Accounting- Exchange Rates/ Gapp v IFRS

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Please assist in answering questions 1-6, that follow the given case, charts and information provided as well as attached guide and outside sources for resources.

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Assignment #7 On January 1,Year 1, Parker, Inc., a U.S.-based firm listed on the NY Stock Exchange, purchased 100 percent of Suffolk PLC, an entity operating in the oil industry, located in Great Britain. Parker paid 52,000,000 British pounds (£) for its purchases. The excess of cost over book values is attributable to land (part of property, plant, and equipment) and is not subject to depreciation. Parker accounts for its investment in Suffolk at cost. On January 1, Year 1, Suffolk reported the following balance sheet: Cash……………………. £ 2,000,000 Accounts receivable….. 3,000,000 Inventory……………….. 14,000,000 PP&E (net)……………… 40,000,000 £ 59,000,000 Accounts payable ……………………..£ 1,000,000 Long-term debt………………………… 8,000,000 Common Stock………………………… 44,000,000 Retained earnings……………………… 6,000,000 £ 59,000,000 Suffolk’s Year 1 income was recorded at £2,000,000. No dividends were declared or paid by Suffolk in 2015. On December 31, Year 2, two years after the date of acquisition, Suffolk submitted the following trial balance to Parker for consolidation: Cash………………………………………………….£ 1,500,000 Accounts receivable…………………………….. 5,200,000 Inventory…………………………………………….. 18,000,000 Property, Plant, & Equipment (net)……… 36,000,000 Accounts Payable………………………………….. (1,450,000) Long-term debt…………………………………….. (5,000,000) Common Stock…………………………………….. (44,000,000) Retained Earnings (1/1/16)………………………. (8,000,000) Sales……………………….……………………….. (28,000,000) Cost of Goods Sold……………………………….. 16,000,000 Depreciation…………………………………………. 2,000,000 Other Expenses…………………………………….. 6,000,000 Dividends Paid (1/30/16)………………………. 1,750,000 0 +++ Other than the payment of dividends, no intercompany transactions occurred between the two companies. Relevant exchange rates for the British pound were as follows: Year 1 Year 2 January 1 $1.60 1.64 January 30 $1.61 1.65 Average $1.62 1.66 December 31 $1.64 1.68 December 31, Year 2, financial statements (before consolidation with Suffolk) follow. Dividend income is the U.S. dollar amount of dividends received from Suffolk translated at the $1.65/£ exchange rate at January 30, 2016. The amounts listed for dividend income and all affected accounts (i.e., net income, December 31, retained earnings, and cash) reflect the $1.65/£ exchange rate at January 30, Year 2. Credit balances are in parentheses. Sales…………………………………………………. $ (70,000,000) Cost of Goods Sold…………………………………. 34,000,000 Depreciation…………………………………………. 20,000,000 Other Expenses……………………………………... 6,000,000 Dividend income……………………………………... (2,887,500) Net income…………………………………………….$ (12,887,500) Retained Earnings (1/1/Year 2)………………… $ (48,000,000) Net income, Year 2……………………………… (12,887,500) Dividends, 1/30/Year 2 ………………………..… 4,500,000 Retained Earnings (12/31/ Year 2)………… …..$(56,387,500) Cash…………………………………………….… $ 3,687,500 Accounts receivable………………………………. 10,000,000 Inventory…………………………………………… 30,000,000 Investment in Suffolk……………………………. 83,200,000 Property, Plant, & Equipment (net)……… 105,000,000 Accounts Payable…………………………………. (25,500,000) Long-term debt……………………………………. (50,000,000) Common Stock…………………………………….. (100,000,000) Retained Earnings (12/31/Year 2)………… $ (56,387,500) Parker’s chief financial officer (CFO) wishes to determine the effect that a change in the value of the British pound would have on consolidated net income and consolidated stockholders’ equity. To help assess the foreign currency exposure associated with the investment in Suffolk, the CFO requests assistance in comparing consolidated results under actual exchange rate fluctuations with results that would have occurred had the dollar value of the pound remained constant or declined during the first two years of Parker’s ownership. In addition to the risk Parker faces from its exposure to the British pound, Suffolk’s oil operations sometimes result in soil contamination. Suffolk cleans up any contamination when required to do so under the laws of the particular country in which it operates. In one of the countries in which Suffolk operates, there is no legislation requiring cleanup. In that same country, Suffolk had inadvertently contaminated land in prior years. As of October 31, Year 2, it is virtually certain that a law requiring the remediation of contaminated land will be enacted in this jurisdiction, though it is not expected to be issued until after the December 31 year-end. A consultant has been hired to help estimate the cost of clean-up. The CFO has requested assistance in assessing the risk and disclosure requirements Parker faces from its foreign exchange exposure and environmental exposure. Suffolk prepares its financial statements in accordance with (1) U.S. GAAP in reporting to its parent and (2) IFRS in reporting to its U.K. based lender. The CFO has requested that you prepare a memorandum with a supporting report that addresses the following requirements. Required: Part A. Given the relevant exchange rates presented, use an spreadsheet to complete the following parts: Translation of Suffolk’s December 31, Year 2, trial balance from British pounds to U.S. dollars. The British pound is Suffolk’s functional currency. A schedule that details the change in Suffolk’s cumulative translation adjustment (beginning net assets, income, dividends, etc.) for Year 1 and Year 2. 1. The spreadsheet is automatically populated directly from the general ledger, but the exchange rates must be input manually. The CFO wants you to ensure that the correct exchange rates are input and then that they are not accidently changed. Since the exchange rates are input manually, what internal controls can you suggest to ensure that the rates in the spreadsheet are accurate? (Note: You may refer back to your Auditing or AIS classes for controls regarding validity of inputs and spreadsheet integrity) 2. Discuss the impacts that the change in the value of the pound has had on results due to exchange rate fluctuations with results that would have occurred had the dollar value of the pound remained constant or declined during the first two years of Parker’s ownership. ASSESS THREATS TO QUALITY OF INFORMATION. Part B. 3. Should Suffolk recognize a provision for the environmental contingency as of December 31, Year 2 in reporting to its U.S. parent under U.S. GAAP? How about when it reports to its U.K. based lender under IFRS? 4. Parker’s purchase of Suffolk has created additional accounting complexities. Identify some of the additional accounting issues that Parker now faces. How do these additional complexities potentially impact the quality of the accounting information for Parker? What internal controls can Parker implement to assure that the company is able to meet all information quality and disclosure requirements? 5. Parker is considering adopting IFRS for financial reporting. What are some of the key differences between IFRS and US GAAP that might impact Parker? What are some of the advantages and disadvantages that might accrue to Parker if it adopted IFRS for all of its operations? 6. Would adoption of IFRS require additional reporting requirements for the SEC? What role does the IASB, FASB, PCAOB and SEC play in promoting high-quality accounting information for US and global businesses? Does the retention of a separate US GAAP in an otherwise IFRS world environment present any challenges for US based companies? US GAAP versus IFRS The basics February 2018 Table of contents Introduction............................................................................. 1 Financial statement presentation............................................ 3 Interim financial reporting ....................................................... 7 Consolidation, joint venture accounting and equity method investees/associates.................................................. 8 Business combinations ..........................................................14 Inventory ...............................................................................18 Long-lived assets ..................................................................20 Intangible assets ...................................................................23 Impairment of long-lived assets, goodwill and intangible assets ...................................................................25 Financial instruments ............................................................29 Foreign currency matters......................................................38 Leases — before the adoption of ASC 842 and IFRS 16 ........40 Leases — after the adoption of ASC 842 and IFRS 16 ...........43 Income taxes .........................................................................47 Provisions and contingencies ................................................51 Revenue recognition — after the adoption of ASC 606 and IFRS 15 ...........................................................................53 Share-based payments..........................................................57 Employee benefits other than share-based payments ..........61 Earnings per share ................................................................63 Segment reporting ................................................................65 Subsequent events ................................................................67 Related parties ......................................................................69 IFRS resources ......................................................................70 Error! No text of specified style in document. Introduction There are two global scale frameworks of financial reporting: US GAAP, as promulgated by the Financial Accounting Standards Board (FASB), and IFRS, as promulgated by the International Accounting Standards Board (IASB) (collectively, the Boards). In this guide, we provide an overview, by accounting area, of the similarities and differences between US GAAP and IFRS. We believe that any discussion of this topic should not lose sight of the fact that the two sets of standards generally have more similarities than differences for most common transactions, with IFRS being largely grounded in the same basic principles as US GAAP. The general principles and conceptual framework are often the same or similar in both sets of standards and lead to similar accounting results. The existence of any differences — and their materiality to an entity’s financial statements — depends on a variety of factors, including the nature of the entity, the details of the transactions, the interpretation of the more general IFRS principles, industry practices and accounting policy elections where US GAAP and IFRS offer a choice. This guide focuses on differences most commonly found in current practice and, when applicable, provides an overview of how and when those differences are expected to converge. 1 Key updates Our analysis generally reflects guidance effective in 2017 and finalized by the FASB and the IASB as of 31 May 2017. We updated this guide to include Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers,1 (largely codified in Accounting Standards Codification (ASC) 606); IFRS 15, Revenue from Contracts with Customers; ASU 2016-02, Leases (largely codified in ASC 842); IFRS 16, Leases; ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities; and IFRS 9, Financial Instruments. We have not included differences before the adoption of ASC 606, IFRS 15, ASU 2016-01 and IFRS 9. Please refer to the October 2016 edition of the tool for these differences. This update doesn’t include differences related to ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, because of the standard’s delayed effective date. Our analysis does not include any guidance related to IFRS for small and medium-sized entities or Private Company Council alternatives that are embedded within US GAAP. We will continue to update this publication periodically for new developments. The guide also includes subsequent amendments in ASU 2015-14, Deferral of the Effective Date; ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net); ASU 2016-10, Identifying Performance Obligations and Licensing; ASU 2016-12, Narrow-Scope Improvements and Practical Expedients; ASU 2016-20, Technical Corrections and Improvements to Topic 606; and ASU 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. US GAAP versus IFRS The basics | 1 Introduction * * * * * Our US GAAP/IFRS Accounting Differences Identifier Tool publication provides a more indepth review of differences between US GAAP and IFRS as of 31 May 2017. The tool was developed as a resource for companies that need to analyze the accounting decisions and changes involved in a conversion to IFRS. Conversion is more than just an accounting exercise, and identifying accounting differences is only the first step in the process. Successfully converting to IFRS also entails ongoing project management, systems and process change analysis, tax considerations and a review of all company agreements that are based on financial data and measures. EY assurance, tax and advisory professionals are available to share their experiences and assist companies in analyzing all aspects of the conversion process, from the earliest diagnostic stages through the adoption of the international standards. To learn more about the US GAAP/IFRS Accounting Differences Identifier Tool, please contact your local EY professional. February 2018 US GAAP versus IFRS The basics | 2 Financial statement presentation Financial statement presentation Similarities There are many similarities in US GAAP and IFRS guidance on financial statement presentation. Under both sets of standards, the components of a complete set of financial statements include: a statement of financial position, a statement of profit and loss (i.e., income statement) and a statement of comprehensive income (either a single continuous statement or two consecutive statements), a statement of cash flows and accompanying notes to the financial statements. Both US GAAP and IFRS also require the changes in shareholders’ equity to be presented. However, US GAAP allows the changes in shareholders’ equity to be presented in the notes to the financial statements, while IFRS requires the changes in shareholders’ equity to be presented as a separate statement. Further, both require that the financial statements be prepared on the accrual basis of accounting (with the exception of the cash flow statement) except for rare circumstances. IFRS and the conceptual framework in US GAAP have similar concepts regarding materiality and consistency that entities have to consider in preparing their financial statements. Differences between the two sets of standards tend to arise in the level of specific guidance provided. Significant differences US GAAP IFRS Financial periods required Generally, comparative financial statements are presented; however, a single year may be presented in certain circumstances. Public companies must follow SEC rules, which typically require balance sheets for the two most recent years, while all other statements must cover the three-year period ended on the balance sheet date. Comparative information must be disclosed with respect to the previous period for all amounts reported in the current period’s financial statements. Layout of balance sheet and income statement There is no general requirement within US GAAP to prepare the balance sheet and income statement in accordance with a specific layout; however, public companies must follow the detailed requirements in Regulation S-X. IFRS does not prescribe a standard layout, but includes a list of minimum line items. These minimum line items are less prescriptive than the requirements in Regulation S-X. Balance sheet — presentation of debt as current versus noncurrent Debt for which there has been a covenant violation may be presented as noncurrent if a lender agreement to waive the right to demand repayment for more than one year exists before the financial statements are issued or available to be issued. Debt associated with a covenant violation must be presented as current unless the lender agreement was reached prior to the balance sheet date. US GAAP versus IFRS The basics | 3 Financial statement presentation US GAAP IFRS Balance sheet — Before the adoption of ASU 2015-17, All amounts classified as noncurrent in classification of deferred Balance Sheet Classification of the balance sheet. tax assets and liabilities Deferred Taxes, deferred taxes are classified as current or noncurrent, generally based on the nature of the related asset or liability. After the adoption of ASU 2015-17, all deferred tax assets and liabilities will be classified as noncurrent. (ASU 2015-17 is effective for public business entities (PBEs) in annual periods beginning after 15 December 2016, and interim periods within those annual periods. For other entities, it is effective for annual periods beginning after 15 December 2017, and interim periods within annual periods beginning after 15 December 2018. Early adoption is permitted.) Income statement — classification of expenses No general requirement within US GAAP to classify income statement items by function or nature although there are requirements based on the specific cost incurred (e.g., restructuring charges, shipping and handling costs). However, SEC registrants are generally required to present expenses based on function (e.g., cost of sales, administrative). Entities may present expenses based on either function or nature (e.g., salaries, depreciation). However, if function is selected, certain disclosures about the nature of expenses must be included in the notes. Income statement — discontinued operations criteria Discontinued operations classification is for components that are held for sale or disposed of and represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. Also, a newly acquired business or nonprofit activity that on acquisition is classified as held for sale qualifies for reporting as a discontinued operation. Discontinued operations classification is for components held for sale or disposed of and the component represents a separate major line of business or geographical area, is part of a single coordinated plan to dispose of a separate major line of business or geographical area of or a subsidiary acquired exclusively with an intention to resell. US GAAP versus IFRS The basics | 4 Financial statement presentation US GAAP IFRS Statement of cash flows — restricted cash After the adoption of ASU 2016-18, Statement of Cash Flows (Topic 230) ...
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Tutor Answer

Chucks574
School: Purdue University

Thank you so much

Running head: US GAAP and IFRS

1

US GAAP and IFRS:
Name:
Institution affiliation:
Date:

US GAAP and IFRS

2

1. The spreadsheet is automatically populated directly from the general ledger, but
the exchange rates must be input manually. The CFO wants you to ensure that the correct
exchange rates are input and then that they are not accidently changed. Since the exchange
rates are input manually, what internal controls can you suggest to ensure that the rates in
the spreadsheet are accurate? (Note: You may refer back to your Auditing or AIS classes
for controls regarding validity of inputs and spreadsheet integrity)
According to Ray (2017) Internal controls that are of the essence in ensuring that the
rates in the spreadsheets are accurate include:
A.

Data validation whereby the rates are verified and validated so as to ensure that

they are accurate
B.

Completeness check so as to ensure that there is no null values

C.

Use of automatic tools to prevent errors from being made when exchange rates

are being input into the spreadsheet manually
D.

Use of self-checks, like a batch total or harsh, to verify that formulae results are

accurate.

2. Discuss the impacts that the change in the value of the pound has had on results
due to exchange rate fluctuations with results that would have occurred had the dollar
value of the pound remained constant or declined during the first two years of Parker’s
ownership. ASSESS THREATS TO QUALITY OF INFORMATION.
Exchange rate fluctuations have had an impact on Parker Inc.’s financial conditions. This
is with regard to the fact that the decline in the value of the dollar resulted in the increase ...

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Tutor went the extra mile to help me with this essay. Citations were a bit shaky but I appreciated how well he handled APA styles and how ok he was to change them even though I didnt specify. Got a B+ which is believable and acceptable.

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