Chapter 9:
Additional
Financial
Reporting Issues
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Learning Objectives
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Explain the concepts underlying two methods of
accounting for changing prices (inflation)—general
purchasing power accounting and current cost accounting
Describe attempts to account for inflation in different
countries, as well as the rules found in International
Financial Reporting Standards (IFRS) related to this issue
Discuss the various issues related to the accounting for
business combinations and the preparation of consolidated
financial statements (group accounting)
Present the approaches used internationally to address
the issues related to group accounting, focusing on IFRS
Describe IFRS segment reporting requirements
9-2
Inflation Accounting – Impact on financial
statements
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Impact of inflation on financial statements
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Understated asset values
Overstated income and overpayment of taxes
Differing rate of inflation
Differing impacts across companies
Lack of comparability
9-3
Purchasing Power Gains and Losses
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Historical cost ignores
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Purchasing power gains and losses
During inflation
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Holding cash and receivables
 Purchasing power losses
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Holding monetary liabilities
 Purchasing power gains
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Two approaches to inflation accounting
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General purchasing power accounting
Current cost accounting
9-4
Approaches to inflation accounting
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General purchasing power
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Adjusts historical costs of assets
Updates currency purchasing power changes
Referred as
 General price-level-adjusted historical cost (GPLAHC)
accounting
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Purchasing power gains and losses included in net
income
9-5
Approaches to inflation accounting
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Current cost accounting
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Accounts specific price changes
Updates assets value
 From historical cost to the current cost
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Referred as
 Current Replacement Cost Accounting (CRC)
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Nonmonetary assets restated
 To current replacement costs
 Expense items based on restated costs
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Holding gains and losses included in equity
9-6
Inflation Accounting Internationally
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United States
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In 1979, (FASB)
 SFAS 33, Financial Reporting and Changing Prices
 Required large U.S. companies
 Provide GPP and CC accounting disclosures
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In 1984, (FASB)
 Discontinued supplemental GPP information
Two years later
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Information is optional (SFAS 89)
Few companies provide
Since the 1980s
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Experienced low rates of inflation
Inflation accounting lifted
9-7
Inflation Accounting Internationally
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United Kingdom
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Introduced in 1980
Statement of Standard Accounting Practice (SSAP) 16
 Required current cost information
 Rescinded
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Since the 1980s
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Experienced low rates of inflation
Inflation accounting lifted
9-8
Inflation Accounting Internationally
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Latin America
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Long history of inflation
Brazil, Chile, and Mexico
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Sophisticated standards
Brazil abandoned
9-9
Inflation Accounting Internationally
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Mexico – Bulletin B-10
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Restatement of nonmonetary assets and liabilities
 Central bank’s general price level index
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Exception
 Option to use replacement cost
 For inventory and related cost of goods sold
 Imported machinery and equipment
 Combination of
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Country of origin price index
Exchange rate between Mexico and country of origin
Bulletin B-10 abandoned in 2007
9-10
Inflation Accounting Internationally
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Netherlands – Replacement Cost Accounting
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Allowed companies to use replacement cost accounting
In 2005, IFRS introduced in Europe
9-11
Inflation Accounting Internationally
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International Financial Reporting Standards
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IAS 15, Information Reflecting the Effects of Changing
Prices
Issued in 1981
Standard withdrawn
 Lack of support
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Relevant standard now
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IAS 29, Financial Reporting in Hyperinflationary
Economies
IAS 29 required by companies
 Located in highly inflationary environments
 IAS 21, The effects of Changes in Foreign Exchange Rates
 Requires restatement of foreign operations
 Located in highly inflationary environments
9-12
Inflation Accounting Internationally
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International Financial Reporting Standards
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IAS 29 – determines the environments
Restatement using a general price index
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Nonmonetary assets
Nonmonetary liabilities
Stockholders’ equity
Income statement items from the time of the transaction
Purchasing power gains and losses
 Included in net income
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Comparative Information
 Restated previous period information
 Adjusted for change in general price index
9-13
Business Combinations and Consolidated
Financial Statements
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Business Combinations is
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Acquisition of one business by another
Referred as
 Mergers and acquisitions activity
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Primary expansion mechanism of MNCs
Different ways
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Acquired company
 Ceases to exist
 Merged into acquiring company
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Merging companies
 Legally dissolve
 New company formed
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Group accounting
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Accounting for
 The parent
 One or more subsidiaries
9-14
Business Combinations and Consolidated
Financial Statements
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Determination of control
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Legal control
 Ownership of more than 50 percent
 Shares and voting rights
 Contract
 Two companies
 Legal control of one by other company
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Effective control
 Widely distributed stock ownership
 Representation on the board of directors
9-15
Business Combinations and Consolidated
Financial Statements
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Scope of Consolidation
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IAS 27, Consolidated and Separate Financial
Statements
 Requires consolidation
 Parent and subsidiaries
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No consolidation
Subsidiary intended to be disposed in 12 months
 Management seeking a buyer
 Subsidiary is dormant
 Insignificant operations
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U.S. GAAP
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Exclusion of subsidiary not allowed
 Although subsidiary held for sale
9-16
Business Combinations and Consolidated
Financial Statements
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Full consolidation
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Minority interest
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Purchase method or
Pooling of interests method
IFRS 3, issued in 2004,
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A separate item
Subsidiary not 100 percent owned
The non-owned portion
Methods
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Subsidiary’s financial statement
Line-by-line aggregation
100% of the elements
Purchase method only
Pooling of interests is no longer acceptable under IFRS, or
in the U.S., Canada, Brazil or Mexico
9-17
Business Combinations and Consolidated
Financial Statements
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Full Consolidation – Purchase Method
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Acquisition of majority of voting shares
Assets and liabilities revalued
Fair value used for revaluation
Goodwill
 Purchase price minus fair value
 IFRS 3, Business Combinations
 Purchase method referred as acquisition method
9-18
Business Combinations and Consolidated
Financial Statements
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Full Consolidation – Goodwill
Accounting for goodwill
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Significant variation internationally
U.S., IFRS, and most other countries
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Goodwill capitalized
Amortization
 Over five to 40 years
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IFRS 3
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Prohibits amortization over useful life
Require annual impairment test
Japan allows immediate expensing of goodwill
9-19
Business Combinations and Consolidated
Financial Statements
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Project for Convergence of U.S. GAAP and IFRS
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IFRS 3, Business Combinations
SFAS 141(R), Business Combinations
Unifies M&A accounting across capital markets
Removal from IFRS
 Accounting of step and partial acquisitions
 Goodwill measured as
 On acquisition date
 Difference in
 Value of investment held plus consideration
 Net asset acquired
9-20
Business Combinations and Consolidated
Financial Statements
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Group Accounting – Equity Method
The equity method is used by investors that
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Do not control
Have significant influence over an investee
 20% or more ownership of the voting shares
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One-line consolidation
Relevant standards
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IAS 28, Investment in Associates and Joint Ventures
IFRS 11, Joint Arrangements
9-21
Segment Reporting
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Facilitates
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In November 2006
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Analysis
Evaluation of financial statements
IASB issued IFRS 8, Operating Segments
Converges IFRS with U.S. GAAP
IASB adopted
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Management approach
Segments defined by
 Line-of-business
 Geographic area
9-22
Segment Reporting
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An operating segment
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Earns revenues and incurs expenses
Operating results reviewed for
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Discrete financial information available
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 Performance
 Resource allocation
Significant if
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Meets revenue test
Meets profit and loss test
Meets asset test
9-23
Segment Reporting
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Differences between IFRS 8 and U.S. GAAP
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U.S. GAAP– no disclosure of segment liabilities
IFRS 8–intangibles included in
 Long-lived assets
 For geographic area disclosures
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Basis of operating segments
 IFRS 8 allows
 Products or services or geographic areas
 U.S. GAAP allows
 Products or services basis
9-24
Segment Reporting—Disclosures
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General information
Segment profit or loss and the following line items:
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Revenues from external customers
Intersegment revenues
Interest revenue and expense
Depreciation, depletion and amortization
Significant noncash items in segment profit or loss
Unusual items (e.g. discontinued operations and
extraordinary items)
Income tax expense or benefit
9-25
Segment Reporting—Disclosures
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Total segment assets (and liabilities for IFRS)
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Investment in equity method affiliates
Expenditures for additions to
 Long-lived assets (U.S. GAAP)
 Noncurrent assets (IFRS 8)
9-26
Entity Reporting—IFRS and U.S. GAAP
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IFRS and U.S. GAAP require
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Entity-Wide Disclosures about
 Products and services
 Major customers (if 10% or more of total entity revenue)
 Geographic areas
9-27
End of Chapter 9
9-28