1. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 9: Additional Financial Reporting Issues

2. Learning Objectives  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

3. Inflation Accounting – Impact on financial statemen ts  Impact of inflation on financial statements  Understated asset values  Overstated income and overpayment of taxes  Differing rate of inflation  Differing impacts across companies  Lack of comparability 9-3

4. Purchasing Power Gains and Losses  Historical cost ignores  Purchasing power gains and losses  During inflation  Holding cash and receivables  Purchasing power losses  Holding monetary liabilities  Purchasing power gains  Two approaches to inflation accounting  General purchasing power accounting  Current cost accounting 9-4

5. Approaches to inflation accounting  General purchasing power  Adjusts historical costs of assets  Updates currency purchasing power changes  Referred as  General price-level-adjusted historical cost (GPLAHC) accounting  Purchasing power gains and losses included in net income 9-5

6. Approaches to inflation accounting  Current cost accounting  Accounts specific price changes  Updates assets value  From historical cost to the current cost  Referred as  Current Replacement Cost Accounting (CRC)  Nonmonetary assets restated  To current replacement costs  Expense items based on restated costs  Holding gains and losses included in equity 9-6

7. Inflation Accounting Internationally  United States  In 1979, (FASB )  SFAS 33, Financial Reporting and Changing Prices  Required large U.S. companies  Provide GPP and CC accounting disclosures  In 1984, (FASB )  Discontinued supplemental GPP information  Two years later  Information is optional (SFAS 89)  Few companies provide  Since the 1980s  Experienced low rates of inflation  Inflation accounting lifted 9-7

8. Inflation Accounting Internationally  United Kingdom  Introduced in 1980  Statement of Standard Accounting Practice (SSAP) 16  Required current cost information  Rescinded  Since the 1980s  Experienced low rates of inflation  Inflation accounting lifted 9-8

9. Inflation Accounting Internationally  Latin America  Long history of inflation  Brazil, Chile, and Mexico  Sophisticated standards  Brazil abandoned 9-9

10. Inflation Accounting Internationally  Mexico – Bulletin B-10  Restatement of nonmonetary assets and liabilities  Central bank’s general price level index  Exception  Option to use replacement cost  For inventory and related cost of goods sold  Imported machinery and equipment  Combination of  Country of origin price index  Exchange rate between Mexico and country of origin  Bulletin B-10 abandoned in 2007 9-10

11. Inflation Accounting Internationally  Netherlands – Replacement Cost Accounting  Allowed companies to use replacement cost accounting  In 2005, IFRS introduced in Europe 9-11

12. Inflation Accounting Internationally  International Financial Reporting Standards  IAS 15, Information Reflecting the Effects of Changing Prices  Issued in 1981  Standard withdrawn  Lack of support  Relevant standard now  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

13. Inflation Accounting Internationally  International Financial Reporting Standards  IAS 29 – determines the environments  Restatement using a general price index  Nonmonetary assets  Nonmonetary liabilities  Stockholders’ equity  Income statement items from the time of the transaction  Purchasing power gains and losses  Included in net income  Comparative Information  Restated previous period information  Adjusted for change in general price index 9-13

14. Business Combinations and Consolidated Financial Statements  Business Combinations is  Acquisition of one business by another  Referred as  Mergers and acquisitions activity  Primary expansion mechanism of MNCs  Different ways  Acquired company  Ceases to exist  Merged into acquiring company  Merging companies  Legally dissolve  New company formed  Group accounting  Accounting for  The parent  One or more subsidiaries 9-14

15. Business Combinations and Consolidated Financial Statements  Determination of control  Legal control  Ownership of more than 50 percent  Shares and voting rights  Contract  Two companies  Legal control of one by other company  Effective control  Widely distributed stock ownership  Representation on the board of directors 9-15

16. Business Combinations and Consolidated Financial Statements  Scope of Consolidation  IAS 27, Consolidated and Separate Financial Statements  Requires consolidation  Parent and subsidiaries  No consolidation  Subsidiary intended to be disposed in 12 months  Management seeking a buyer  Subsidiary is dormant  Insignificant operations  U.S. GAAP  Exclusion of subsidiary not allowed  Although subsidiary held for sale 9-16

17. Business Combinations and Consolidated Financial Statements  Full consolidation  Subsidiary’s financial statement  Line-by-line aggregation  100% of the elements  Minority interest  A separate item  Subsidiary not 100 percent owned  The non-owned portion  Methods  Purchase method or  Pooling of interests method  IFRS 3, issued in 2004,  Purchase method only  Pooling of interests is no longer acceptable under IFRS, or in the U.S., Canada, Brazil or Mexico 9-17

18. Business Combinations and Consolidated Financial Statements  Full Consolidation – Purchase Method  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

19. Business Combinations and Consolidated Financial Statements  Full Consolidation – Goodwill  Accounting for goodwill  Significant variation internationally  U.S., IFRS, and most other countries  Goodwill capitalized  Amortization  Over five to 40 years  IFRS 3  Prohibits amortization over useful life  Require annual impairment test  Japan allows immediate expensing of goodwill 9-19

20. Business Combinations and Consolidated Financial Statements  Project for Convergence of U.S. GAAP and IFRS  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

21. Business Combinations and Consolidated Financial Statements  Group Accounting – Equity Method  The equity method is used by investors that  Do not control  Have significant influence over an investee  20% or more ownership of the voting shares  One-line consolidation  Relevant standards  IAS 28, Investment in Associates and Joint Ventures  IFRS 11, Joint Arrangements 9-21

22. Segment Reporting  Facilitates  Analysis  Evaluation of financial statements  In November 2006  IASB issued IFRS 8, Operating Segments  Converges IFRS with U.S. GAAP  IASB adopted  Management approach  Segments defined by  Line-of-business  Geographic area 9-22

23. Segment Reporting  An operating segment  Earns revenues and incurs expenses  Operating results reviewed for  Performance  Resource allocation  Discrete financial information available  Significant if  Meets revenue test  Meets profit and loss test  Meets asset test 9-23

24. Segment Reporting  Differences between IFRS 8 and U.S. GAAP  U.S. GAAP– no disclosure of segment liabilities  IFRS 8–intangibles included in  Long-lived assets  For geographic area disclosures  Basis of operating segments  IFRS 8 allows  Products or services or geographic areas  U.S. GAAP allows  Products or services basis 9-24

25. Segment Reporting—Disclosures  General information  Segment profit or loss and the following line items:  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

26. Segment Reporting—Disclosures  Total segment assets (and liabilities for IFRS )  Investment in equity method affiliates  Expenditures for additions to  Long-lived assets (U.S. GAAP)  Noncurrent assets (IFRS 8) 9-26

27. Entity Reporting—IFRS and U.S. GAAP  IFRS and U.S. GAAP require  Entity-Wide Disclosures about  Products and services  Major customers (if 10% or more of total entity revenue)  Geographic areas 9-27

28. End of Chapter 9 9-28