Solutions Manual All

IFRS Primer International GAAP Basics 1e, Irene Wiecek, Nicola Young

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1 Chapter 1 – Solutions

1-1 Define and discuss the merits of a principles-based and rules-based approach to standard setting. How do they differ? Are there any similarities? What is an objectives-based standard- setting model? How does it compare with the other two?

- Principles-based approach:

• Provides a conceptual basis to follow rather than detailed rules
• Built around principles/objectives, which provide guidance to accountants
• Allows more room for the use of professional judgment since standards may not exist for

every situation one may encounter

• Broad guidelines – may be applied to many situations
• Easier to manage (size and understanding)
• Other

- Rules-based approach:

• Provides detailed rules for accountants to follow
• Provides more guidance for accountants as rules/standards can normally be found for any

situation

• Reduces the chance for bias, therefore reducing the chance for potential litigation
• Other

- Differences:

• Principles-based approach allows more room for professional judgment since standards

are not always tailored to specific situations; professional judgment allows the chance for bias

• Rules-based approach does not provide much room for professional judgment as rules

exist for almost all situations and therefore provides more guidance for accountants; less chance for bias

• A rules-based system may become overbearing in size as rules must be in place for all

situations; the size of a principles-based system can be much more easily managed

• Principles-based system has greater flexibility, especially when new situations or

transactions arise; if a new situation or transaction arises under a rules-based system, a new standard/rule must be developed to account for the situation

• Other

- Similarities:

• Although the approach taken to applying accounting standards is different, principles-

based and rules-based accounting are generally based on the same general principles and conceptual framework; therefore, the accounting results are often similar.

- Objectives-based standard-setting model:

• The proposed standard-setting model under U.S. GAAP
• One that is neither purely rules-based nor purely principles-based
• Standards are written such that there is an objective at the beginning of each
• Concise statement of relevant accounting principle defined and underlies standards 2 / 4

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• Few if any exceptions/internal inconsistencies within the standard
• Supplemented by implementation guidance
• No bright-line tests
• Consistent with the conceptual framework

• Similarities/differences
• Takes the best of both principles- and rules-based
• Like principles-based, it is anchored in the principles and conceptual framework. It is

also devoid of bright-line tests – allowing use of judgment

• Like the rules-based approach, it includes an appropriate amount of implementation

guidance

• In terms of volume of information (standards), it would likely be somewhere between the

two

1-2 Go to the IASB and FASB websites and look up the project summary relating to the conceptual framework project. Identify some of the main differences between the old frameworks and the proposed framework.

- Links:

- http://www.fasb.org/project/conceptual_framework.shtml

• http://www.iasb.org/Current+Projects/IASB+Projects/Conceptual+Framework/Conceptu

al+Framework.htm

- Differences:

• Although the proposed framework looks very familiar to the current U.S. GAAP

framework, some differences do exist.

• Some qualitative characteristics will be considered on different levels: fundamental vs.

enhancing

• Relevance and faithful representation are fundamental characteristics
• Comparability, verifiability, timeliness, and understandability are enhancing

characteristics

• Other characteristics such as conservatism and reliability will be excluded from the

framework. It was felt that conservatism introduced bias and that the reliability characteristic was not consistently applied. Faithful representation was felt to be more representative of the general principle.

• Definitions of the elements of financial statements have also changed to provide more

guidance to accountants (see “Looking Ahead” on p. 12 for proposed definitions).

1-3 Discuss the relative merits of a single set of global accounting standards. What are some of the impediments or barriers?

- Merits:

• Greater comparability
• Better access to global capital markets 3 / 4

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• Better capital allocation — investors may be more willing to invest in foreign companies

as they are able to make informed decisions regarding the companies’ financial position and ability to produce future cash flows

• Reduces an accountant’s need to learn more than one set of accounting standards (e.g.,

employees of Canadian-listed U.S. companies being required to reconcile to Canadian GAAP)

• May lead to the creation of an international accounting designation
• Facilitates mobility for accountants
• Promotes the increasingly global nature of the profession
• Other

• Impediments/barriers
• Some countries may have unique accounting needs — one set of standards may not be

suitable for all countries and companies (e.g., the U.S.’s oil and gas industry).

• How will the system be regulated? Currently, each country regulates its own capital

markets.

• Resistance to change — desire to stick with home-grown systems. This is especially true

where a significant amount of funding has already gone into local country standard- setting (such as in the U.S.).

• Other

1-4 Standard-setters often refer to bright-line tests. What are these and do you believe they are useful in standard setting? What are some of the drawbacks to the use of bright-lines?

- Bright-line tests:

Bright-line refers to the inclusion of a specific number or threshold in an accounting standard (e.g., reportable segments are identified based on whether their revenues/assets/profits/losses are greater than 10% of the total for the company)

• Useful?
• Can be useful in simple accounting situations, but not where the use of professional

judgment would be more practicable and provide for a more useful decision

• May allow for greater comparability
• May allow for greater consistency in application of the standard
• More objects — less judgmental
• Other

• Drawbacks
• IASB not in favour of bright-line test
• Does not allow for use of professional judgment — every situation is different
• Many accounting situations may be so complex that applying a bright-line test is far too

simplistic for the situation

• Puts too much emphasis on the calculation rather than the reasoning based on substance
• May promote manipulation of contracts/business transactions to ensure that the bright-

line test is not met if the accounting implication is undesirable

• Other
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