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Discussion
If you were the CFO for a $10 billion-a-year international company headquartered in Ireland, which accounting rules would you recommend your company to follow: U.S. GAAP or IFRS? Are these rules comparable? What are the major differences between the two accounting standards? What was your rationale for choosing a rule?
Case Study
Instructions
Read the case study indicated below, and answer the following questions:
James, M. L. (2010). Accounting for business combinations and the convergence of International Financial Reporting Standards with U.S. Generally Accepted Accounting Principles: A case study. Journal of the International Academy for Case Studies, 16(1), 95-108.
1. What key financial ratios will be affected by the adoption of FAS 141R and FAS 160? What will be the likely effect?
2. Could any of the recent and forthcoming changes affect the company’s acquisition strategies and potentially its growth?
3. What were FASB’s primary reasons for issuing FAS 141R and FAS 160?
4. What are qualifying SPEs? Do they exist under IFRS? What is the effect of FAS 166 eliminating the concept of qualifying SPEs on the convergence of accounting standards?
5. If the company adopts IFRS, what changes should management be aware of?
6. What are the principle differences between IFRS and U.S. GAAP?
Your submission should be a minimum of three pages in length in APA style; however, a title page, a running head, and an abstract are not required. Be sure to cite and reference all quoted or paraphrased material appropriately in APA style.
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LaTanya Lester-Hayes
Submission UUID: d037cd63-007f-1ff5-6a8b-2391597b0c2
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Total Number of Reports
1
Highest Match
43 %
Unit VII IFRS vs GAAP x
Average Match
43 %
Submitted on
05/11/20
08:18 PM EDT
Average Word Count
988
Highest: Unit VII IFRS vs GA…
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Institutional database (9)
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Word Count: 988
Unit VII IFRS vs GAAP x
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Running Head: IFRS vs GAAP 2
IFRS vs GAAP
La Tanya Lester-Hayes
Columbia Southern University
May 09, 2020
All financial ratios that are computed using the company’s assets or liabilities would be directly affected by the adoption of FAS 141R and FAS
160. In particular, the firm’s liquidity ratios that include the current ratio and the acid test ratio will change upon the approval of FAS 141R and FAS
160. While previous calculations revalued assets and liabilities based on the ownership percentage of the parent company, the new approach
required firms to undertake such revaluation to fair market value at the date of acquisition (100%revaluation) (James, 2010). This requirement will
affect the calculation of other financial ratios such as the total asset turnover that depend on the valuation of assets. Secondly, by adopting FAS
141R and FAS 160, all ratios that depend on the firm’s equity such as the equity ratio will change in value. The firm’s noncontrolling interest would
no longer be classified as a liability or between liabilities and equity. The new approach categorizes noncontrolling interest (NCI) exclusively as equi-
ty. In addition, the NCI valuation will be carried at fair market value of the net assets of subsidiaries, before the NCI percentage is factored in.
This deviates from the previous approach where the NCI valuation was carried to book value. The forthcoming changes will ultimately affect acquisi-
tion strategies in terms of in process research and development (R&D). Previously, these costs could be expensed at the time of acquisition. The up-
coming changes require such costs to be capitalized at the time of acquisition. Second, the acquisition stages will be affected by the intended
changes. In particular, measurement of the previously acquired equity interest will change with the adoption of the new standards. The changes dic-
tate that instead of measuring the previously acquired equity interest based on values at time of individual equity acquisition, the acquiring firm
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should remeasure such values when it achieves control.
Losses and gains are recognized in the income statement. Third, when it comes to the cost of business combinations, the adoption of the new stan-
dards implies that direct costs would be expensed in the same year of acquisition. This would be a change from the previous approach where the
direct costs were taken (capitalized) as part of the acquisition cost (James, 2010). For FASB, the primary objective regarding the issuance of FAS
141R and FAS 160 was to achieve convergence between the IFRS and IASB. In addition, the FASB focus was to improve the way in which information
about business combinations was reported. In this process, the FASB worked in collaboration with IASB to ensure that international accounting stan-
dards were achieved. By working closely with IASB, it was possible to introduce important variations/changes to improve the scope of financial re-
porting and accounting for consolidated entities (Tavakoli, n.d.). Qualifying Special Purpose Entities are defined as off balance sheet, bankruptcy
remote entities FASB, 2009). In other words, they comprise of “assets placed presumptively beyond the reach of the bank transferor’s creditors
through a true sale” (James, 2010). They may be used by organizations for a number of purposes such as structured management of risk. In elimi-
nating the concept of Qualifying SPEs, FAS 166 requires qualifying SPES to evaluate the remote entities for possible consolidation. It also stipulates
additional disclosures and changes the criteria for derecognizing assets. FAS 166 also dictates that firms must provide additional information related
to the transference of financial assets that include securitization activities, and in instances where the companies face continuing risks emanating
from the transferred financial assets (FASB, 2009).
By adopting IFRS, it would be important to understand the various provisions that enhance convergence between GAAP and IFRS. In this case, GAAP
rules would still apply to the company’s financial reporting and accounting within the United States while IFRS applies to its international activities.
With this in mind, the company must understand the implications of FASB’s FAS 141R and FAS 160. According to James (2010), these relate to;
subsidiaries’ assets and liabilities, negative goodwill, balance sheet classification of noncontrolling interest (NCI), Income statement presentation of
NCI’s share of income, NCI valuation, Cost of business combinations, acquisition in stages. In the definition of control, firms that use GAAP standards
focus on the controlling financial interest that’s understood to be the majority voting interest. On the other hand, IFRS is oriented towards the man-
date to govern financial and operating policies with the primary objective of running activities that guarantee benefits for the controlling entity. Sec-
ond, when it comes to shares for determining control, GAAP is concerned with only the existing voting rights. The use of IFRS allows for the inclusion
of exercisable shares.
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Third, in the calculation of NCI, GAAP requires firms to measure interest at fair value of the company’s net assets with an allowance for inclu-
sion of share of goodwill (James, 2010). On the other hand, IFRS allows accountants to make a choice between the fair value of the company’s
net assets and the proportionate share of fair value. In calculating goodwill at the time of acquisition, GAAP presupposes that if goodwill exists,
it includes share attributed to NCI. The IFRS rules imply that if a second choice is taken, goodwill can only be attributed to controlling interest. Lastly,
in goodwill impairment test, subscribers of the US GAAP rules adopt a two-step method while IFRS is based on a one step approach.
References
FASB. (2009). FASB Issues Statements 166 and 167 Pertaining to Securitizations and Special Purpose Entities. Retrieved from https://www.-
fasb.org/jsp/FASB/FASBContent_C/NewsPage&cid=1176156240834
James, M. L. (2010). Accounting for business combinations and the convergence of International Financial Reporting Standards with U.S. Gener-
ally Accepted Accounting Principles: A case study. Journal of the International Academy for Case Studies, 16(1), 95-108. Tavakoli, J. Introduction
to Special Purpose Entities. Retrieved from https://www.tavakolistructuredfinance.com/special-purpose-entities/
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Student paper
IFRS vs GAAP 2 IFRS vs GAAP
Original source
IFRS vs GAAP IFRS vs GAAP
2
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Columbia Southern University
Original source
Columbia Southern University
2
Student paper
All financial ratios that are computed
using the company’s assets or liabili-
ties would be directly affected by the
adoption of FAS 141R and FAS 160.
Original source
There are two main financial ratios
that are likely to be directly affected
by the adoption of FAS 141R and FAS
160
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While previous calculations revalued
assets and liabilities based on the
ownership percentage of the parent
company, the new approach re-
quired firms to undertake such
revaluation to fair market value at
the date of acquisition (100%revalu-
ation) (James, 2010).
Original source
For instance previously the assets
and liabilities were revalued based
on the parent’s ownership percent-
age whereas now all assets and lia-
bilities are revalued to fair market
value at acquisition date (100%
revaluation) (James, 2010)
4
Student paper
In addition, the NCI valuation will be
carried at fair market value of the
net assets of subsidiaries, before the
NCI percentage is factored in.
Original source
Finally, the NCI Valuation will be car-
ried at fair market value of sub-
sidiaries net assets multiplied by the
NCI percentage instead of at book
value of subsidiaries
4
Student paper
For FASB, the primary objective re-
garding the issuance of FAS 141R
and FAS 160 was to achieve conver-
gence between the IFRS and IASB.
Original source
The primary reasons for the issuing
of FAS 141R and FAS 160 were due
to the efforts between the FASB and
IASB to bring about convergence be-
tween US GAAP and IFRS
5
Student paper
Qualifying Special Purpose Entities
are defined as off balance sheet,
bankruptcy remote entities FASB,
2009).
Original source
Qualifying special-purpose entities
(QSPEs) generally are off-balance-
sheet entities that are exempt from
consolidation
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Student paper
subsidiaries’ assets and liabilities,
negative goodwill, balance sheet
classification of noncontrolling inter-
est (NCI), Income statement presen-
tation of NCI’s share of income, NCI
valuation, Cost of business combina-
tions, acquisition in stages.
Original source
Cost of the business combinations,
subsidiaries assets/liabilities, Nega-
tive Goodwill, Balance Sheet Classifi-
cation of Noncontrolling Interest
(NCI), Income statement presenta-
tion of NCI’s share of the NCI valua-
tion (Marianne.J.L.,2010)
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Student paper
Third, in the calculation of NCI, GAAP
requires firms to measure interest at
fair value of the company’s net as-
sets with an allowance for inclusion
of share of goodwill (James, 2010).
Original source
Additionally, with GAAP, “NCI interest
is measured at fair value of total net
assets and includes share of good-
will” (James, 2010, 103)
8
Student paper
On the other hand, IFRS allows ac-
countants to make a choice between
the fair value of the company’s net
assets and the proportionate share
of fair value.
Original source
Choice between fair value and pro-
portionate share of fair value of
identifiable net assets
9
Student paper
In calculating goodwill at the time of
acquisition, GAAP presupposes that
if goodwill exists, it includes share
attributed to NCI. The IFRS rules im-
ply that if a second choice is taken,
goodwill can only be attributed to
controlling interest.
Original source
Under GAAP goodwill (if it exists)
also includes share attributed to NCI
Under IFRS if a second option is cho-
sen, goodwill is only attributed to
controlling interest (parent)
4
Student paper
FASB Issues Statements 166 and 167
Pertaining to Securitizations and
Special Purpose Entities.
Original source
FASB Issues Statements 166 and 167
Pertaining to Securitizations and
Special Purpose Entities
10
Student paper
Retrieved from
https://www.fasb.org/jsp/FASB/FAS-
BContent_C/NewsPage&cid=117615
6240834
Original source
Retrieved from
https://www.fasb.org/jsp/FASB/FAS-
BContent_C/NewsPage&cid=117615
6240834
11
Student paper
Accounting for business combina-
tions and the convergence of In-
ternational Financial Reporting Stan-
dards with U.S. Generally Accepted
Accounting Principles: A case study.
Journal of the International Academy
for Case Studies, 16(1), 95-108.
Original source
Accounting for business combina-
tions and the convergence of In-
ternational Financial Reporting Stan-
dards with U.S Generally Accepted
Accounting Principles A case study
Journal of the International Academy
for Case Studies, 16(1), 95-108
4
Student paper
Introduction to Special Purpose Enti-
ties. Retrieved from https://www.-
tavakolistructuredfinance.com/spe-
cial-purpose-entities/
Original source
Special Purpose Entities Retrieved
from https://www.tavakolistruc-
turedfinance.com/special-purpose-
entities/