Cases adopted from International Accounting, 6ed, by Frederick D S Choi and Gary K eek,
published by Pearson International Edition.
Case 5-1: Novartis
Exhibit 5-5 presents the limited restatement from Novartis Group’s 2005 annual financial
statement, reconciling net income and shareholders’ equity from International Financial
Reporting Standards (IFRS) to U.S. GAAP. Note 34 of the annual report further explains
the details of the IFRS/U.S.GAAP differences in the reconciliation.
Required:
1. Identify the three IFRS/U.S.GAAP accounting-principle differences that cause the
largest differences in Novartis’s 2005 net income prepared in conformance with
the two sets of accounting principles.
2. Go to the Novartis Web site (www.novartis.com) and locate Note 34 in the 2005
annual report. For each of the three accounting-principles differences identified
in requirements 1, discuss:
Required:
a. Treatment under IFRS
b. Treatment under U.S. GAAP
c. Effect of the accounting-principle difference on Novartis’s net income in 2005
and 2004.
d. Evaluation of the two treatments (IFRS vs. U.S. GAAP). Which treatment do
you believe provides more useful information?
3. Does Novartis’s discussion of difference between IFRS and U.S. GAAP in Note
34 provide enough information for the financial statement reader to critically
compare the two sets of accounting principles? Present an explanation for your
response.
4. Assume that Novartis forecasts (IFRS-based) net income of I.S. $6,300 million
for the next year. Develop a forecast of Novartis’s U.S. GAAP based net income
using information provided in Note 34. How reliable is your U.S. GAAP-based
forecast, and how might your use the forecast?
Case 5-2: Seeing is Believing
Greg Benson is a stock picker responsible for recommending Mexican Securities for his
brokerage firm’s clients. He is often frustrated about the lack of credible information on
companies in Mexico. “Everything is always so top secret,” he says. “Any time I try to
learn about a company’s activities, all I hear is ‘I wouldn’t know what to tell you.” In
Mexico, it seems, information is power. Trivial or not, information seems to be off-limits
to anyone who is not an insider.
Greg knows that this secretiveness goes way back in Mexico’s history. The Aztec
rulers kept their subjects amazed by powerful deities who were both unpredictable and
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Cases adopted from International Accounting, 6ed, by Frederick D S Choi and Gary K eek,
published by Pearson International Edition.
hare to understand. The Spanish followed many detailed bureaucratic rules but hardly
ever shared them with ordinary Mexicans. After independence, the ruling political
parties made sure that compromising information never got in the wrong hands.
Historian and novelist Hector Aguilar Camin has written, “In Mexico, powerful
people.e have traditionally kidnapped information. Part of the process of democratization
is freeing it.” But “there is still a tendency to want to hold it hostage for some kind of
benefit.”
Most economists believe that government secrecy made the 1994 currency
collapse more sever because the Mexican government withheld vital maroeconomic
statistics from the international banking community. Many worry now that secrecy will
limit Mexico’s economic growth. Yet pressure for transparency has grown along with an
influx of foreign investors doing business in Mexico. The rise of opposition political
parties and the growth of a free press have fueled a new debate over access to
information.
“What good are all of these trends to me?” Complains Greg. “I need better
information now.”
Case 6-1: Regents Corporation
Regents Corporation is a recently acquired U.S. manufacturing subsidiary located on the
outskirts of London. Its products are marketed principally in the United Kingdom, with
sales invoiced in pounds and prices determined by local competitive conditions.
Expenses (labor, materials, and other production costs) are mostly local, although a
significant quantity of components is now imported from the U.S. parent. Financing is
primarily in U.S. dollars provided by the parent.
Headquarters management must decide on the functional currency for its London
operation: Should it be the U.S. dollar or the British pound? You are asked to advise
management on the appropriate currency designation and its relative financial statement
effects. Prepare a report that supports your recommendations and identify any
policy issues your analysis uncovers.
Exhibit 6-14 presents comparative balance sheets for Regents Corporation at December
31, 20X7 and 20X8, and a statement of income for the year ended December 31, 20X8.
The statements conform with U.S. generally accepted accounting principles prior to
translation to dollars.
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Cases adopted from International Accounting, 6ed, by Frederick D S Choi and Gary K eek,
published by Pearson International Edition.
Exhibit 6-14: Regents Corporation Financial Statements
Balance Sheet
Assets
Cash
Accounts receivable
Inventory (FIFO)
Fixed Assets
Accumulated depreciation
Intangible assets (patents)
Total
Liabilities and Stockholders’ Equity
Accounts payable
Due to parent
Long-term debt
Deferred taxes
Common Stock
Retained earnings
Total
Income Statement Year Ended 12/31/X8
Sales
Expenses
Cost of Sales
General and administrative
Depreciation
Interest
Operating Income
Transaction gain (loss)
Income before taxes
Income taxes Current
Deferred
Net income
Retained earnings at 12/31/X7 (residual)
12/31/X7
12/31/X8
£ 1,060
2,890
3,040
4,400
(420)
£ 10,970
£ 1,150
3,100
3,430
4,900
(720)
70
£ 11,930
£ 1,610
1,800
4,500
80
1,500
1,480
£ 10,970
£ 1,385
1,310
4,000
120
1,500
3,615
£ 11,930
£ 16,700
£ 11,300
1,600
300
480
£ 670
40
Dividends
Retained earnings at 12/31/X8
Exchange rate information and additional data:
1. Exchange rates:
December 31, 20X7
December 31, 20X8
Average during 20X8
Average during the fourth quarter 20X7
Average during the fourth quarter 20X8
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$ 1.80 = £ 1
$ 1.90 = £ 1
$ 1.86 = £ 1
$ 1.78 = £ 1
$ 1.88 = £ 1
13,680
3,020
125
3,145
710
£ 2,435
1,480
3,915
300
£ 3,615
Cases adopted from International Accounting, 6ed, by Frederick D S Choi and Gary K eek,
published by Pearson International Edition.
2. Common stock was acquired, long-term debt issued, and original fixed assets
purchased when the exchange rate was $ 1.70 = £ 1.
3. Due to parent account is denominated in U.S. dollars
4. Exchange rate prevailing when the intangible asset (patent) was acquired and
additional fixed assets purchased was $ 1.82 = £ 1.
5. Purchases and dividends occurred evenly during 20X8.
6. Of the £ 300 depreciation expense for 20X8, £ 20 relates to fixed assets purchased
during 20X8.
7. Deferred taxes are translated at the current rate.
8. Inventory represents approximately 3 months of production.
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