International Accounting Assignment -
Question 1 - MANGO Company is an engineering company based in USA and the company prepares its consolidated financial statements using U.S. GAAP. As at 31 December 2010, the company reported income of US$8 million and stockholder's equity of US$50 million. Romell, the Chief Financial Officer of MANGO Company has intentions to list the company on European stock exchanges and is wondering what is the impact and implications of reporting under IFRS as compared with U.S. GAAP. He has engaged you to prepare a reconciliation of income and shareholder's equity from U.S. GAAP to IFRS.
You have identified the following areas in which MANGO Company's accounting principles based on U.S. GAAP differs from that of IFRS.
(i) Revenue recognition
(ii) Stock options
(iii) Bonds payable
(iv) Pension funds
(v) Restructuring
Romell has provided the information with relation to the identified areas.
(i) Revenue recognition
- Entered into a contract in 2010 to provide engineering services to customers over a 12 month period. The price for the project is US$300,000 and the company estimates with a high degree of reliability that by 2010 end, 35% of the project will be completed.
(ii) Stock options
- Stock options were granted to key officers of the company on 1 January 2010, the fair value per option as at grant date was US$10, and a total of 12,000 options were granted. The options vest in equal instalments over 3 years in 2009 till 2011.
- The company recognises the compensation expenses related to stock options using a straight line method.
(iii) Bonds payable
- On 1 January 2009, the company issued US$20,000,000 of 5% bonds at par value.
- Bonds will mature in 5 years period on 31 December 2013.
- Costs incurred in issuing the bond were US$1,000,000. Interest is paid on the bonds annually.
(iv) Pension funds
- In 2008, the company made amendments to its pension plan.
- Past service cost in 2009 is US$90,000.
- 50% of the past service cost was attributable to the already vested employees who has an average remaining service life of 10 years, and half of the past service cost was attributable to non-vested employees, which on the average, had two more years till vesting.
- The company has no retired employees.
(v) Restructuring
- The company publicly announced a restructuring plan in 2010 that created a valid expectation on the part of the employees to be terminated that the company will carry out the restructuring.
- The company has estimated that the restructuring costs would require US$500,000.
No legal obligation to restructure exists as at 31 December 2010.
Required:
(a) Compare the differences which exist between U.S. GAAP and IFRS and prepare a U.S. GAAP Basis to IFRS reconciliation of the 2010 income and Shareholders' equity as at 31 December 2010. For the purpose of this exercise, ignore income taxes.
(b) Prepare a narrative note to explain each adjustment made in the reconciliation schedule including your workings.
Question 2 -
Many jurisdictions are mainly towards adopting or converging with International Financial Reporting Standards (IFRS). Companies who are practising the national generally accepted accounting practice may encounter significant changes during their transition to IFRS. Hence, the consistency of the interpretation and application of IFRS in different countries is important. IFRS are applied based on principles, rules and on management's judgement. There is significant scope for managerial judgement to influence the practice of accounting. For financial statements to be consistent and comparable worldwide, it is crucial to manage the national differences in accounting.
Required:
(a) Analyse and discuss how inconsistency between the financial statements of companies could be due to the modifications in accounting practices on transition to IFRSs and choice in the application of individual IFRS.
(b) Discuss and explain how financial statements prepared under IFRS could have been significantly impacted by management's judgement and the financial reporting infrastructure of a country.
Question 3 - The International Accounting Standards Board (IASB) has begun a joint project to revisit its conceptual framework for financial accounting and reporting. The goals of the project are to build on the existing frameworks and converge them into a common framework.
Required:
(a) Appraise and discuss why there is a need to develop an agreed international conceptual framework and the extent to which an agreed international conceptual framework can be used to resolve practical accounting issues.
(b) Discuss the key issues which will need to be addressed in determining the basic components of an internationally agreed conceptual framework.