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Short Answer:

1. Briefly describe some of the similarities and differences between U.S. GAAP and IFRS
with respect to the accounting for investments.
1. The accounting and reporting under IFRS and U.S. GAAP are for the most part very
similar, although the criteria used to determine the accounting is often different. For
example, among the notable similarities are: (1) the accounting for trading,
sale, and held-to-maturity securities is essentially the same between IFRS and
U.S. GAAP; (2) both IFRS and U.S. GAAP use the same test to determine whether
the equity method of accounting should be used – that is, significant influence with a
general guide of over 20% ownership. IFRS uses the term associate investment rather
than equity investment to describe its investment under the equity method; (3)
reclassifications of securities from one category to another generally follow the same
accounting under the two GAAP systems. Reclassification in and out of trading
securities is prohibited under IFRS. It is not prohibited under U.S. GAAP, but this type
of reclassification should be rare.

17 - 44 Test Bank for Intermediate Accounting, Fourteenth Edition

Differences include: (1) Gains and losses related to available-for-sale securities are
reported in other comprehensive income under U.S. GAAP. Under IFRS, these gains
and losses are reported directly in equity; (2) under IFRS, both the investor and an
associate company should follow the same accounting policies. As a result, in order to
prepare financial information, adjustments are made to the associate’s policies to
conform to the investor’s books; (3) the basis for consolidation under IFRS is control.
Under U.S. GAAP, a bipolar approach is used which is a risk-and-reward model (often
referred to as a variable-entity approach) and a voting-interest approach. However,
under both systems, for consolidation to occur, the investor company must generally
own 50% of another company; (4) U.S. GAAP does not permit the reversal of an
impairment charge related to available-for-sale debt and equity investments. IFRS
follows the same approach for non-trading equity investments but permits reversal for
non-trading debt investments and held-for-collection securities.
2. Ramirez Company has an available-for-sale (non-trading) investment in the 6%, 20-
bonds of Soto Company. The investment was originally purchased for $1,200,000 in
Early in 2012, Ramirez recorded an impairment of $200,000 on the Soto investment, due
to Soto’s financial distress. In 2013, Soto returned to profitability and the Soto investment
was no longer impaired. What entry does Ramirez make in 2013 under (a) U.S. GAAP
and (b) IFRS?
2. Under U.S. GAAP, Ramirez makes no entry, because impaired investments may not
be written up if they recover in value. Under IFRS, Ramirez makes the following entry:
Debt Investments…………………………………… 200,000
Recovery of Impairment Loss ……………………….. 200,000