IFRS Seminar. Berlin /24/2015 1

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1 IFRS Seminar Berlin /24/2015 1

2 Accounting Issues for US Parent with European Subsidiaries: Cross Border Consolidation Issues Scott A. Walters, CPA, CGMA Partner, Daszkal Bolton LLP 8/24/2015 2

3 Purpose of Consolidation To present operating results and financial position of a Parent and all of its subsidiaries as if the consolidated group were a single economic entity Presumption is that consolidated financial statements are more meaningful & necessary for a fair presentation 8/24/2015 3

4 Premise: Control Ownership of a majority voting interest (>50% of the outstanding voting securities) Power to control by contract or agreement 8/24/2015 4

5 Subsidiary with Different Year End Reporting periods should be calibrated to same year end HOWEVER, US GAAP generally permits consolidation with different fiscal year ends if there is NO MORE THAN a 3-month difference (aka the 93-day rule ) BUT added complexity for intercompany transactions 8/24/2015 5

6 Can a Subsidiary with Same Fiscal Year End Report on Time Lag? GAAP permits equity method investments to report on a lag (93-day rule), but is silent on consolidation Practitioners generally permit based on cost/benefit for timely financial reporting BUT added complexity for consolidation procedures and elimination of intercompany transactions 8/24/2015 6

7 Group Accounting Basis Parent company must adjust subsidiary financials to conform to the Parent s accounting basis [and reporting currency] 8/24/2015 7

8 Group Accounting Policies BUT US GAAP does not require Parent and Subsidiaries to follow the same accounting policies 8/24/2015 8

9 Main IFRS: US GAAP Conversion Capitalization of Research & Development Post Employment Benefit Obligations Contingencies FX and Hedging Activities Revenue Recognition (multiple elements) Product Warranty Share-based Compensation IFRS US GAAP 8/24/2015 9

10 8/24/

11 Balance Sheet IFRS Basis ABC Corp. Balance Sheet - IFRS Basis December 31 ASSETS LIABILITIES and SHAREHOLDERS' EQUITY Intangible assets Current liabilities Trade name 6,000 Accounts payable 30,000 Patent 6,000 Accrued expenses 25,000 Goodwill 5,000 Taxes payable - current 16,150 Development costs, net 1,800 Total current liabilities 71,150 Total intangible assets 18,800 Noncurrent liabilities Property and equipment Bonds payable 54,000 Assets (cost) 105,000 Contingent liability payable 3,000 Accumulated depreciation (30,500) Total noncurrent liabilities 57,000 Total property and equipment 74,500 Total Liabilities 128,150 Current assets Cash 43,000 Shareholders' equity Accounts recreivables 35,000 Common stock ($1 par) 66,000 Investments (AFS) 20,000 Surplus (deficit) 6,000 Inventory 67,000 Retained earnings 58,150 Total current assets 165,000 Total shareholders' equity 130,150 8/24/2015 Total Assets 258,300 Total liabs and SH's equity 258,300 11

12 Income Statement IFRS Basis ABC Corp. Income Statement - IFRS Basis Year Ended December 31 INCOME FROM CONTINUING OPERATIONS Sales 350,000 Cost of goods sold 273,000 Gross profit 77,000 Selling and administrative expenses (incl of amort and depr expense of $13,700) 47,500 Operating income 29,500 Non-operating income (loss) Reversal of trademark impairment loss 1,000 Exchange rate gain on AFS 3,000 Contingent losses (3,000) Hurricane loss (4,000) (3,000) Earnings before interest and taxes 26,500 Interest expense 2,700 Income before tax 23,800 Tax expense (25%) 5,950 8/24/2015 Net income 17,850 12

13 ABC Case Study 1. Parent company uses LIFO method to account for inventory. Use of LIFO results in a reserve of 5,000 at beginning of year and 7,000 at end of year. 2. Property and equipment was revalued by 5,000 above book value 3. Earlier year recorded 2,000 goodwill impairment, reducing value from 7,000 to 5, Earlier year recorded 1,000 trade name impairment 5. Upon review, management revalued Goodwill to 7,000 and Trade name to 6, Property and equipment depreciated SL over 10 years and intangibles SL over 5 years. ½ year when placed in service 8/24/

14 ABC Case Study 7. Investments include AFS with FMV of 15,000 at beginning of year and 20,000 at end of year. 3,000 was due to FX currency gains. 8. Long-term contingencies of 3,000 from civil lawsuits where counsel consider payout slightly more likely than not but not highly probable. ABC is a plaintiff in a 10,000 punitive damage case. Both expected to settle in time frame greater than 1 year. 9. Extraordinary loss due to hurricane damage considered unusual and infrequent 10. Bonds are convertible. Conversion feature given assigned value of 10% using B-S-M valuation model 11. Company spent 2,000 on internally feasible development costs 8/24/

15 ABC Case Study Identify the IFRS:US GAAP differences and similarities for the balance sheet and income statement Prepare Journal Entries for the differences to conform to US GAAP Prepare a US GAAP balance sheet Prepare a US GAAP income statement 8/24/

16 Other Cross-Border Consolidation Issues Translate from functional to Reporting currency FX-based Interco reconciliations & eliminations Contract rights & obligations (side arrangements?) Cultural differences (timing & transparency) Internal and Disclosure Controls 8/24/

17 Thank You 8/24/

18 Things you can do Technical excellence Providing the proof Great Service What they believe You can do Telling the world Brand Focus Marketing Targeting People who Are likely to use us Getting on the list Winning the pitch 8/24/