LaTonia Williamson Week-7

EXERCISE 11-2

IASB appoints Hilary Eastman, CFA to lead its investor liaison activities13 May 2011

 The International Accounting Standards Board (IASB) announced today the appointment of Hilary Eastman to lead its Investor Liaison programme. The IASB’s investor liaison programme serves to encourage greater investor participation in the standard-setting process. Hilary was formerly a valuation professional and is a Chartered Financial Analyst (CFA) charter holder.

Hilary joined the technical staff of the IASB in June 2006 and currently serves as a senior technical manager with responsibility for the Fair Value Measurement project. She takes over the role from Luci Wright, who has been running the programme for the last year. Luci will return as a technical manager supporting the IFRS Interpretations Committee.

IASB and FASB issue common fair value measurement and disclosure requirements12 May 2011

Boards conclude major convergence project - important element of response to the financial crisis

The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) today issued new guidance on fair value measurement and disclosure requirements for International Financial Reporting Standards (IFRSs) and US generally accepted accounting principles (GAAP).The guidance, set out in IFRS 13 Fair Value Measurement and an update to Topic 820 in the FASB’s Accounting Standards Codification® (formerly referred to as SFAS 157), completes a major project of the boards’ joint work to improve IFRSs and US GAAP and to bring about their convergence.The harmonisation of fair value measurement and disclosure requirements internationally also forms an important element of the boards’ response to the global financial crisis.

Completion of the project is the culmination of more than five years’ work to improve and align fair value measurement and disclosure requirements. The requirements, which are largely identical across IFRSs and US GAAP, have benefited from extensive due process and public consultation, including input from a Fair Value Expert Advisory Panel and the FASB’s Valuation Resource Group.The requirements do not extend the use of fair value accounting, but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRSs or US GAAP.For IFRSs, IFRS 13 Fair Value Measurement will improve consistency and reduce complexity by providing, for the first time, a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs.For US GAAP, the Update will supersede most of the guidance in Topic 820, although many of the changes are clarifications of existing guidance or wording changes to align with IFRS 13. It also reflects the FASB’s consideration of the different characteristics of public and non-public entities and the needs of users of their financial statements. Non-public entities will be exempt from a number of the new disclosure requirements.

Registration opens for Trustee strategy review round tables04 May 2011 The Trustees of the IFRS Foundation are seeking expressions of interest to participate in the upcoming strategy review round-table discussions.The round tables will be held in:Tokyo - 7 June 2011 (morning) Hong Kong - 8 June 2011 (morning) New York - 13 June 2011 (morning) London - 21 June 2011 (afternoon) and 22 June 2011 (morning)Participating:If you are interested in participating in a round table, you can download a form here. Please be sure to indicate clearly which meeting you would like to participate in. Please send your completed form back by email to kmcardle@ifrs.org or by fax to +44 (0)207 246 6411. Interested parties should respond by 19 May 2011.

EXERCISE 11-3

IFAC is the global organization for the accountancy profession. It works with its 157 members and associates in 123 countries and jurisdictions to protect the public interest by encouraging high quality practices by the world's accountants. IFAC members and associates, which are primarily national professional accountancy bodies, represent 2.5 million accountants employed in public practice, industry and commerce, government, and academia. Through its independent standard-setting boards, IFAC develops international standards on ethics, auditing and assurance, education, and public sector accounting standards. It also issues guidance to support professional accountants in business, small and medium practices, and developing nations.

September 23, 2009IFAC's Bunting Calls for Global Commitment to High-Quality Financial Standards to Solve Crisis

Mr. Bunting reminded the audience that every kind of entity needs the financial information that high-quality standards provide as we move toward recovery from the recession. Businesses in Latin America and the Caribbean often need to prove their economic viability as business partners for new opportunities in the Middle East and China, or for ongoing ones in this hemisphere. Governments need to confirm their fiscal health for the capital markets or for membership in regional economic organizations.

PROBLEM 11-1

A. Are expenditures reported on BP’s income statement reported by function or by nature of the expense? Be specific. Do you think that this format is more or less useful for users of the financial statements?

BP’s income statement lists expenses by nature. This can be determined by examining the expenses. Instead of listing cost of goods sold, the expenses are listed as purchases, production and manufacturing expenses, and depreciation expenses.

B. On the BP income statement, what is the earnings from affiliates usually referred to in the U.S.?

In the U.S., investments in affiliates are typically equity method investments where the investor owns between 20 and 50% of the outstanding stock.

C. On ExxonMobil’s income statement, are the expenses listed by function or by nature?

ExxonMobil’s income statement discloses expenses using a combination of function and nature. This can be determined by examining the expenses. Some expenses are listed by the function, such as selling, general and administration expense while other expenses such as manufacturing costs are expensed by nature (such as crude oil purchases, production and manufacturing expenses, and depreciation).

D. Compare the performance of BP relative to ExxonMobil. Is it easy to compare the numbers from companies using IFRS to companies using U.S. GAAP?

    BP       ExxonMobil    2008 2007 Growth 2008 2007  Total Revenues 367,053 291,438 25.9% 477,359 404,552 18.0%Profit for the year 21,666 21,169 2.3% 45,220 40,610 11.4%Profit/Revenues 5.9% 7.3%     9.5% 10.0%  

Looking at the growth in revenues and the bottom line profit margin percentage (profit divided by revenues), ExxonMobil’s revenues grew at 18% resulting in an 11.4% growth in profits. BP’s revenues grew at almost 26%, which resulted in a modest 2.3% growth in net income. Because the two companies prepare the income statement prepared using either the nature or the function of the expenses, direct comparisons of certain items, such as gross margin, are more difficult without extensive reading of the footnotes.

E. Does it matter that BP is using FIFO and ExxonMobil is using LIFO for inventory? The LIFO reserve decreased by $15.4 billion dollars in 2008.

Because the LIFO reserve dropped, reported income using LIFO will exceed the amount of income reported using FIFO. The user would need to determine if the change in the LIFO reserve was caused by falling prices or merely a reduction in inventory levels. This can have a significant impact on how you might interpret the results of operations for ExxonMobil.

PROBLEM 11-2

IFRS Income Statement and Terminology Differences LO2A. On the income statement, the first two lines in Unilever’s income statement are Turnover and then Operating profit. What does the term ‘Turnover’ mean? Which costs are typically reported between ‘Turnover’ and operating profit?

The term ‘turnover’ is a term that is used internationally to indicate revenues or sales. In the financial statement for Unilever, the income statement simply listed ‘turnover’ and then operating profit on the next line. If you examine the footnotes, you would see that expenses not listed as a line item on the income statement (items between sales and operating margin) include cost of sales, distribution and selling costs, and administration expenses.

B. How useful is Unilever’s income statement presentation considering that this information about expenses is disclosed in footnote 3 rather than being reported on the face of the income statement?

The answer to this question depends on whether you believe that important line items should be disclosed on the face of the income statement versus disclosing the detail in a footnote to the financial statements. If companies only delivered summary financial statements to the users, this detail (the amount of off-balance sheet payments) often might not be disclosed. Information concerning the change in gross margin provides useful information to users about the growth in inventory costs relative to the change in revenues.

Exercise 12-1

Apr. 3 Purchases 11,520Accounts Payable (1,600,000 x .0072)

11,520

5 Accounts Receivable 2,800Sales

2,800

9 Accounts Receivable 16,800Sales

16,800

11 Purchases 25,000Accounts Payable (801,282 x .0312)

25,000

16 Accounts Payable (1,000,000 x .0072) 7,200

Transaction Gain 500

Cash (1,000,000 x .0067) 6,700

18 Accounts Payable 25,000Transaction Loss 4,487

Cash (801,282 x .0368)29,487

22 Cash 16,800Accounts Receivable

16,800

30 Accounts Payable (600,000 x .0072) 4,320Transaction Loss 360

Cash (600,000 x .0078) 4,680

Exercise 12-14

Alternative entries are presented assuming the forward contract is not formally recorded on the books.

Dec. 1 Dollars Receivable from Exchange Dealer (1,000,000 x 0948) 94,800FC Payable to Exchange Dealer

94,800

Dec. 31 FC Payable to Exchange Dealer 400Foreign Exchange Gain

400[1,000,000 x.0948 - .0944)]

Foreign Exchange Loss 400Firm Commitment

400[1,000,000 x .0948 - .0944)]

March 1 Foreign Exchange Loss 300FC Payable to Exchange Dealer

300[1,000,000 x .0944 - $.0947)]

Firm Commitment 300Foreign Exchange Gain

300

[1,000,000 x .0944 - .0947)]

Investment in FC 94,700Firm Commitment 100

Sales (1,000,000 x .0948)94,800

Cash 94,800FC Payable to Exchange Dealer 94,700

Investment in FC94,700

Dollars Receivable from Exchange Dealer94,800

Cost of Goods Sold (Cost of Equipment Sold) 40,000Inventory

40,000

Alternative entries assuming the forward contract is not formally recorded.Dec. 1 No Entry

Dec. 31 Foreign exchange contract 400Foreign Exchange Gain

400[1,000,000 x.0948 - .0944)]

Foreign Exchange Loss 400Firm Commitment

400[1,000,000 x .0948 - .0944)]

March 1 Foreign Exchange Loss 300Foreign exchange contract

300[1,000,000 x .0944 - .0947)]

Firm Commitment 300Foreign Exchange Gain

300[1,000,000 x .0944 - .0947)]

Cash 100

Foreign exchange contract100

Cash 94,700Firm Commitment 100

Sales (1,000,000 x .0948)94,800

Cost of Goods Sold (Cost of Equipment Sold) 40,000Inventory

40,000

Problem 12-5

Part A

Nov. 2 Accounts Receivable 80,105Sales (50,000 x 1.6021 = 80,105)

80,105 Dollars Receivable from Exchange Dealer (50,000 x 1.5920 =

79,600) 79,600FC Payable to Exchange Dealer

79,600

Dec. 31 Transaction Loss 1,005Accounts Receivable [(50,000 x 1.5820 = 79,100) - 80,105]

1,005

FC Payable to Exchange Dealer 600Transaction Gain [(50,000 x 1.58 = 79,000) – 79,600]

600

Mar. 1 Accounts Receivable 3,615Transaction Gain [(50,000 x 1.6543 = 82,715) - 79,100]

3,615

Transaction Loss 3,715FC Payable to Exchange Dealer [(50,000 x 1.6543 = 82,715) –

79,000] 3,715

Investment in FC 82,715

Accounts Receivable82,715

Cash 79,600

FC Payable to Exchange Dealer 82,715Investment in FC

82,715Dollars Receivable from Exchange Dealer

79,600

Problem 12-5 (continued)Part BNov. 2 Dollars Receivable from Exchange Dealer 79,600

FC Payable to Exchange Dealer 79,600

Dec. 31 FC Payable to Exchange Dealer 600Exchange Gain

600

Exchange Loss 600Firm Commitment

600

Mar. 1 Exchange Loss 3,715FC Payable to Exchange Dealer

3,715

Firm Commitment 3,715Exchange Gain

3,715

Investment in FC 82,715Sales

79,600Firm Commitment (1.6543 - 1.592) 50,000

3,115

Cash 79,600FC Payable to Exchange Dealer 82,715

Investment in FC82,715

Dollars Receivable from Exchange Dealer79,600Part CNov. 2 Dollars Receivable from Exchange Dealer 79,600

FC Payable to Exchange Dealer79,600

Dec. 31 FC Payable to Exchange Dealer ((50,000 x 1.5800 = 79,000) - $79,600) 600

Transaction Gain 600

Mar. 1 Transaction Loss ((50,000 x 1.6543 = 82,715) - 79,000) 3,715FC Payable to Exchange Dealer

3,715

Investment in FC 82,715Cash

82,715

Cash 79,600FC Payable to Exchange Dealer 82,715

Dollars Receivable from Exchange Dealer79,600

Investment in FC82,715

Part D 2008      A      B     CSales 80,105 0 0Transaction gain (loss) 600 600600   (1,005) (600)

0 Increase (decrease) in net income 79,700 0

600Problem 12-5 (continued)

2009Sales 0 79,600

0Transaction gain (loss) 3,615 3,715

0  (3,715)  (3,715)

(3,715)Increase (decrease) in net income   (100) 79,600

(3,715)

Net increase (decrease) in net income 2008 + 2009 79,600 79,600(3,115)

82,715 - 3,115 = 79,600

Verification of loss

Cash paid to buy currency 82,715Cash paid to complete forward contract 79,600Net loss on forward contract 3,115

On BS 2008Receivable 79,600FC Payable 79,000

600

Problem 12-7

Part A Rather than focusing on the solution, students should focus on the rational supporting their conclusions. Accordingly, the following questions should be given consideration:

1. What is the purpose of the company policy? Under what conditions

might it be justified to deviate from company policy, if any?

2. In whose best interest was the controller acting? Is there some overall "best interest" which supersedes company policy?

3. Is it appropriate to have "situation specific" ethics?

Part B1. HAL may hedge against future losses by entering into forward

exchange contracts.2. Advantages:

(a) Determine the extent of loss related to each transaction which is important for planningPurposes, and

(b) Minimize potential losses.Disadvantage:Eliminates potential to take advantages of any favorable exchange

rate changes.3. SFAS No. 133 specifies the disclosure requirements concerning concentrations of credit risk for all financial instruments. SFAS No. 107 is relied on to provide valuation guidance for measuring fair value.

SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities measured at fair value. Specific disclosures required under SFAS No. 133 are the objectives of the instruments, the context needed to understand them, the strategies for achieving them, the risk management policy, and a description of items or transactions that are hedged for each of the following:1. Fair value hedges2. Cash flow hedges3. Foreign currency net investment hedges; and4. All other derivatives.

For derivative instruments not designated as hedges, the purpose of their activity must be disclosed. Qualitative disclosures concerning the use of derivative instruments are encouraged, particularly in a context of overall risk management, as well as for financial instruments or

nonfinancial assets and liabilities related by activity to derivative instruments.

Part C 1. Options are to (a) enter into foreign currency hedges or (b) leave the contracts exposed to future currency fluctuations.

2. Rather than focusing on the specific decision, students should give consideration to the

conflict between fiduciary responsibility to shareholders and desire for individual financial gain.