC modified its position on the Form 20-F requirement when it issued; “Acceptance from Foreign Private Issuers of Financial Statements Prepared in Accordance with International Financial Reporting Standards without Reconciliation to GAAP.” This rule amends Form 20-F to accept from foreign private issuers in their filings with the SEC financial statements prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board without reconciliation to generally accepted accounting principles as used in the United States. The SEC’s rationale for this action was to foster the adoption of a set of globally accepted accounting standards. However, the requirements regarding reconciliation to U.S. GAAP do not change for a foreign private issuer that files its financial statements using a basis of accounting other than IFRSs.

15. Discuss the objectives of accounting as defined by the IASB’s Framework for the Preparation of Financial Statements

The framework indicates that the objective of financial statements is to provide information about the financial position, performance, and changes in financial position of an enterprise that is useful to a wide range of users making economic decisions. It also indicates that financial statements prepared for this purpose will satisfy most user needs, but they do not provide all information that may be needed to make economic decisions because they largely portray past information and do not provide nonfinancial information.In its discussion of general-purpose financial statements, the framework indicated the following: 1. Users require an evaluation of an enterprise’s ability to generate cash and the timing and

certainty of this generation.2. The financial position of an enterprise is affected by the economic resources it controls, its

financial structure, its liquidity and solvency, and its capacity to adapt to changes in its environment.

3. Information on profitability is required to assess changes in the economic resources an enterprise controls in the future.

4. Information on the financial position of an enterprise is useful in assessing its investing, financing, and operating activities.

5. Information about financial position is contained in the balance sheet, and information about performance is contained in an income statement.

The framework also indicated that two underlying assumptions for the preparation of financial statements were the accrual basis and going concern.

16. Discuss the qualitative characteristics of accounting information as defined by the IASB’s Framework for the Preparation of Financial Statements.

The framework describes qualitative characteristics as the attributes that make the information provided in financial statements useful. The following four principal qualitative characteristics were defined.

UnderstandabilityInformation should be provided so that individuals with a reasonable knowledge of business and economic activities and accounting and a willingness to study the information are capable of using it. Nevertheless, complex information should not be withheld just because it is too difficult for some users to understand.RelevanceInformation is relevant when it influences the economic decisions of users by helping them evaluate past, present, or future events or by confirming or correcting their past evaluations. Relevance is also affected by materiality.ReliabilityInformation is reliable when it is free from material error and bias and when users can depend on it to represent faithfully that which it purports to represent. As a consequence, events should be accounted for and presented in accordance with their substance and economic reality, not merely their legal form.ComparabilityUsers must be able to compare an enterprise’s performance over time and to make comparisons with the performance of other enterprises.

The framework also recognized that timeliness and the balance between benefits and costs were constraints on providing both relevant and reliable information.

17. Discuss the elements of financial statements defined by the IASB’s Framework for the Preparation of Financial Statements.

The elements defined by the IASB’s Framework for the Preparation of Financial Statements were defined as follows:

The elements directly related to the measurement of financial position in the balance sheet are assets, liabilities, and equityAsset. A resource controlled by an enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise.Liability. A present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.Equity. The residual interest in the assets of the enterprise after deducting all its liabilities. The elements directly related to the measurement of performance in the income statement are income and expenses. These elements were defined as follows: Income. Increases in economic benefits during the accounting period in the form of inflows or enhancement of assets or the decreases in liabilities that result in increases in equity, other than those relating to contributions from equity participants.Expenses. Decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to contributions from equity participants.

18. Discuss the concepts of capital and capital maintenance discussed in the Framework for the Preparation of Financial Statements.

A final issues addressed in the framework were concepts of capital. Under the financial concept of capital, capital was defined as being synonymous with the net assets or equity of the enterprise. Under a physical concept of capital, capital is regarded as the productive capacity of the enterprise. The framework indicated that the selection of the appropriate concept of capital by an enterprise should be based on the needs of the user of its financial statements. As a consequence, a financial concept of capital should be adopted if users are concerned primarily with the maintenance of nominal invested capital or the purchasing power of invested capital. However, if the users’ main concern is with the operating capacity of an enterprise, a physical concept of capital should be used. As a result, the following concepts of capital maintenance may be used:

Financial capital maintenance. Profit is earned only if the financial (or money) amount of net assets at the end of the period exceeds the net asset at the beginning of the period excluding any distributions to or contributions from owners.

Physical capital maintenance. Profit is earned only if the physical productive capacity (or operating capacity) of the enterprise exceeds the physical productive capacity at the beginning of the period.

Finally, the framework noted that the selection of the measurement bases and concept of capital maintenance will determine the accounting model used in preparing financial statements. Also, since different accounting models differ with respect to relevance and reliability, management must seek a balance between these qualitative characteristics. At the current time, the IASB does not intend to prescribe a particular model other than for exceptional circumstances, such as for reporting in the currency of a hyperinflationary economy.

19. Discuss IFRS No. 1, “First Time Adoption of International Reporting Standards.

IFRS No. 1, “First Time Adoption of International Reporting Standards,” requires an entity to comply with every IASB standard in force in the first year when the entity adopts IFRSs, with some targeted and specific exceptions after consideration of the cost of full compliance. Under IFRS No. 1, entities must explain how the transition to IASB standards affects their reported financial position, financial performance, and cash flows.IFRS No. 1 requires an entity to comply with each IFRS that has become effective at the reporting date of its first financial statements issued under IASB standards. The following principles apply: 1. Recognize all assets and liabilities whose recognition is required under existing IFRSs;2. Do not recognize items as assets or liabilities when existing IFRSs do not allow for such

recognition;3. Reclassify assets, liabilities, and equity as necessary to comply with existing IFRSs; and4. Apply existing IFRSs in measuring all recognized assets and liabilities.