Chapter 9: Additional Financial Reporting Issues

Chapter outline Explain the concepts underlying two methods of accounting for changing prices (inflation) Discuss the various issues related to the accounting for business combinations and the preparation of consolidated financial statements (group accounting) Describe IFRS segment reporting requirements

Inflation Accounting – Impact on financial statements 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

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

Approaches to inflation accounting General purchasing power (Example page 451-3) 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

Approaches to inflation accounting Current cost accounting (Example page 453-4) 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

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

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Kingdom Introduced in 1980 Statement of Standard Accounting Practice (SSAP) 16 Required current cost information Rescinded Since the 1980s Experienced low rates of inflation Inflation accounting lifted

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

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

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

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 (Page 463) Requires restatement of foreign operations

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

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

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

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

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

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

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 Exhibit 9.6

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

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 IAS 31 Financial Reporting of interests in Joint venture –Proportionate Consolidation ( US GAAP not allowed)

Segment Reporting Facilitates In November 2006 IASB adopted 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

Segment Reporting Earns revenues and incurs expenses An operating segment Earns revenues and incurs expenses Operating results reviewed for Performance Resource allocation Discrete financial information available Significant if (Page 476-477) Meets revenue test Meets profit and loss test Meets asset test

Segment Reporting IFRS 8, Operating Segments – Significance Tests to Justify Disclosure. Must meet any of the following tests: Revenue test —segment revenue (external and intersegment) represents 10% or more of combined internal and external revenue. Profit or loss test —segment profit or loss is 10% or more of the higher of the combined reported profit of profitable segments or the combined loss of all segments reporting a loss. Asset test —segment assets are 10% or more of the combined assets of all operating segments. Notwithstanding the tests above, segments must be disclosed if less than 75% of total company sales are to outsiders. 24

ตัวอย่าง Segment Report ตาม IFRS 8

ตัวอย่าง Segment Report

ตัวอย่าง Segment Report 27

Segment Reporting U.S. GAAP– no disclosure of segment liabilities 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

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

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)

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 Exhibit 9.9