International Accounting - Ch 9

IFRS (International Financial Reporting Standards) provides guidance on how to determine the initial amount to measure assets and liabilities of subsidiaries that are acquired at under 100 percent. This can be done through either the parent company concept or the economic unit concept. The parent company concept involves measuring the subsidiary's assets and liabilities at their fair value on the date of acquisition. The economic unit concept involves measuring the subsidiary's assets and liabilities at their fair value, but also considering the fair value of the non-controlling interest in the subsidiary. Therefore, the statement that IFRS allows the determination of the initial amount to measure subsidiaries' assets and liabilities through either the parent company concept or the economic unit concept is true.

The parent company follows the concept of valuing the subsidiary's assets and liabilities at their book value. Additionally, the parent company also includes its ownership percentage of the difference between fair value and book value at the date of acquisition. This indicates that the statement is true.

Current replacement cost accounting was created to account for specific price changes by updating the values of non-monetary assets from historical cost to the current cost to replace those assets. This method ensures that the financial statements reflect the current market value of the assets, taking into consideration any changes in prices over time. By using the current replacement cost, companies can make more informed decisions regarding the value of their assets and the financial health of the organization.

Both IFRS (International Financial Reporting Standards) and US GAAP (Generally Accepted Accounting Principles) indeed require goodwill to be tested for impairment annually. Goodwill is an intangible asset that represents the excess of the purchase price over the fair value of the net assets acquired in a business combination. Impairment testing ensures that the carrying amount of goodwill is not overstated and reflects its true value. This annual assessment is necessary to identify any potential decrease in the value of goodwill and adjust the financial statements accordingly. Therefore, the statement "True" is the correct answer.

IAS 27 requires a parent to consolidate all subsidiaries unless the subsidiary was acquired with the intention to be disposed of within 12 months and management is actively seeking a buyer, or if the subsidiary is dormant and its operations are insignificant to the company as a whole. In both cases, the consolidation of the subsidiary may not be necessary as it does not significantly impact the financial statements of the parent company. Therefore, either option a or b can be valid reasons for not consolidating the subsidiary.

IFRS requires companies operating in hyperinflationary economies to use general purchasing power accounting. This accounting method takes into consideration the changes in the general price level caused by inflation. It adjusts the financial statements to reflect the changes in purchasing power of the currency, allowing for more accurate reporting of the company's financial position and performance. This is important in hyperinflationary economies where the value of the currency is constantly eroding, as it ensures that financial statements provide meaningful and comparable information to users.

The economic unit or entity concept is a fundamental accounting principle that treats a subsidiary as a separate entity from its parent company. According to this concept, when a parent company acquires a subsidiary, the assets and liabilities of the subsidiary are valued at 100 percent of their fair value at the date of acquisition. This means that the subsidiary's financial position is recorded independently from the parent company, allowing for a more accurate representation of its value and performance. Therefore, the statement "True" is the correct answer.

The pooling of interest method is not permitted in US GAAP. This method was used to account for business combinations prior to the issuance of the Financial Accounting Standards Board (FASB) Statement No. 141, which requires the use of the purchase method. The pooling of interest method allowed companies to combine their financial statements as if they had always been one entity, without recognizing the fair value of the assets and liabilities acquired. However, this method was considered to be less transparent and reliable, and therefore, it is no longer allowed under US GAAP.

General purchasing power accounting was created to account for changes in the general price level and makes adjustments to the historical costs of non-monetary assets to update for changes in the purchasing power of the currency. This type of accounting recognizes that the value of money can change over time due to inflation or deflation, and aims to provide a more accurate representation of the economic reality by adjusting the historical costs of assets. By doing so, it allows for a better comparison of financial statements across different time periods and helps in assessing the real value of assets.

In the context of the question, the correct answer is "fair value." When a company acquires a subsidiary, it is required to restate the assets and liabilities of the subsidiary at their fair value as of the date of acquisition. Fair value represents the estimated market value of an asset or liability, which takes into account factors such as supply and demand, market conditions, and other relevant factors. Restating the subsidiary's assets and liabilities at fair value ensures that the acquiring company accurately reflects the true value of the subsidiary's financial position on its own balance sheet.

Under US GAAP, a subsidiary cannot be excluded from consolidation solely because it is being held for sale. The criteria for exclusion from consolidation include having a plan to sell the subsidiary, actively seeking a buyer, and the sale being highly probable within a year. Additionally, other conditions must be met, such as the subsidiary being available for immediate sale in its current condition and the sale being unlikely to be blocked. Therefore, the statement that a subsidiary can be excluded from consolidation if it is being held for sale is false.

All nonmonetary assets and liabilities, stockholders' equity, and all income statement items are restated from the GPI at the transaction date to the GPI at the end of the current period.

IFRS uses the purchase method to account for business combinations that are fully consolidated. This method involves recording the acquired assets and liabilities at their fair values at the date of acquisition. It recognizes goodwill as the excess of the purchase price over the fair value of the net identifiable assets acquired. This method provides a more accurate representation of the financial position and performance of the combined entity, as it reflects the economic substance of the business combination.