Deck 8: International Business Combinations, Goodwill and Intangibles

Question 1

Parent company balance sheets

A) are not permitted for U.K. companies.
B) usually accompany consolidated statements in the United States.
C) are always provided by U.K. companies in addition to a consolidated balance sheet and income statement.
D) are not common in continental Europe.

Answer 1

C

Question 2

The current practice in all countries is to amortize goodwill.

Answer 2

False

Question 3

According to purchase accounting,

A) assets are revalued to book value upon acquisition.
B) assets are revalued to fair market value upon acquisition.
C) earnings are usually enhanced due to the amortization of goodwill.
D) there is no resulting goodwill since the purchase price of the assets must equal their fair value.

Answer 3

B

Question 4

All of the following are MNE consolidation methods except

A) full consolidation
B) proportional consolidation
C) equity method
D) intangible elimination method

Question 5

Acquisition accounting in the United States and United Kingdom generally requires assets to be adjusted to fair value or purchase price.

Question 6

Proportional consolidation involves

A) including a proportion of the firm's income and equity.
B) using the cost but not the equity method.
C) consolidating the ownership share of assets and liabilities on a pro-rata basis.
D) having a proportion of companies in a country (usually the internationally-traded companies) consolidate their financial statements.

Question 7

In the UK merger accounting means

A) purchase accounting
B) joint-venture accounting
C) pooling accounting
D) goodwill accounting

Question 8

The best means of accounting for business combinations in most of the world is

A) by disaggregating data by line of business.
B) by disaggregating data by geographic area.
C) consolidation of financial information.
D) through parent company statements only, except in Anglo-Saxon countries.

Question 9

International and US accounting standards recommend the indirect method of cash flow statements.

Question 10

With respect to business combinations resulting from mergers and acquisitions,

A) British firms tend to use the purchase method, whereby assets are revalued to "fair values" at the date of acquisition.
B) merger accounting (pooling of interests) requires that firms revalue assets to "fair value."
C) the purchase method allows the acquiring firm to include prior years' profits from the acquired firm.
D) the pooling of interests method is widely used outside of the United States, especially in Japan and other Asian countries.

Question 11

Multinational enterprises differ from strictly domestic enterprises in what way from an accountability and disclosure perspective?

A) MNEs typically don't pay taxes.
B) MNEs usually are in conflict with the objectives of host countries, whereas domestic firms tend to be compatible with home country objectives.
C) strictly domestic companies do not operate on an arms-length basis with customers abroad.
D) with MNEs, there is usually a significant volume of intercompany transactions in foreign operations.

Question 12

Where pooling-of-interest accounting is used

A) accounts must be adjusted to fair value after the merger
B) there is no goodwill
C) the companies have no comparative earnings advantages over companies that use purchase accounting
D) goodwill must be examined annually for impairment

Question 13

An alternative to line-by-line consolidation is

A) proportional consolidation
B) minority interest accounting
C) joint-venture accounting
D) the cost method

Question 14

Group identification is a problem for international consolidation.

Question 15

Because of international accounting standards, R&D is always expensed.

Question 16

No company uses the pooling-of interests consolidation method because it is now prohibited throughout the world by standards.

Question 17

Major problems have occurred with joint ventures in Russia, Eastern Europe and China because of the accounting systems.

Question 18

The countries with immediate write-off of goodwill take the advantage that future earnings will be higher.

Question 19

Nonconsolidation can be highly misleading as to overall financial performance with complex foreign operations.

Question 20

Current international accounting standards permits the amortization of goodwill.

Question 21

The MNE disclosure of cash flow statements

A) is decreasing in favor of working capital funds statements
B) is increasing over time
C) is limited by a lack of a restrictive consolidation standard
D) helps the analysis of barter transactions

Question 22

According to the 7th Directive of the EU,

A) proportional consolidation is not permitted.
B) consolidation can only occur when one firm owns a majority of the shares with voting rights of another company.
C) the definition of a group is a good example of a compromise.
D) the Germans did not have to make many changes in their consolidation practices.

Question 23

For non-consolidated subsidiaries where the parent owns less than a majority interest but more than a 20 percent interest,

A) the equity method is used by a majority of corporations worldwide.
B) the equity method must be used by U.S. companies.
C) the cost method recognizes income when earned by the subsidiary.
D) the equity method recognizes income when a dividend is received by the parent.

Question 24

According to the IASB,

A) the cost method must be used instead of the equity method.
B) consolidated financial statements are required.
C) companies may choose between issuing parent company or consolidated financial statements.
D) the pooling of interests method may not be used.

Question 25

Which of the following accurately reflects the accounting for non-consolidated subsidiaries in Japan?

A) Cross-holdings of related companies makes it difficult to identify a parent company.
B) Japanese companies are not permitted to use the equity method.
C) Keiretsu relationships usually have a bank as the major shareholder in related companies.
D) Earnings and assets of Japanese companies tend to be overstated due to the inclusion of group members in consolidated financial statements.

Question 26

According to IFRS 3,

A) the cost method must be used instead of the equity method.
B) amortization of goodwill is allowed
C) companies may choose between issuing parent company or consolidated financial statements.
D) the pooling of interests method may not be used.

Question 27

According to the 7th Directive of the EU,

A) worldwide consolidation is required.
B) companies must consolidate domestic subsidiaries, but foreign subsidiaries are optional.
C) the more conservative cost method must be used to account for subsidiaries for which the parent owns less than a majority interest.
D) assets must be revalued to book values in the case of an acquisition.

Question 28

AT&T has a 60 percent equity interest in a joint venture with Marubeni Corporation in Japan to develop and market laptop notebook portable computers, notably the Safari notebook. Would you classify this operation as an

A) implementor.
B) integrated player.
C) local innovator.
D) multidomestic operation.

Question 29

Which of the following accurately reflects the accounting for non-consolidated subsidiaries in Japan?

A) Cross-holdings of related companies make it difficult to identify a parent company.
B) Japanese companies are not permitted to use the equity method.
C) Keiretsu relationships usually have a bank as the major shareholder in related companies.
D) Earnings and assets of Japanese companies tend to be overstated due to the inclusion of group members in consolidated financial statements.

Question 30

Which of the following is not a type of joint controlled venture

A) operations
B) accounting practice
C) assets
D) entities

Question 31

The IASC recommends a "Benchmark Treatment" of

A) accrual accounting
B) fair value accounting
C) full translation
D) proportionate consolidation

Question 32

A contractual arrangement whereby two or more parties undertake an activity which is subject to joint control

A) a consol
B) a preferred stock
C) a joint venture
D) a mutual fund

Question 33

Cash flow statements

A) are required by the EU 4th Directive.
B) are already required by most members of the EU, so it was not necessary to include a requirement for cash flow statements in the 4th Directive.
C) are required by IAS 7.
D) are not required by IOSCO.

Question 34

The revaluation of the assets acquired to fair value or updated purchase price

A) is usually base on current values.
B) is required by Swiss and Japanese companies.
C) is not allowed in the United Kingdom or United States.
D) has no future affect on earnings.

Question 35

The trend of IASB accounting for combinations is becoming

A) less restrictive
B) no trend is present
C) dependent on business cycles
D) more restrictive

Question 36

IAS 7

A) encourages the direct method
B) requires the direct method
C) encourages the indirect method
D) requires the indirect method

Question 37

The equity method is used,

A) by a most all of the corporations worldwide.
B) by Japanese, U.S. and United Kingdom companies.
C) only if proportional consolidation will result in different income.
D) by Germany and Switzerland.

Question 38

In terms of funds and cash flow statements,

A) there is a lack of regulation worldwide on their use.
B) fewer and fewer companies are providing cash flow statements due to the cost of competitive disadvantage.
C) firms are shifting away from cash flow statements and moving to working capital as a definition of funds.
D) most countries require cash flow rather than funds statements.

Question 39

A problem with joint-venture accounting

A) includes an emphasis on a receipts and payments approach
B) includes an emphasis on an accruals approach
C) is the lack disclosure on contingencies
D) is the lack of a definition of what constitutes a joint venture

Question 40

Most countries

A) require the direct method of cash flow statements
B) require the indirect method of cash flow statements
C) require the working capital approach
D) don't require any specific method in cash flow statements

Question 41

A major argument in favor of the immediate write-off approach to goodwill is that

A) it is an asset with future economic benefit.
B) its true value has no predictive relationship to the cost paid on acquisition.
C) it does not distort the financial statements.
D) It provides a more accurate relationship between debt and total assets.

Question 42

Prior to 1998, the dominant approach to accounting for goodwill in the United Kingdom is the

A) immediate write-off to reserves.
B) immediate write-off to income.
C) set up as an asset with amortization.
D) set up as an asset without amortization.

Question 43

Recognizing goodwill as an asset subject to annual impairment testing

A) is subject to double-accounting
B) might have the asset appreciate in value
C) argues that goodwill does not always decline on a straight-line basis
D) is easy because all other accounts are fair value and therefore goodwill is a plug number

Question 44

In the case of brands, which separability treatment is accurate?

A) Amortization is not an issue.
B) U.K. firms must amortize brands over a maximum of 20 years. Brands may qualify as assets.
D) Brands may qualify as a liability.

Question 45

What is the problem of writing off goodwill in service companies

A) leverage will become low
B) the price earnings ratio will not change
C) the stated financial position will not change
D) equity maybe become depleted

Question 46

The advantage of setting up brands as an asset without amortization is that

A) brand names have value and are being maintained through advertising.
B) it is relatively easy to assess the future value of well-known brands.
C) it is consistent with accrual accounting.
D) it is the most conservative approach to accounting for brands.

Question 47

Research and development costs

A) are generally written off immediately to earnings in the United States.
B) are typically capitalized and amortized.
C) are not very significant due to the lack of R&D being done in the U.S. currently.
D) are split into two parts by the IASB. Research costs should be capitalized, whereas development costs should be written off.

Question 48

DLT, a German firm, acquired a foreign corporation for a purchase price of $500 million. The book value of the net assets was stated at $350 million, but the fair market value of the net assets is $420 million. Assume the useful life of the goodwill to be 10 years. If the goodwill is systematically amortized over its useful life, what would be the amount per year?

A) $15 million per year
B) $8 million per year
C) $7 million per year
D) Goodwill cannot be systematically amortized in Germany.

Question 49

The International Accounting Standards Board requires that brands

A) be set up as an asset and amortized over its useful life.
B) be set up as an asset but not amortized.
C) be written off immediately.
D) The IASB has no standard relating to brands.

Question 50

Capitalization of brands without amortization

A) is acceptable in Canada and the United States
B) is acceptable in France if there is no limit to its useful life
C) is only permissible when the brand is internally generated under the IASB
D) The IASB has no standard relating to brands.

Question 51

A motivation for current US GAAP was a major concern over the treatment of goodwill by the British in comparison with the Americans is that

A) the British may be able to offer more for an acquisition than an American firm.
B) British income tends to be lower than U.S. income.
C) British firms would have a more difficult time acquiring firms that have brand names.
D) British firms are able to pay more for new greenfield (as opposed to acquisition) investments than are U.S. firms.

Question 52

A major argument against the systematic amortization of goodwill is that

A) it is not consistent with accrual accounting.
B) it tends to overstate earnings.
C) it represents an unrealized loss, not a cash flow.
D) its future value is not being continuously maintained.

Question 53

According to the efficient market hypothesis as it relates to goodwill,

A) share prices do not accurately reflect all publicly available information.
B) accounting treatment of intangibles is not as important as the disclosure of information on how they are accounted for.
C) goodwill should be set up as an asset and amortized.
D) goodwill should be written off to reserves.

Question 54

Using the same assumptions as given in question 44, but assume that DLT is Swedish. What would be the amount of goodwill recognized on an annual basis under their GAAP?

A) $8 million per year
B) $7.5 million per year
C) $4 million per year
D) Goodwill cannot be systematically amortized.

Question 55

The fundamental problem with intangibles

A) is not the separability issue
B) is the trade-off between relevance and reliability
C) is resolved in the IASB's conceptual framework
D) can be resolved by writing them off immediately upon acquisition

Question 56

The dominant approach to accounting for goodwill in the United States is the

A) immediate write-off to reserves.
B) immediate write-off to income.
C) set up as an asset subject to amortization.
D) set up as an asset not subject to amortization.

Question 57

Analysts

A) do not adjust corporate profits to exclude profit/losses from goodwill
B) do not consider the market as efficient
C) do not regard intangible accounting as full disclosure
D) do adjust corporate profits to exclude profit/losses from goodwill

Question 58

A major argument in favor of setting up goodwill as an asset with amortization is that

A) goodwill is a cost of resources that will be used up
B) its future value is being continuously maintained.
C) its true value has no predictive relationship to the cost paid on acquisition.
D) it does not distort the financial statements.

Question 59

A major argument in favor of setting up goodwill as an asset without amortization is that

A) it is inconsistent to amortize purchased but not internally generated goodwill.
B) it is the cost of resources which will be used up.
C) its future value is being continuously maintained.
D) everything needs to pass through the income statement sometime.

Question 60

A focus of stock market valuation is on

A) recurring profits and cash flow
B) payback
C) activity based costing
D) transfer pricing