10 Questions - FRA

  1. Which of these statements is accurate? A) Companies are allowed to have held-to-maturity or available-for-sale securities carried at fair value only under US GAAP and not IFRS. B) Companies are allowed to have held-to-maturity or available-for-sale securities carried at fair value only under IFRS and not US GAAP. C) Companies are allowed to have held-to-maturity or available-for-sale securities carried at fair value only under both IFRS and US GAAP. 2) Which of these statements is accurate? A) U.S. GAAP requires the equity method accounting for joint ventures. B) IFRS requires the proportionate consolidation method accounting for joint ventures. C) U.S. GAAP & IFRS both allow the use of either equity or proportinate consolidation method accounting for joint ventures. 3) Which of these statements is accurate? A) Current IFRS & US GAAP accounting standards require the use of the acquisition method to account for business combinations. B) Only US GAAP accounting standard requires the use of the acquisition method to account for business combinations. C) Only IFRS accounting standard allows the use of the acquisition method to account for business combinations. 4) Which of the following uses the two-step approach to measure the impairment loss of Goodwill? A) Only U.S. GAAP B) Only IFRS C) Both U.S. GAAP & IFRS 5) Which of the following recognizes in-process R&D acquired in a business combination as a separate intangible asset and measures it at fair value? A) Only U.S. GAAP B) Only IFRS C) Both U.S. GAAP & IFRS 6) Which of these statements is accurate? A) Under IFRS, at the time of acquisition, the total amount of goodwill recognized is allocated to each of the acquirer’s reporting units. B) Under U.S. GAAP, at the time of acquisition, the total amount of goodwill recognized is allocated to each of the acquirer’s reporting units. C) Under both IFRS and U.S. GAAP, at the time of acquisition, the total amount of goodwill recognized is allocated to each of the acquirer’s reporting units. 7) Which of these statements is accurate? A) Currently, only IFRS allows the use of the uniting of interests method for business combination. B) Currently, only US GAAP allows the use of the uniting of interests method for business combination. C) Currently, neither US GAAP nor IFRS allows the use of the uniting of interests method for business combination. 8) Which of these statements is accurate? A) IFRS require held-to-maturity securities to be initially recognized at cost including transaction costs. B) US GAAP require held-to-maturity securities to be initially recognized at fair value including transaction costs. C) Both statements are incorrect. 9) Which of these statements is accurate? A) Under the temporal method, revenues are restated using the historical rates. B) Under the current rate method, revenues are restated using the historical rates. C) Under the temporal and current rate method, revenues are restated using average rates. 10) Which of these statements is accurate? A) Under the current rate method, liability increases when the foreign currency strengthens relative to parents presentation currency. B) Under the current rate method, net income decreases when the foreign currency strengthens relative to parents presentation currency. C) Under the current rate method, asset decreases when the foreign currency strengthens relative to parents presentation currency.

some of these seems strange but here are my answers: 1) B. (totalling guessing here) 2) A. (thats a requirement under GAAP. IFRS allows both methods but prefers PC) 3) A. (there has been convergence) 4) A. (under GAAP you first need to figure if there was impairement, then come up with an implied GW value to figure out the loss) 5) C. (guessing here, given convergence) 6) C. 7) C. never heard of this method. is this pooling? 8) A. Transaction costs are always included 9) C. 10) A. under the current method, you always have a net Assets BS exposure. When the FC appreciates u have a + CTA in Equity vice versa. Your assets increase along with your liabiliies so provided your assets > Liabilities, you gain.

My answers would be: 1. B) 2. A) 3. A) 4. A) 5. B) Not sure 6. A) Not sure 7. C) 8. B) 9. C) 10. Dont know, all options seem incorrect to me. Not convinced with intelo’s argument yet :slight_smile:

Here’s what I put down: 1. C 2. A 3. A 4. B 5. A 6. A 7. C 8. C 9. C 10. A

you will bow down rus1bus, you will bow down :). Can you please give me an explanation for your answers where we differ? thanks

Guys lets try to give explanations wherever we can. It will help us better understand those concepts.

Intelo, no shame in bowing down to you :slight_smile: Actually most of these questions are memory based, except last one which is conceptual and I think I am messing it. Regarding Q8, you are correct and I was wrong. AFS Securities are INITIALLY recorded at their Fair Values, INCLUDING Transaction Costs under BOTH IFRS and US GAAP. Regarding Q10: From my understanding: Asset values are directly related to Exchange Rates and Liabilities are Inversely related to Exchange Rates. By this definition, options A and C should be out. Option B is also not true, as Net Income under Current Rate method would be based on Average Exchange Rate for the year and in Appreciating Foreign Currency environment, Average Rate would be higher than the rate at the beginning of the year. I agree with your logic of +CTA, but that should not make Liabilities Increase as stated in option A. Damil4real, thanks for posting questions.

rus1bus1 for 8 you mean HTM are recorded at cost including transaction costs right? ok let me try to explain 10. Let A = 100, L = 70 ==> E = 30 all expressed in lb, the FC. So we have a net asset exposure. Say lb is the foreign currency and $ is the domestic currency. Exchange rate goes from 1/lb to 2/lb. So FC has appreciated it. What happens to translated assets? ==> 2 * 100 = 200. Liabilities? ==> 2 * 70 = 140. Equities? ==> Including the +CTA adjustment is 60. As you can see both Assets and Liabilities are going up. Your statement “Asset values are directly related to Exchange Rates and Liabilities are Inversely related to Exchange Rates.” should be refined to “When FC appreciates, there is a benefit from an assets point of view but a detriment from a liability point of view”. It is not Liabilities are inversely related to exchange rate per se, it is just that they have a -/+ impact if exchange rates rise or fall. another way to look at this is to view assets as exports and liabilities as imports. When the FC appreciates, we gain from exporting (asset) but have to pay more when we need to import (liability). bottom line is liabilities are increasing when exchange rates increase, but this is detrimental to the firm.

Got it Intelo. Great! Thanks for detailed explanation. I told you, no shame in bowing to you :slight_smile: and sorry, It was HTM in Q8.

  1. Which of these statements is accurate? A) IFRS require held-to-maturity securities to be initially recognized at cost including transaction costs. B) US GAAP require held-to-maturity securities to be initially recognized at fair value including transaction costs. C) Both statements are incorrect. This quesion is not exactly rightly worded. The actual treatment is Cost Incl. Txn Costs under US GAAP. Fair Value incl. Txn Cost under IFRS However, in general -> Fair Value = Costs excluding Transaction Costs. So BOTH IFRS and US GAAP are IDENTICAL in their initial value estimation for HTM securities.

cpk123 Wrote: ------------------------------------------------------- > Cost Incl. Txn Costs under US GAAP. > Fair Value incl. Txn Cost under IFRS > Thanks CP for correcting it.

1-b 2-c 3-a 4-a 5-c 6-c 7-c 8-c 9-c 10-c

1-b 2-a 3-a 4-a 5-c 6-b 7-c 8-c 9-? 10-a

Correct Answers: 1 A 2 A 3 A 4 A 5 C 6 B 7 C 8 C 9 C 10 A

intelo - 70% rus1bus - 50% bpdulog - 60% parac - 60% june2009 - 80%

cpk123 Wrote: ------------------------------------------------------- > 8) Which of these statements is accurate? > > A) IFRS require held-to-maturity securities to be > initially recognized at cost including transaction > costs. > B) US GAAP require held-to-maturity securities to > be initially recognized at fair value including > transaction costs. > C) Both statements are incorrect. > > This quesion is not exactly rightly worded. The > actual treatment is > Cost Incl. Txn Costs under US GAAP. > Fair Value incl. Txn Cost under IFRS > > However, in general -> Fair Value = Costs > excluding Transaction Costs. So BOTH IFRS and US > GAAP are IDENTICAL in their initial value > estimation for HTM securities. CFAI text: “IFRS require that held-to-maturity securities be initially recognized at fair value including transaction costs, whereas U.S. GAAP require held-to-maturity securities be initially recognized at cost including transaction costs. In most cases, however, initial fair value is equal to cost excluding transaction costs, so the treatment is identical.”

FYI.