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ACCT 311:1 – FALL 2015
ASSIGNMENT 3 - INTERNATIONAL FINANCIAL REPORTING & ETHICS
ISSUES
[72 POINTS]
The assignment is based on the material covered in chapters 2, 4,5, 7, 9, 11 and 12 of
the course text –
th
Intermediate Accounting (15 Ed.), Kieso, Weygandt and Warfield. You may
also find useful resources to address the requirements of Part A of this assignment
on the IASB’s website, especially in its conceptual framework document. Part B of
this assignment focuses on understanding and applying the AICPA Code of
Professional Conduct (Especially Part 2). Information about accessing the Code is
available at the course Canvas site https://svsu.instructure.com/courses/4151 .
GENERAL GUIDELINES
1.
Your responses MUST be presented in memorandum format. (Negative
grading of up to 4 points is applicable if the memo format is not properly
used.)
2.
The memo should be written in clear language from the perspective of a
staff accountant writing to her/his manager.
3.
The memo should not exceed 10, double line spaced, 12-point font, type
written pages (8 1/2” x 11”) in length.
4.
Do NOT use note book pages or other sizes of paper.
5.
You may use bullets, tables or other appropriate mechanisms to present
your responses.
6.
You are required to work independently on this assignment. While you
may discuss the assignment with your peers, the work submitted for
grading must be that of the student whose name and ID number appears
on the assignment ONLY.
ASSIGNMENT REQUIREMENTS
PART A – INTERNATIONAL FINANCIAL ACCOUNTING & REPORTING ISSUES (30
Points)
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1. Review the details of Pinafore Holding B.V. Group Consolidated Income
Statement presented on page 83 in the attached annual report. Then answer
questions 1(a) – (c) below.
a)
Identify ONE difference between the format / structure of the Pinafore Holding
B.V. Group, iGAAP-based income statement and the US-GAAP-based income
statement of a U.S. company as presented in Chapter 4 of the text book, for
example those presented on pages 165 and 172.
(1 Points)
b)
Identify ONE irregular item reported by the Pinafore Holding B.V. Group. (1
Points)
2. Review the IASB’s Conceptual Framework for the Preparation and
Presentation of Financial Statements (2010) (available at the following link),
then describe the other means that are available for communicating financial
reporting information, besides financial statements? (2
Points)
3. Review the iGAAP-based Balance Sheet of Pinafore Holdings B.V. Group
presented on page 86 of the attached annual report (available at the following
link) identify TWO differences between the structure / format of the iGAAPbased balance sheet of this British firm and that prepared by USGAAP-based
firms, as shown in chapter 5 of the course text, for example on pages 213 and
237. (2 Points)
4. Review the information for Liberty International and Kimco Realty presented
on pages 645/6 of the course text. Then answer question 4(a) – (d) below.
(a) Compute the following ratios for both companies:
i.
ii.
iii.
iv.
Return on assets [ Net Income / Average Total Assets] (2 Point)
Profit margin on sales [Net Income / Total Revenue] (2 Point)
Asset turnover [Total Revenue / Average Total Asset] (2 Point)
How do the companies compare on these three performance measures?
(2 Points)
(b) Liberty reports a revaluation surplus (see pages 641 – 643 in the course text) of
£1,952. Assume that £1,550 of this amount arose from an increase in the net
replacement value of investment properties during the year. Prepare the journal
entry to record this (£1,550) increase. (2 Points)
(c) Under the UK (and IASB) standards, are Liberty’s assets and equity overstated
relative to what they would be under US-GAAP? If so, why? (2 Point)
(d) When comparing Liberty to US companies, like Kimco, what adjustments would
you need to make in order to have valid comparisons of ratios such as those
computed in 4(a) above? (2 Point)
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5. Review the IFRS Insights section of Chapter 9 on pages 525 – 534 in the
course text. Then briefly describe TWO differences between US-GAAP and
iGAAP in the methods allowed for inventory valuation. (4 Points)
6. Review the following information related to NEC Enterprises. Then complete
question 6(a) and (b) below.
NEC Enterprises uses the lower-of-cost-or-net-realizable-value (LCNRV) method,
on an individualitem basis, in pricing its inventory items. The inventory at 31,
December 2013, consisted of products A, B, and C. Relevant data for these
products appear below.
Estimated selling price
Acquisition cost
Replacement cost
Cost to complete
Selling costs
Normal profit margin
Item A Item
B
$120
$90
75
80
78
33
30
10
10
20
10
5
Item C
$90
36
32
30
20
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(a) Using the LCNRV rule under IFRS, determine the proper unit value for statement
of financial position (balance sheet) purposes at December 31, 2013, for each of
the items above. (3 Points)
(b) Using the LCM rule under US GAAP, determine the proper unit value for
statement of financial position (balance sheet) purposes at December 31, 2013,
for each of the items above. (3 Points) PART B – PROFESSIONAL
RESPONSIBILITY & ETHICS ISSUES (42 Points)
Unique Design Concepts (UDC) was a private company that manufactured office, school
and restaurant furniture in the English-speaking Caribbean. The company began its
operations in 1984 and quickly attained a leadership position in the industry as a direct
result of its high quality products and its aggressive sales and credit policies. UDC
manufactures an indigenous line of furniture as well as a leading international brand of
ergonomic chairs – Glove - under license from an Austrian firm. All UDC’s products met or
exceeded international standards. The Company’s sales team was engineered for efficiency
and growth, and consistently delivered double-digit sales growth through its export activities
in the Caribbean and Central America. Export sales accounted for forty-five percent (45%)
of overall sales. The company utilized a generous credit policy and offered attractive
discounts for prompt payment by customers. Its rapid growth had placed a considerable
strain on the administrative resources of UDC. As a result, UDC had recently employed
several persons at the middle management level to help relieve this administrative strain.
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Your friend, Tom De Gazon, a CPA, was one of the persons recently hired by UDC. He was
appointed to the newly created position of Supervisor – Revenue Accounting. His contract
provided for a probationary period of three months before his appointment was confirmed.
As part of his orientation, Tom was given a copy of the company’s chart of accounts, its
accounting manual and “read-only” access to the accounting system. While reviewing the
general ledger, Tom noticed a debit entry of $500,000 to WIP Inventory two days before the
end of the third quarter and an off-setting credit entry to the same account a few weeks later,
on November 7th for the same amount. The entries aroused Tom’s interest and he decided
to review the journal and supporting documents. The full journal entry follows:
Date
Account Title & Explanation
Dr.
Cr.
9-29-14 WIP Inventory
$500,000
Administrative Expenses
$500,000
To reclassify production costs
The entry on November 7th was a reversal of the above entry and Tom found no supporting
documents for either entry.
While having lunch with the Chief Accountant, Darcelle Mark, Tom asked whether she was
aware of the third quarter adjusting entry that reclassified a substantial amount of
administrative expenses as inventory. Mark indicated that she was aware of the entry, and
explained that it was made based on the company’s experience during the 2013 audit.
During their examination of the company’s 2013 records the auditors had discovered that
several items were misclassified and required a similar journal entry in order for the firm to
receive a clean report. The company complied with the auditors adjustments at that time.
Mark also indicated that it was her understanding that UDC also decided to make a similar
adjustment for 2014 as the control flaws that led to the 2013 errors had not been corrected.
Tom asked Mark about the criteria used for estimating the amount of the adjustment and
whether similar adjustments had been made in the first or second quarter of 2014. Mark
casually responded that she assumed the CFO (Hayden LaCroix) had used his professional
judgment since he had given the directive for the third quarter entry to be made, and that
she was not sure whether similar entries were made for the first two quarters of 2014. Mark
seemed surprised when Tom told her that the entry was subsequently reversed in November
2014 and suggested that he speak with the CFO about it. Tom casually raised the matter
with the CFO following a weekly departmental meeting and was told it was "not a big deal"
and he should be concentrating on activities in his core area of responsibility. Tom
conducted some additional investigations and discovered that the company would not have
met its third quarter income target without the September 29 th adjusting entry. When Tom
attempted to share this latest information with the CFO he was reminded that he was still
on probation and advised to be more strategic about the issues he pursues. Tom asked for
your advice.
REQUIREMENTS
1. What facts in this scenario are relevant to Tom De Gazon's ability to comply with the
provisions of the AICPA Code of Professional Conduct? (3 Points)
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2. What questions must Tom De Gazon answer as he determines the appropriateness of
the company's accounting related to the reclassification of its administrative expenses
as assets and the responses of the CFO to his questions? (5 Points)
3. Identify and briefly describe the specific principles of the AICPA Code of Professional
Conduct that might be relevant to Tom De Gazon's resolution of this situation. (6 Points)
4. Explain why you think any TWO of the principles you identified in requirements 3 above
are relevant to Tom De Gazon’s resolution of the situation. (4 Points)
5. Identify TWO types of threats to compliance with the AICPA Code of Professional
Conduct (e.g., adverse interest, advocacy, familiarity, self-interest, self-review, undue
influence) that are present in this scenario. Use information from the case to support
your choice. (4 Points)
6. How significant is each type of threat you identified to compliance with the principle(s)?
(2 Points)
7. For each type of threat to Tom's compliance with the requirements of the AICPA Code of
Professional Conduct that you identified in requirement 5 above, indicate ONE
safeguard that might be implemented to reduce the threat to an acceptable level. (2
Points)
8. Identify at least THREE parties / stakeholders that should be involved in the resolution
of this situation, and explain why you think each of these parties should be involved in
the resolution of this situation. (6 Points)
9. Outline an approach (series of steps) that Tom De Gazon might take to resolve this
situation in conformity
with the AICPA Code of Professional Conduct. (10 Points)
Supporting Materials
•
iasb conceptual framework.pdf
•
•
annual results pinafore holdings bv group - dec 2013.pdf
http://pub.aicpa.org/codeofconduct/Ethics.aspx (链接到外部网站。) (AICPA Code of Professional Conduct)
•
http://www.ifrs.org/Pages/default.aspx (链接到外部网站。) (IASB Website)
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