Intermediate Accounting: IFRS Edition Fourth Edition DONALD E. KIESO PhD, CPA Northern Illinois University DeKalb, Illinois JERRY J. WEYGANDT PhD, CPA University of Wisconsin—Madison Madison, Wisconsin TERRY D. WARFIELD, PhD University of Wisconsin—Madison Madison, Wisconsin DEDICATED TO Our wives, Donna, Enid, and Mary, for their love, support, and encouragement DIRECTOR AND VICE PRESIDENT Michael McDonald EXECUTIVE EDITOR Emily Marcoux CONTENT DEVELOPMENT EDITOR Lindsey Myers EDITORIAL SUPERVISORS Terry Ann Tatro/Nicola Smith SENIOR DEVELOPMENT AND PRODUCTION MANAGER Ed Brislin SENIOR PRODUCTION EDITORS Elena Saccaro/Rachel Conrad DIRECTOR OF MARKETING Karolina Honsa Zarychta MARKETING MANAGER Jenny Geiler SENIOR DESIGNER Wendy Lai ASSISTANT EDITOR Kirsten Loose EDITORIAL ASSISTANT Natalie Munoz COVER IMAGE © Elymas / Shutterstock (BACKCOVER) © Hero Images/Getty Images Copyright © 2020 John Wiley & Sons, Inc. All rights reserved. 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ISBN-13 978-1-119503682 Table of Contents Cover Title Page DEDICATED TO Copyright From the Authors About the Authors New to This Edition Proven Pedagogical Framework Acknowledgments CHAPTER 1: Financial Reporting and Accounting Standards Global Markets Objective of Financial Reporting Standard-Setting Organizations Financial Reporting Challenges Review and Practice Global Accounting Insights CHAPTER 2: Conceptual Framework for Financial Reporting Conceptual Framework Fundamental Concepts Assumptions Measurement, Recognition, and Disclosure Concepts Review and Practice Global Accounting Insights CHAPTER 3: The Accounting Information System Accounting Information System Record and Summarize Basic Transactions Identify and Prepare Adjusting Entries Preparing Financial Statements Financial Statements for a Merchandising Company APPENDIX 3A: Cash-Basis Accounting versus Accrual- Basis Accounting Conversion from Cash Basis to Accrual Basis Theoretical Weaknesses of the Cash Basis APPENDIX 3B: Using Reversing Entries Illustration of Reversing Entries—Accruals Illustration of Reversing Entries—Deferrals Summary of Reversing Entries APPENDIX 3C: Using a Worksheet: The Accounting Cycle Revisited Worksheet Columns Preparing Financial Statements from a Worksheet Review and Practice Global Accounting Insights CHAPTER 4: Income Statement and Related Information Income Statement Content and Format of the Income Statement Reporting Various Income Items Accounting Changes and Errors Related Equity Statements Review and Practice Global Accounting Insights CHAPTER 5: Statement of Financial Position and Statement of Cash Flows Statement of Financial Position Preparation of the Statement of Financial Position Statement of Cash Flows Additional Information APPENDIX 5A: Ratio Analysis—A Reference Using Ratios to Analyze Performance Review and Practice Global Accounting Insights CHAPTER 6: Accounting and the Time Value of Money Basic Time Value Concepts Single-Sum Problems Annuities (Future Value) Annuities (Present Value) Other Time Value of Money Issues Review and Practice CHAPTER 7: Cash and Receivables Cash Receivables Valuation of Accounts Receivable Notes Receivable Other Issues Related to Receivables APPENDIX 7A: Cash Controls Using Bank Accounts The Imprest Petty Cash System Physical Protection of Cash Balances Reconciliation of Bank Balances Review and Practice Global Accounting Insights CHAPTER 8: Valuation of Inventories: A Cost-Basis Approach Inventory Issues Goods and Costs Included in Inventory Which Cost Flow Assumption to Adopt? Effect of Inventory Errors APPENDIX 8A: LIFO Cost Flow Assumption Last-In, First-Out (LIFO) Inventory Valuation Methods—Summary Analysis Review and Practice CHAPTER 9: Inventories: Additional Valuation Issues Lower-of-Cost-or-Net Realizable Value (LCNRV) Valuation Bases The Gross Profit Method of Estimating Inventory Retail Inventory Method Presentation and Analysis Review and Practice Global Accounting Insights CHAPTER 10: Acquisition and Disposition of Property, Plant, and Equipment Property, Plant, and Equipment Borrowing Costs During Construction Valuation of Property, Plant, and Equipment Costs Subsequent to Acquisition Disposition of Property, Plant, and Equipment Review and Practice CHAPTER 11: Depreciation, Impairments, and Depletion Depreciation—A Method of Cost Allocation Other Depreciation Issues Impairments Depletion Revaluations Presentation and Analysis APPENDIX 11A: Revaluation of Property, Plant, and Equipment Revaluation of Land Revaluation of Depreciable Assets Review and Practice Global Accounting Insights CHAPTER 12: Intangible Assets Intangible Asset Issues Types of Intangible Assets Goodwill Impairment and Presentation of Intangible Assets Research and Development Costs Review and Practice Global Accounting Insights CHAPTER 13: Current Liabilities, Provisions, and Contingencies Current Liabilities Provisions Contingencies Presentation and Analysis Review and Practice CHAPTER 14: Non-Current Liabilities Bonds Payable Long-Term Notes Payable Extinguishment of Non-Current Liabilities Presentation and Analysis Review and Practice Global Accounting Insights CHAPTER 15: Equity Corporate Capital Reacquisition of Shares Dividend Policy Presentation and Analysis of Equity APPENDIX 15A: Dividend Preferences and Book Value per Share Dividend Preferences Book Value per Share Review and Practice Global Accounting Insights CHAPTER 16: Dilutive Securities and Earnings per Share Dilutive Securities Share Warrants Share Compensation Plans Basic Earnings per Share Diluted Earnings per Share APPENDIX 16A: Accounting for Share-Appreciation Rights SARs—Share-Based Equity Awards SARs—Share-Based Liability Awards Share-Appreciation Rights Example APPENDIX 16B: Comprehensive Earnings per Share Example Diluted Earnings Per Share Review and Practice Global Accounting Insights CHAPTER 17: Investments Debt Investments Equity Investments Other Reporting Issues APPENDIX 17A: Accounting for Derivative Instruments Defining Derivatives Who Uses Derivatives, and Why? Basic Principles in Accounting for Derivatives Derivatives Used for Hedging Other Reporting Issues Comprehensive Hedge Accounting Example Controversy and Concluding Remarks APPENDIX 17B: Fair Value Disclosures Disclosure of Fair Value Information: Financial Instruments Disclosure of Fair Values: Impaired Assets or Liabilities Conclusion Review and Practice Global Accounting Insights CHAPTER 18: Revenue Recognition Fundamentals of Revenue Recognition The Five-Step Process Revisited Accounting for Revenue Recognition Issues Presentation and Disclosure APPENDIX 18A: Long-Term Construction Contracts Revenue Recognition over Time APPENDIX 18B: Revenue Recognition for Franchises Franchise Accounting Recognition of Franchise Rights Revenue over Time Review and Practice CHAPTER 19: Accounting for Income Taxes Fundamentals of Accounting for Income Taxes Additional Issues Accounting for Net Operating Losses Financial Statement Presentation APPENDIX 19A: Comprehensive Example of Interperiod Tax Allocation First Year—2021 Second Year—2022 APPENDIX 19B: Accounting for Net Operating Loss Carrybacks Loss Carryback Review and Practice Global Accounting Insights CHAPTER 20: Accounting for Pensions and Postretirement Benefits Fundamentals of Pension Plan Accounting Using a Pension Worksheet Past Service Cost Remeasurements Reporting Pension Plans in Financial Statements Review and Practice Global Accounting Insights CHAPTER 21: Accounting for Leases The Leasing Environment Lessee Accounting Lessor Accounting Special Lease Accounting Problems Appendix 21A: Sale-Leasebacks Accounting Issues in Sale-Leaseback Transactions Sale-Leaseback Example Appendix 21B: Comprehensive Example Lease Terms: Scenario 1 Lease Terms: Scenario 2 Review and Practice Global Accounting Insights CHAPTER 22: Accounting Changes and Error Analysis Accounting Changes Changes in Accounting Estimates Accounting Errors Error Analysis Review and Practice Global Accounting Insights CHAPTER 23: Statement of Cash Flows The Statement of Cash Flows Preparing the Statement of Cash Flows Special Problems in Statement Preparation Use of a Worksheet Review and Practice Global Accounting Insights CHAPTER 24: Presentation and Disclosure in Financial Reporting Full Disclosure Principle Disclosure Issues Auditor’s and Management’s Reports Current Reporting Issues Appendix 24A: Basic Financial Statement Analysis Perspective on Financial Statement Analysis Ratio Analysis Comparative Analysis Percentage (Common-Size) Analysis Appendix 24B: First-Time Adoption of IFRS General Guidelines Implementation Steps Summary Review and Practice Global Accounting Insights Appendix A: Specimen Financial Statements: Marks and Spencer Group plc Appendix B: Specimen Financial Statements: adidas AG Appendix C: Specimen Financial Statements: Puma Group Company Index Subject Index End User License Agreement List of Tables CHAPTER 6 Table 6.1 Future Value of 1 (Future Value of a Single Sum) Table 6.2 Present Value of 1 (Present Value of a Single Sum) Table 6.3 Future Value of an Ordinary Annuity of 1 Table 6.4 Present Value of an Ordinary Annuity of 1 Table 6.5 Present Value of an Annuity Due of 1 List of Illustrations CHAPTER 1 ILLUSTRATION 1.3 Capital Allocation Process ILLUSTRATION 1.4 International Standard-Setting Structure ILLUSTRATION 1.5 IASB Due Process ILLUSTRATION 1.6 User Groups that Influence the Formulation of Accounting Standards CHAPTER 2 ILLUSTRATION 2.1 Conceptual Framework for Financial Reporting ILLUSTRATION 2.2 Hierarchy of Accounting Qualities ILLUSTRATION 2.4 Fair Value Hierarchy ILLUSTRATION 2.5 The Five Steps of Revenue Recognition ILLUSTRATION 2.7 Conceptual Framework for Financial Reporting CHAPTER 3 ILLUSTRATION 3.1 Double-Entry (Debit and Credit) Accounting System ILLUSTRATION 3.2 The Basic Accounting Equation ILLUSTRATION 3.3 Expanded Equation and Debit/Credit Rules and Effects ILLUSTRATION 3.4 Income Statement and Equity Relationships ILLUSTRATION 3.5 Effects of Transactions on Equity Accounts ILLUSTRATION 3.6 The Accounting Cycle ILLUSTRATION 3.8 Posting a Journal Entry ILLUSTRATION 3.10 Investment of Cash by Shareholders ILLUSTRATION 3.11 Purchase of Office Equipment ILLUSTRATION 3.12 Receipt of Cash for Future Service ILLUSTRATION 3.13 Payment of Monthly Rent ILLUSTRATION 3.14 Payment for Insurance ILLUSTRATION 3.15 Purchase of Supplies on Credit ILLUSTRATION 3.16 Signing a Contract ILLUSTRATION 3.17 Declaration and Payment of Dividend ILLUSTRATION 3.18 Payment of Salaries ILLUSTRATION 3.19 Receipt of Cash for Services Provided ILLUSTRATION 3.22 Adjusting Entries for Deferrals ILLUSTRATION 3.23 Adjustment for Supplies ILLUSTRATION 3.24 Adjustment for Insurance ILLUSTRATION 3.25 Adjustment for Depreciation ILLUSTRATION 3.27 Adjustment for Unearned Service Revenue ILLUSTRATION 3.28 Adjusting Entries for Accruals ILLUSTRATION 3.29 Accrual Adjustment for Receivable and Revenue Accounts ILLUSTRATION 3.30 Formula for Computing Interest for One Month ILLUSTRATION 3.31 Adjustment for Interest