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I. The International Accounting Standards Board (IASB) had 26 International Accounting Standards (IAS) and 15 International Financial Reporting Standards (IFRS) in force in 2018.
A. Prior agreements between IASB and U.S. Financial Accounting Standards Board (FASB) to work together to reduce differences between IFRS and U.S. GAAP have resulted in convergence in many areas notably, inventories, revenue recognition, and leases
II. There are several types of differences between IFRS and U.S. GAAP.
A. Definition differences. Differences in definitions can occur even though concepts are similar. Definition differences can lead to differences in recognition and/or measurement.
B. Recognition differences. Differences in recognition criteria and/or guidance related to (a) whether an item is recognized, (b) how it is recognized, and/or (c) when it is recognized (timing difference).
C. Measurement differences. Differences in approach for determining the amount recognized resulting from either (a) a difference in the method required, or (b) a difference in the detailed guidance for applying a similar method.
D. Alternatives. One set of standards allows a choice between two or more alternative methods; the other set of standards requires one specific method to be used.
E. Lack of requirements or guidance. IFRS does not cover an issue addressed by U.S. GAAP, and vice versa.
F. Presentation differences. Differences in the presentation of items in the financial statements.
G. Disclosure differences. Differences in information presented in the notes to financial statements related to (a) whether a disclosure is required and/or (b) the manner in which a disclosure is required to be made.
III. A variety of differences exist between IFRS and U.S. GAAP with respect to the recognition and measurement of assets.
A. Inventory – Lower of cost or net realizable value write-downs may be reversed under IFRS, but not under U.S. GAAP. U.S. GAAP allows the use of LIFO; IFRS does not.
B. Property, plant, and equipment – subsequent to acquisition, IFRS allows fixed assets to be reported on the balance sheet using a cost model (historical cost less accumulated depreciation and impairment losses) or a revaluation model (fair value at the balance sheet date less accumulated depreciation and impairment losses); U.S. GAAP requires the use of the cost model. Component depreciation must be applied under IFRS when items of property, plant, and equipment are comprised of significant parts; this is not the case under U.S. GAAP
C. Investment property – IFRS allows companies to carry investment property at fair value, with revaluation gains or losses recognized in each period’s income statement. U.S. GAAP prohibits fair value accounting for most such properties.
2020
D. Biological assets – IFRS requires companies to carry biological assets at fair value, with revaluation gains or losses recognized in each period’s income statement. It makes an important exception for bearer plants. U.S. GAAP has not established an explicit fair value regime for biological assets, although agricultural commodities may be marked to market in certain cases.
E. Impairment of assets – An asset is impaired under IFRS when its carrying amount exceeds its recoverable amount, which is the greater of net selling price and value in use. Value in use is calculated as the present value of future cash flows expected from continued use of the asset and from its disposal. An asset is impaired under U.S. GAAP when its carrying amount exceeds the undiscounted future cash flows expected from the asset’s continued use and disposal.
1. Measurement of impairment loss – The impairment loss under IFRS is the difference between carrying amount and recoverable amount; under U.S. GAAP, the impairment loss is the amount by which carrying amount exceeds fair value. Recoverable amount and fair value are likely to be different.
2. Reversal of impairment loss – If subsequent to recognizing an impairment loss, the recoverable amount of an asset is determined to exceed its new carrying amount, IFRS requires the original impairment loss to be reversed; U.S. GAAP does not allow the reversal of a previously recognized impairment loss.
F. Development costs – When certain criteria are met, IFRS requires development costs to be capitalized as an asset and then amortized over their useful life; U.S. GAAP requires development costs to be expensed as incurred. An exception exists in U.S. GAAP for software development costs.
G. Borrowing costs – Similar to U.S. GAAP, IFRS requires borrowing costs to be capitalized to the extent they are attributable to the acquisition, construction, or production of a qualifying asset. Other borrowing costs are expensed as incurred. However, the amount of borrowing costs to be capitalized differs between IFRS and U.S. GAAP.
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1. The types of differences that exist between IFRS and U.S. GAAP can be classified as:
• Definition differences
• Recognition differences
• Measurement differences
• Differences in allowed alternatives
• Differences in (lack of) guidance
• Presentation differences
• Disclosure differences
2. IFRS requires the reversal of write-downs from cost to net realization value (NRV) when the selling price increases. U.S. GAAP prohibits the reversal of past write-downs.
3. The estimated costs of dismantling and removing an asset must be included in the asset’s cost upon initial recognition.
4 The two models allowed by IAS 16 are the cost model and the revaluation model. Under the revaluation model, property, plant, and equipment is reported on the balance sheet at a revalued amount, measured as fair value at the date of remeasurement, less accumulated depreciation and any accumulated impairment losses.
5. Any item of property, plant, and equipment may be accounted for under the revaluation model. However, all other items within that class of PPE must be revalued at the same time. Revaluation must occur frequently enough that the difference between the revalued assets’ carrying amount and fair value is not material.
6. The revaluation surplus is an element of other comprehensive income in stockholders’ equity The revaluation surplus is transferred to retained earnings as the revalued asset is realized, either through its use or upon its disposal. The surplus is transferred to retained earnings either: (1) as a lump sum when the asset is disposed of, or (2) each period, as the difference between depreciation on the revalued amount and depreciation on the historical cost. A third treatment for revaluation surplus is to allow it to stay in other comprehensive income indefinitely.
7. When an item of property, plant, and equipment is comprised of significant parts that have different useful lives, as is the case for an airplane, the asset must be split into components and each component must be depreciated separately.
8. Under the fair value model for investment property, changes in fair value are recognized in net income, whereas changes in fair value under the revaluation model are taken to other comprehensive income.
9. Businesses that regularly buy and hold real estate in the ordinary course of their operations often simultaneously hold material quantities of investment properties. Investment property assets are common in hospitality, retail, and construction.
10. Biological assets are held by companies active in the early stages of the food products value chain. Examples include milk companies that own cows and feed and paper companies that own timber resources.
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11. Companies have the option of applying fair value accounting to investment properties but are required to do so for biological assets. In both cases, revaluation gains and losses are included in current period income.
12. Companies treat bearer plants as PPE. Thus, they choose between the cost and revaluation models for these assets. The treatment of bearer plants constitutes an important exception to the requirement that companies revalue biological assets.
13. Under IAS 36, an impairment loss arises when an asset’s recoverable amount is less than its carrying value, where recoverable amount is the greater of net selling price and value in use. Value in use is determined as the expected future cash flows from use of the asset discounted to present value. The amount of the loss is the difference between carrying value and recoverable amount.
Under U.S. GAAP, an impairment loss arises when the expected future cash flows (undiscounted) from the use of the asset are less than its carrying value. If impairment exists, the amount of the loss is equal to the difference between carrying value and fair value, which can be determined in different ways.
14. A previously impaired asset may be written back up only to what it’s carrying amount would have been if the impairment had never been recognized.
15. The three types of intangible assets are: (1) purchased, (2) acquired in a business combination, and (3) internally generated. (1) and (2) are classified as having a finite or indefinite useful life; (3) can only be classified as finite-lived. Finite-lived intangibles are amortized on a systematic basis over their useful lives. All intangibles are subject to impairment testing. Indefinite-lived intangibles must be tested for impairment at least annually.
16. Under IAS 36, expenditures giving rise to a potential intangible are classified as either research or development expenditures. Research expenditures are expensed as incurred. Development expenditures are recognized as an intangible asset when six criteria are met. Under U.S. GAAP, research and development costs are expensed as incurred. The only exception is for software development costs, which are recognized as an asset when certain criteria have been met.
17. Indefinite-lived intangibles and goodwill are subject to impairment testing at least annually.
18. Effective control is control over a subsidiary exercised through means other than controlling a majority of voting shares of the subsidiary’s stock. Criteria that establish effective control include control of the subsidiary’s senior management or board of directors, the control of the subsidiary’s operating, investing, or financing activities, and the right to obtain control by buying more shares after a triggering event.
19. Goodwill is measured as the excess of (a) consideration transferred plus noncontrolling interest over (b) the fair value of the acquired firm’s net assets. Two alternative methods are available to measure noncontrolling interest; therefore, two different measures of goodwill exist for a given business combination.
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20. A gain on bargain purchase exists when (a) consideration transferred plus noncontrolling interest is less than (b) the fair value of the acquired firm’s net assets. The difference between (a) and (b) is sometimes referred to as “negative goodwill.”
21. Goodwill must be tested for impairment annually. Goodwill that can be allocated to a specific cash-generating unit is tested for impairment using a bottom-up test. In this test, the carrying value of the cash-generating unit, including goodwill, is compared with the recoverable amount of the cash-generating unit. If the recoverable amount of a cash-generating unit is less its carrying value, goodwill is deemed to be impaired and is written down.
22. The two-step model starts with a test of whether the fair value of the reporting unit is less than its book. If it is, then a second stage must be undertaken. In this second stage, each of the reporting unit’s specifically identifiable asset and liability is reappraised. This leads to an indirect re-appraisal of the unit’s goodwill. IFRS assumes that a shortfall between a CGU’s fair and book values is attributable to goodwill, eliminating the need for a second stage analysis.
23. IAS 23 requires borrowing costs to be capitalized to the extent they are attributable to the acquisition, construction, or production of a qualifying asset; other borrowing costs are expensed in the period in which they are incurred.
24. Borrowing costs are defined more broadly in IAS 23 than are interest costs in U.S. GAAP. For example, foreign exchange gains and losses are treated as borrowing costs to the extent they represent adjustments to interest costs. Another difference is that under IFRS interest income earned on short-term investment of borrowed amounts is netted against interest cost to determine the amount of borrowing cost to capitalize. There is no netting of interest income and interest expense under U.S. GAAP.
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1. B ($100,000 - $10,000) + $60,000 + $30,000 +$25,000 = $205,000
2. C lower of cost ($50,000) and net realizable value ($45,000) = $45,000
3. A
4. D Total $100,000
Motor 20,000 / 5 years = $4,000
Inspection 10,000 / 4 years = 2,500
Machine $70,000 / 20 years = 3,500 $10,000
5. D
6. B
7. D
8. B $80,000 + $4,000 +$8,000
9. C
10. The Noodle Bowl brand name and favorable lease agreements would likely be recorded as distinct identifiable assets. The value of the Noodle Bowl workforce would be included in goodwill.
Both brand names and the favorable lease agreements are commonly recognized as separate assets when an acquirer allocates the purchase price in a business combination. Here, the brand valuation is supported by observed royalty rates, which is evidence that it is identifiable. The lease agreements arise from specific contracts. Both IFRS and U.S. GAAP specifically prohibit recognition of an “assembled workforce” because it is not controlled by the acquiree and will not be controlled by the acquirer postacquisition.
11. C Mishima and Kawabata
Saratoga exercises control over Mishima through voting interests. Mishima exercises effective control over Kawabata through its control of a majority of the seats on Kawabata’s board of directors Mitsui Corporation appears to control Tanizaki.
12. The following assets may be carried at a fair value higher than historical costs under IFRS:
a. A new home office under IAS 16.
c. An office park being rented to a tenant under IAS 40
d. 100 hectares of young trees under IAS 41.
e. A vineyard because IAS 41 transfers coverage such assets to IAS 16 accounting.
Intangible assets with indefinite useful lives, such as the broadcasting license, may not be carried at fair value.
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13 Income statement recognition is allowed for the following assets: c. An office park being rented to a tenant under IAS 40 d 100 hectares of young trees under IAS 41
Intangible assets with indefinite useful lives, such as the broadcasting license, may not be carried at fair value. The home office and the vineyard may be carried at fair value, but revaluation gains on these assets would be confined to comprehensive income under IAS 16.
14. Optiplex Company – Inventory (determination of cost) Cost
complete the design of the generators
Note:The fixed overhead application rate based on a normal level of production is used per IAS 2.13. The actual level of production can be used if it approximates the normal level; however, the actual level of production in Year 3 does not approximate the normal level.
Storage costs are excluded from the cost of inventory per IAS 2.16, which indicates that storage costs are excluded from the cost of inventories unless they are necessary in the production process before a further production stage.
IAS 2.29 indicates that inventories are usually written down to NRV item by item. Grouping is acceptable when several criteria are met, including relating to the same product line. Because these three products relate to three different product lines, grouping would not be allowed.
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15. (continued)
Cost $390
LCNRV 358
Write-down $ 32
Inventory write-down expense $32
valuation allowance $32
Note: The use of the contra-account “Inventory valuation allowance” facilitates a possible reversal of the write-down as is allowed under IAS 2.
16. Beech Corporation – Inventory (reversal of write-down)
a IAS 2 indicates that an inventory write-down is reversed when, for example, inventory is still on hand and its selling price has increased. The reversal is limited to the amount of the original write-down. The new carrying amount should be the lower of original cost and current NRV.
Inventory should be reported on the 12/31/Y2 balance sheet at LCNRV of $382. The carrying amount at 12/31/Y1 is $358, so inventory must be written up by $24.
At 12/31/Y2, the inventory valuation allowance has a credit balance of $8 the difference between the original cost of $390 and LCNRV of $382.
Note: If LCNRV at 12/31/Y2 had been greater than $390, inventory could have been written back up only to the original cost of $390. In other words, the inventory valuation allowance would be reduced to zero, but will never have a net debit balance.
b. The reversal of the Year 1 write-down would not be allowed under U.S. GAAP. Because no additional write-downs are required in Year 2, the inventory carrying amount would remain at $358.
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Because the exchange transaction lacks commercial substance, no gain would be recognized. The acquired printing press is measured at the carrying value of the asset given up ($24,000) less cash received ($3,000).
Note: According to IAS 16.25, an entity determines whether an exchange transaction has commercial substance by considering the extent to which its future cash flows are expected to change as a result of the transaction. An exchange transaction has commercial substance if:
(a) the configuration (risk, timing and amount) of the cash flows of the asset received differs from the configuration of the cash flows of the asset transferred; or
(b) the entity-specific value of the portion of the entity’s operations affected by the transaction changes as a result of the exchange; and
(c) the difference in (a) or (b) is significant relative to the fair value of the assets exchanged.
This problem assumes that these conditions are not met.
IAS 16.44 states: “an entity allocates the amount initially recognized in respect of an item of property, plant and equipment to its significant parts and depreciates separately each such part.” This is referred to as “component depreciation.” Thus, the total cost of $500,000 must be allocated to carpeting, roof, HVAC system, and the rest of the building, and each component is depreciated separately over its expected useful life.
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a. IAS 36 requires companies to assess annually whether there are any indicators that an asset is impaired. If so, then an impairment loss calculation must be made. External events, such as technological changes that adversely affect the value of an asset, can be indicators of impairment. Quick Company must make an impairment loss calculation at the end of Year 4 because an external event impairment indicator is present.
b.
December 31, Year 4
Cost $100,000
Accumulated depreciation ($10,000 × 4) 40,000 Carrying amount, 12/31/Y4 $60,000
(a) Net selling price $50,000
(b) Value in use (PV of future cash flows) $51,000 Recoverable amount (higher of (a) and (b)) $51,000
The carrying amount exceeds the recoverable amount. Therefore, a $9,000 impairment loss is recorded as follows:
Impairment loss $ 9,000 Equipment (or Accumulated depreciation) $ 9,000
The carrying amount of the equipment on the 12/31/Y4 balance sheet is $51,000.
Annual depreciation beginning in Year 5 will be $8,500 ($51,000 / 6 remaining years of life).
December 31, Year 5
Depreciation expense $8,500 Accumulated depreciation $8,500
The carrying amount of the equipment on the 12/31/Y5 balance sheet is $42,500 ($51,000 –8,500).
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19. (continued)
December 31, Year 6
Depreciation expense $8,500 Accumulated depreciation $8,500
The carrying amount of the equipment on the 12/31/Y6 balance sheet is $34,000 ($42,500 –8,500), prior to any evaluation of whether the impairment has reversed.
Because the technological innovations related to the equipment are not as effective as expected, there is an indicator that the equipment might no longer be impaired. The company must compare the carrying amount of the equipment at 12/31/Y6 with its recoverable amount
Carrying amount, 12/31/Y6 $34,000
Recoverable amount, 12/31/Y6:
(a) Net selling price $42,000
(b) Value in use (PV of future cash flows) $44,000
Recoverable amount (higher of (a) and (b)) $44,000
The recoverable amount exceeds the carrying amount, thus the equipment is no longer impaired. The equipment is written-up and the impairment loss reversed, but only up to the point where the resulting carrying amount is equal to what it would have been if no impairment had been recorded. This is calculated as:
In this case, the asset is written up from $34,000 to $40,000. The following journal entry is recorded at December 31, Year 6:
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20. (continued)
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21 Jefferson Company – Property, Plant and Equipment (measurement subsequent to acquisition)
Income before tax is the same under IFRS and U.S. GAAP in Years 1 and 2. Income before tax is $2,000,000 smaller under IFRS in Years 3, 4, and 5.
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22 Madison Company – Property, Plant and Equipment (impairment)
Total Stockholders’ Equity (ignoring income taxes)
23. Stratosphere Company – Property, Plant, and Equipment (revaluation model)
Amounts in parentheses represent credits.
* Calculated as $3,780,000 divided by remaining life of 18 years.
Note: The net impact on retained earnings over the life of the equipment is negative $500,000 (debit), which is the difference between the purchase price of $4,000,000 and the selling price of $3,500,000.
Journal entries to account for the building under the revaluation model:
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Note: if the asset hadn’t been revalued, the carrying amount of the building would have been $3,400,000 (cost of $4,000,000 less $200,000 depreciation x3 years) at the date of sale. If the building was sold for $3,500,000, there would have been a gain of $100,000.
Since the building was revalued, the depreciation expense over the three years was $610,000 ($200,000 in Year 1 and Year 2 and $210,000 in Year 3). Revaluation surplus was reduced by $10,000 during this period with the credit applied directly to retained earnings. Therefore, after reversing the remaining revaluation surplus of $170,000 to retained earnings, the resulting loss is $70,000.
a. Net income as reported under IFRS: $1,000,000
Plus: Depreciation on revalued component of property for own operations: 35,000
Less: Revaluation of investment property (200,000)
Less: Depreciation on investment property under the cost method (60,000)
Plus: Amortization of development costs under IFRS 160,000
= Net income under U.S. GAAP $935,000
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24. (continued)
b. Shareholders’ equity as reported under IFRS:
Less: Remaining revaluation surplus on property for own operations: (245,000)
Less: Revaluation of investment property
Less: Depreciation on investment property under the cost method
Less:
development costs under IFRS
25 Buch Corporation – Property, Plant, and Equipment (impairment loss and subsequent reversal of impairment loss)
Test for impairment at December 31, Year 3:
-
The impairment loss of $7,000 would be recognized in income on December 31, Year 3 with an offsetting reduction in the asset’s carrying value As a result, the asset will be reported at on the December 31, Year 3 balance sheet at a carrying value of $63,000 This amount will be depreciated over the remaining useful life of 7 years on a straight-line basis.
Review for reversal of impairment loss at December 31, Year 5:
($50,000 - $7,000) $43,000
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25. (continued)
IAS 36 requires an impairment loss to be reversed if the recoverable amount of an asset is determined to exceed its new carrying amount, but only if there are changes in the estimates used to determine the original impairment loss or there is a change in the basis for determining the recoverable amount (from value in use to net selling price or vice versa). Because recoverable amount has changed from net selling price at the end of Year 3 to value in use at the end of Year 5, and the recoverable amount is greater than the carrying value at the end of Year 5, the impairment loss recognized in Year 3 should be reversed However, the carrying value of the asset after reversal of the impairment loss should not exceed what it would have been if no impairment loss had been recognized The carrying value of Machine Z at December 31, Year 5 would have been $50,000 if no impairment loss had been recognized in Year 3 ($100,000 original cost less $10,000 annual depreciation for five years) Thus, an increase in the carrying value of the asset of $5,000 should be recognized at December 31, Year 5 with a reversal of impairment loss in an equal amount The asset’s carrying value on the December 31, Year 5 balance sheet will be $50,000 ($45,000 + $5,000) This amount will be depreciated over the remaining useful life of 5 years on a straight-line basis.
Summary of amounts to be reported on the balance sheet and income statement in Years 1 – 5:
IAS
Carry asset on the balance sheet at cost less accumulated depreciation and any accumulated impairment losses.
Capitalize borrowing costs borrowing costs attributable to the construction of qualifying assets
* Expenditures of $1,000,000 were made evenly throughout the year, so the average accumulated expenditures during the year are $500,000 ($1,000,000 / 2).
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26. (continued)
IAS 16 Revaluation Model
Carry asset on the balance sheet at revalued amount equal to fair value less any subsequent accumulated depreciation and any accumulated impairment losses.
Capitalize borrowing costs attributable to the construction of qualifying assets.
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26. (continued)
1 At December 31,Year 3, the fair value of the building is determined to be $970,000 The carrying value of the building is decreased by $27,500, with a loss on revaluation recognized in Year 3 net income.
2 Depreciation in Year 4 is $25,526 ($970,000 / 38 remaining years).
3 At December 31,Year 5, the fair value of the building is determined to be $950,000 The carrying value of the building is increased by $31,052 A reversal of revaluation loss of $27,500 is recognized in income and $3,552 ($31,052 – 27,500) is recorded as revaluation surplus in shareholders’ equity.
27 Reforce Company – Intangible Assets (determination of cost)
The legal fees to register and defend the patent are capitalized as an intangible asset (Patent, $75,000).
Development costs incurred after both (a) technical feasibility has been established and (b) a business plan has been developed are capitalized (Deferred Development Costs, $175,000).
Production costs will be capitalized as Inventory; not as an intangible asset.
Note: Under U.S. GAAP, only the costs associated with obtaining and defending the patent would be recognized as an asset
28 Lincoln Company – Research and Development Costs
a. IFRS Year 1 Year 2
b. IFRS result in $4 million larger income before tax in Year 1 and $800,000 smaller income before tax in Years 2-6 compared to U.S. GAAP.
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Ignoring income taxes, total assets and total stockholders’ equity are larger under IFRS by the following amounts:
a. R&D expenses would have been higher by 188,107 – 123,938 = 64,169 million yen in 2015. This is because the company would have expensed 188,107 under U.S. GAAP but would have avoided amortization on prior spending of 123,938.
b. R&D expenses would have been lower by 152,548 – 121,037 = 31,511 million yen. This is because the company would have expensed 121,037 under U.S. GAAP but would have avoided amortization on prior spending of 152,548.
c. Expensing will be more conservative when current R&D spending is higher than average R&D in prior years. It will be less conservative when current R&D spending is lower Honda’s R&D spending was substantially lower in 2017 than it had been in the recent past.
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Because Philosopher Stone’s intranet will only be used to share information about company personnel, demonstrating future economic benefits might be difficult SIC 32 talks about a company using a web site to generate revenue, which is not the purpose of the intranet in this case Even if future economic benefits can be demonstrated, only the costs incurred beyond the “planning stage” are eligible for capitalization In addition, SIC 32 indicates that the estimated useful life of a web site should be short, meaning that whatever amount of costs are capitalized they will be amortized over a short period of time
32. Prime Publishing – Goodwill (Impairment)
a
b.
Yes. The fair value of the CGU is less than its book value. A goodwill write-down equal to $3,326,000 – $2,950,000 = $376,000 would be required on December 31, 2016.
Under the proportionate share method, goodwill is recorded only for the controlling interest that Bartholomew Corporation purchased. The fair value of the controlling noncontrolling interests on the date of acquisition were thus $5,000,000 × .8 = $4,000,000 and $5,000,000 × .2 = $1,000,000, respectively. The value of NCI was thus $1,000,000. Goodwill was equal to $5,500,000 - $4,000,000 = $1,500,000.
Part
Because goodwill was neither added to nor subtracted from since the acquisition, the book value of the reporting unit at the end of Year 2 can be decomposed as follows:
The CGU’s recoverable amount equals 6,000,000 - 200,000 = $5,800,000. A goodwill impairment charge of $1,100,000 would be required in Year 2. After applying the charge, the ending carrying values would be
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Calculation of impairment loss, 12/31/Y5:
The impairment loss is allocated first to goodwill, until it is reduced to zero The remaining $215 of loss is allocated to the other assets on the basis of relative carrying amounts:
Amortization expense is calculated for Year 6 using the revised carrying amounts and estimated remaining useful lives of 11 years and 4 years, respectively:
/ 11 years = $110
The improvement in export laws results in a potential impairment recovery of $370 = $1,930 – $1,560 However, carrying amounts may only be written-up to the original cost less accumulated amortization (that would have occurred without the impairment loss)
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Carrying amount of PPE is limited to historical cost $1,500 less depreciation of $250 (2 years at $125) = $1,250; carrying amount of Other Intangibles is limited to historical cost of $500 less amortization of $200 (2 years at $100) = $300; the carrying amount for total assets at 12/31/Y6 is limited to $1,550 ($1,250 + $300) Therefore, recovery of impairment loss is $188 ($1,550 - $1,362), which will be prorated to PPE and Other Intangibles based on relative carrying amounts No recovery of impairment on goodwill is allowed
Property, plant, and equipment
Other intangibles
$1,098 / $1,362 × $188 = $152
$264 / $1,362 × $188 = $ 36
a. Fair value of Bulgari’s net identifiable assets on June 30, 2011:
€901+2,365+64 - 319 - 742 = €2,269 million
Value of NCI under the proportionate share method: 2,269 × .34 = 771.5 million
Purchase consideration plus NCI = 3,019 + 771.5 = €3,790.5 million
Goodwill: 3,790.5 – 2,269 = €1,521.5 million
b. Under U.S. GAAP, LVMH would have been required to record NCI at its fair value. Evidence of the fair value of NCI would be the number shares trading publicly in Milan multiplied by the price of those shares on the date of the acquisition. The fair value of NCI using this method would have been 118.6 × €12.25 = €1,452.85 million
Purchase consideration plus fair value of NCI = 3,019 + 1,452.85 = €4,471.85 million
Goodwill: 4,471.85 – 2,269 = €2,202.85 million
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Interest cost (£300,000 × 4% = £12,000 × $2.10 exchange rate on 3/31/Y1)
• A company takes out a loan to finance the construction of a building that will be used by the company The interest on the loan is capitalized as part of the cost of the building.
• Inventory is reported on the balance sheet using the last-in, first-out (LIFO) cost flow assumption.
• A company owns 40% of foreign entity’s voting stock but consolidates the entity because it controls the entity’s operating and financial decisions through other means.
• A company writes a fixed asset down to its recoverable amount and recognizes an impairment loss in Year 1. In a subsequent year, the recoverable amount is determined to exceed the asset’s carrying amount, and the previously recognized impairment loss is reversed.
• A company pays less than the fair value of net assets in the acquisition of another company. The acquirer recognizes the difference as a gain on purchase of another company.
• A dairy company records a herd of milk cows at fair value based on an independent appraisal. X
• An intangible asset with an active market that was purchased two years ago is carried on the balance sheet at fair value.
• A company that accounts for inventory using first-in, first-out (FIFO) records a write-down of a product line to its net realizable value.
• A manufacturer capitalizes development costs for an industrial product when certain criteria are met.
• A hotel contains a shopping arcade filled with independent retailers. The hotel measures the arcade’s fair value each accounting period and includes valuation gains and losses in that period’s income statement.
X
X
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1.
Development costs capitalized in 2017: £1,426 million
Total R&D spending in 2017: £1,794 million
Capitalization ratio: 1,426/1,794 = 79.5%
This is a substantially higher capitalization ratio than those reported by the German automakers. Based on the figures, those ranged between 30% and 42% in 2016.
2.
Average balance in the Capitalised Product Development costs account during fiscal 2017: (4,525+5,196)/2 =£4,860.5 million
Amortization expense for fiscal 2017: £769 million
Estimated useful life 4,860.5 / 769 = 6.3 years. This estimate falls within JLR’s disclosed range of two to ten years.
Solutions:
The first two cases are straightforward extensions of the example provided in the text discussion. In Case a), despite the minority ownership stake, effective control stems from Telco’s control of the subsidiary’s board and senior management positions. Case b) is essentially the same set up. Telco controls a majority of votes on the board, despite not having a majority of official “seats.”
Case c) is long, but as one might suspect, based on a real-world example: Telenor’s loss of effective control over its Ukrainian subsidiary in the mid-2000s, resulting in the deconsolidation of that subsidiary. Such cases are normally very messy and nuanced. This example is simplified to make it clear that Telco has lost control of the board along with effective control of T-Mobe’s operations because of the need to roll over its short-term loans.
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