SOLUTION MANUAL
Modern Advanced Accounting In Canada,
10th Edition By Darrell Herauf, Chima
Mbagwu,
Chapters 1 - 12, Complete
,
, Chapter 1
Conceptual & Case Analysis
Frameworks for Financial Reporting
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 ASPE and asked to provide arguments to support the different standards.
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 IFRS or U.S. GAAP for the U.S. subsidiary. Financial statement
information is provided under IFRS 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 CPA Canada 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
doubtfulaccounts receivable.
Case 1-5
This case is adapted from a CPA Canada case. A private company is planning to transition from
ASPE to IFRS. Analysis and recommendations are required for accounting issues related to
convertible debentures, unusual item, revenue recognition, contingency and impairment.
,PROBLEMS
Problem 1-1 (40 min.)
A single asset is acquired. 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.
Problem 1-2 (40 min.)
Details of a European company that reports using IFRS are given along with specific details
relating to certain account balances. Students are asked to show how these balances should
be reported under 1) ASPE and 2) IFRS using the facts provided. Students are also asked to
reconcile Net Income and Shareholders` Equity from IFRS to ASPE.
Problem 1-3 (50 min.)
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 IFRS for impaired
loans, interest costs, actuarial gains, compound financial instrument and income taxes.
Problem 1-4 (50 min.)
While taking the role of a financial analyst, the student uses vertical and horizontal analysis and
ratios to analyse and interpret the profitability, solvency and liquidity of a private company.
Problem 1-5 (25 min.)
A private company plans to convert to IFRS. It wants to know the impact on three key ratios if it
converts from ASPE to IFRS for impaired loans, capitalization of interest and actuarial
gains/losses.
Problem 1-6 (50 min.)
A private company plans to convert from ASPE to IFRS and wants to know the impact on three
key ratios if it converts from ASPE to IFRS for impairment losses, convertible bonds and income
taxes.
, SOLUTIONS TO REVIEW QUESTIONS
1. There are times when external 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. The three main areas where judgment needs to be applied are as follows:
- Choosing accounting policies that are appropriate for the company’s situation
- Making estimates to accurately reflect the company’s financial position and results of
operations
- Deciding what to disclose and how to disclose it in the notes to the financial statements.
3. The GAAP-based financial statements are prepared primarily for the benefit of external users. The
financial statements provide a summary of the financial position and results of operations for the
company. Management has access to the detailed information available within the company.
Therefore, the formal financial statements should give priority to the needs of the external users.
4. The main reason the Accounting Standards Board decided to create a separate section of the CPA
Canada 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.
5. There are a few reasons why a private company would want to comply with IFRS even
though it is not required to do so. It may have plans to become publicly listed at some point
Modern Advanced Accounting In Canada,
10th Edition By Darrell Herauf, Chima
Mbagwu,
Chapters 1 - 12, Complete
,
, Chapter 1
Conceptual & Case Analysis
Frameworks for Financial Reporting
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 ASPE and asked to provide arguments to support the different standards.
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 IFRS or U.S. GAAP for the U.S. subsidiary. Financial statement
information is provided under IFRS 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 CPA Canada 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
doubtfulaccounts receivable.
Case 1-5
This case is adapted from a CPA Canada case. A private company is planning to transition from
ASPE to IFRS. Analysis and recommendations are required for accounting issues related to
convertible debentures, unusual item, revenue recognition, contingency and impairment.
,PROBLEMS
Problem 1-1 (40 min.)
A single asset is acquired. 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.
Problem 1-2 (40 min.)
Details of a European company that reports using IFRS are given along with specific details
relating to certain account balances. Students are asked to show how these balances should
be reported under 1) ASPE and 2) IFRS using the facts provided. Students are also asked to
reconcile Net Income and Shareholders` Equity from IFRS to ASPE.
Problem 1-3 (50 min.)
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 IFRS for impaired
loans, interest costs, actuarial gains, compound financial instrument and income taxes.
Problem 1-4 (50 min.)
While taking the role of a financial analyst, the student uses vertical and horizontal analysis and
ratios to analyse and interpret the profitability, solvency and liquidity of a private company.
Problem 1-5 (25 min.)
A private company plans to convert to IFRS. It wants to know the impact on three key ratios if it
converts from ASPE to IFRS for impaired loans, capitalization of interest and actuarial
gains/losses.
Problem 1-6 (50 min.)
A private company plans to convert from ASPE to IFRS and wants to know the impact on three
key ratios if it converts from ASPE to IFRS for impairment losses, convertible bonds and income
taxes.
, SOLUTIONS TO REVIEW QUESTIONS
1. There are times when external 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. The three main areas where judgment needs to be applied are as follows:
- Choosing accounting policies that are appropriate for the company’s situation
- Making estimates to accurately reflect the company’s financial position and results of
operations
- Deciding what to disclose and how to disclose it in the notes to the financial statements.
3. The GAAP-based financial statements are prepared primarily for the benefit of external users. The
financial statements provide a summary of the financial position and results of operations for the
company. Management has access to the detailed information available within the company.
Therefore, the formal financial statements should give priority to the needs of the external users.
4. The main reason the Accounting Standards Board decided to create a separate section of the CPA
Canada 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.
5. There are a few reasons why a private company would want to comply with IFRS even
though it is not required to do so. It may have plans to become publicly listed at some point
