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ACC 305 Lecture Notes - Lecture 23: Historical Cost, Financial Statement

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orangegnat648
17 Aug 2019
School
McKendree University
Department
Accounting
Course
ACC 305
Professor
Brasel

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Document Summary

The historical cost (or acquisition cost) of an asset is the amount paid initially to acquire the asset. The cost of an asset is measured by the cash paid for the asset including shipping, installation, set up and testing. For liabilities, this is the amount of the originally incurred obligation. Companies typically recognize monetary assets and liabilities using present values. A monetary asset or liability is initially recognized in the financial statements using interest rates appropriate for the particular financing arrangement at that time. For monetary assets and liabilities due within one year, u. s. gaap and ifrs permit companies to ignore discounting for the time value of money. When the present value of cash flows for and asset or liability change over time, companies typically use adjusted present value to reflect the passage of time. Gaap requires that certain types of assets and liabilities be measured at fair values. Companies have a fair value option for financial instruments.

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Related Questions

Case 10-1

Swisscom AG, the principal provider of telecommunications inSwitzerland, prepares consolidated financial statements inaccordance with IFRS. Until 2007, Swisscom also reconciled its netincome and stockholders’ equity to US GAAP. Swisscom consolidatedfinancial statements from a recent annual report are presented intheir original format in Column 1 of the following worksheet. Note27, Differences between IFRS and GAAP, which includes Swisscom’s USGAAP reconciliation, also is provided.

Required

Use the information in Note 27 to restate Swisscom’sconsolidated financial statements in accordance with US GAAP. Beginby constructing debit/credit entries for each reconciliation item,and then post these entries to columns 2 and 3 in the worksheetsprovided.

Calculate each of the following ratios under both IFRS and GAAPand determine the percentage differences between them, using IFRSratios as the base:

Net income/net revenue

Operating income/net revenues

Operating income/total assets

Net income/shareholders’ equity

Operating income/total shareholders’ equity

Current assets/current liabilities

Total liabilities/total shareholders’ equity

Which of these ratios is most (least) affected by the accountingstandards used?

Worksheet for theRestatement of Swisscom's Financial Statements from IFRS to USGAAP
Reconciling Adjustment
IFRS DR CR US GAAP
Consolidated Statement of Operations
Net revenue 9,842
Capitalized cost and changes ininventory 277
Total 10,119
Goods and services purchased 1,666
Personnel expenses 2,584
Other operating expenses 2,090
Depreciation and amortization 1,739
Restructuring charges 1,726
Total operating expenses 9,805
Operating income 314
Interest expense (428)
Financial income 25
Income(loss) before incometaxes and equity in net loss of affiliated companies (89)
Income tax expense 1
Income(loss) before equity innet loss of affiliated companies (90)
Equity in net loss of affiliatedcompanies (325)
Net income(loss) (415)
Consolidated Retained EarningsStatement
Retained earnings, 1/1 (151)
Net loss (415)
Profit distribution declared (1,282)
Conversion of loan payable to equity 3,200
Retained earnings, 12/31 1,352
Assets
Current assets
Cash and equivalents 256
Securities available for sale 51
Trade accounts receivable 2,052
Inventories 169
Other current assets 34
Total current assets 2,562
Noncurrent assets
Property, plant and equipment 11,453
Investments 1,238
Other noncurrent assets 220
Total noncurrent assets 12,911
Total assets 15,473
Current liabilities
Short-term debt 1,178
Trade accounts payable 889
Accrued pension cost 789
Other current liabilities 2,213
Total current liabilities 5,069
Long-term liabilities
Long-term debt 6,200
Finance lease obligation 439
Accrued pension cost 1,488
Accrued liabilities 709
Other long-term liabilities 338
Total long-term liabilities 9,174
Total liabilities 14,243
Shareholders' equity
Retained earnings 1,352
Unrealized market valueadjustment on securities available for sale 39
Cumulative translation adjustment (161)
Total shareholders' equity 1,230
Total liabilities and shareholders'equity 15,473

27. Differences between IFRS and GAAP

The consolidated financial statements of Swisscom have beenprepared in accordance with IFRS, which differ in certain respectsfrom GAAP in the US. Application of US GAAP would have affected thebalance sheet and net income (loss) to the extent described below.A description of the material differences between IFRS and GAAP asthey relate to Swisscom are discussed in further detail below.

Reconciliation of net income (loss) from IFRS toGAAP

The following schedule illustrates the significant adjustmentsto reconcile net income (loss) in accordance with US GAAP to theamounts determined under IFRS, for the current year ended December31.

(CHF in millions)
Net income (loss) according toIFRS (415)
US GAAP adjustments:
Capitalization of interest cost 8
Restructuring charges 205
Depreciation expense -5
Capitalization of software 182
Restructuring charges byaffiliates 50
Net income according to GAAP 25

Reconciliation of shareholders’ equity from IFRS toGAAP

The following is a reconciliation of the significant adjustmentsnecessary to reconcile shareholders’ equity in accordance with USGAAP to the amounts determined under IFRS as at December 31 of thecurrent year.

(CHF in millions)
Shareholders' equity accordingto IFRS 1230
US GAAP adjustments:
Capitalization of interest cost 54
Restructuring charges 205
Depreciation expense -5
Capitalization of software 475
Restructuring charges byaffiliates 50
Shareholders' equity accordingto GAAP 2009

Capitalization of interest cost

Swisscom expenses all interest costs as incurred. US GAAPrequires interest costs incurred during the construction ofproperty, plant and equipment to be capitalized. Under US GAAP,Swisscom would have capitalized CHF 13 million and amortized CHF 5million for the current year.

Restructuring charges

During the current year, Swisscom recognized under IFRSrestructuring charges totaling CHF 1726 million. The followingschedule illustrates adjustments necessary to reconcile thesecharges to amounts determined under US GAAP.

Restructuringcharges in accordance with IFRS
Personnel restructuringcharges 1326
Write-down of long-livedassets 316
Misc. restructuring charges 84
Total in accordance with IFRS 1726
Adjustments to restructuringcharges to accord with GAAP (205)
Restructuring charges inaccordance with GAAP 1521

Reconciliation of restructuring charges
Restructuring chargesaccording to US GAAP consist of the following:
Personnel restructuringcharges 1228
Write-down of long-livedassets 209
Misc. restructuring charges 84
Restructuring charges inaccordance with GAAP 1521

Depreciation expense

Due to the difference in carrying value of long-lived assetsafter write-downs describe in (b), there is a difference in theamount of depreciation expense taken under IFRS and GAAP. Anadjustment is made for the current year to record an additional CHF5 million of depreciation under US GAAP.

Capitalization of software

Swisscom has expensed software costs as incurred. For US GAAPpurposes, external consultant costs incurred I the development ofsoftware for internal use has been capitalized. These costs arebeing amortized over a 3 year period. The capitalization ofsoftware costs accords with common practice in the UStelecommunications industry.

Swisscom has capitalized, as disclosed in the reconciliation ofnet income (loss) and shareholders’ equity to US GAAP, CHF 220million and amortized CHF 37 million in the previous year andcapitalized CHF 370 million and amortized CHF 188 million in thecurrent year.

Restructuring charges of affiliates

During the current year, Swisscom’s share of personnel and otherrestructuring charges recorded by affiliates amounted to CHF 50million. These restructuring charges do not meet all therecognition criteria contained in EITF 94-3 and therefore cannot beexpensed in the current year, under US GAAP.

FASB SFAS 157 was issued September 2006 for application tofinancial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years.This Statement, which applies to assets and liabilities, definesfair value, establishes a framework for measuring fair value ingenerally accepted accounting principles (GAAP), and expandsdisclosures about fair value measurements. The statement does notapply to assets acquired and liabilities assumed in an acquisitionof a business or non-profit activity by a not-for-profit entitythat are required to be measured at fair value under FASB StatementNo. 164. The objective of a fair value measurement is to determinethe price that would be received to sell the asset or paid totransfer the liability at the measurement date which is the exitprice. The fair value measurement assumes that the asset orliability is exchanged in an orderly transaction between marketparticipants. For assets, fair value measurement assumes thehighest and best use of the asset by market participants,considering the use of the asset that is physically possible,legally permissible, and financially feasible at the measurementdate. The highest and best use of the asset establishes thevaluation premise. For liabilities, it is assumed that theliability is transferred to a market participant at the measurementdate and that the nonperformance risk relating to that liability isthe same before and after its transfer. The fair value of theliability shall reflect the nonperformance risk relating to thatliability. As in our text, the position in the statement is thatvaluation techniques must be consistently applied. It emphasizesthose valuation techniques using the market approach, incomeapproach, and cost approach to measure fair value. In some cases asingle valuing technique may serve the purpose, however in others,using multiple techniques may be more appropriate. The informationthat is available will help to determine which method that shouldbe used. Examples are provided in Appendix A to illustrate thevarious approaches for certain transactions. The statement alsoestablishes a fair value hierarchy that prioritizes the inputs tovaluation techniques used to measure fair value by placing theminto three broad levels in order to increase consistency andprovide better comparability. Level 1 is given the highest priorityand is based on quoted prices (unadjusted) in active markets foridentical assets or liabilities that the reporting entity has theability to access at the measurement date. Level 2 is based oninformation other than quoted prices included within Level 1 thatare observable for the asset or liability, either directly orindirectly through substantiation with observable market data.Level 3 has the lowest priority and is based on unobservable inputsfor the asset or liability, primarily, inputs that reflect thereporting entity’s own assumptions.

Follow-Up Discussion Expand upon any of the points identified byyour classmates and/or ask for clarification on points that you donot understand.

I have provided the classmates response.

300 words

You are the CFO for Jones company (reporting using IFRS) andmust reconcile your financial statements for the years ending 2008,2009, and 2010 to U.S. GAAP (The Income Statement and StatementStockholders’ Equity). You have identified the following 4 areaswhere there are differences between IFRS and U.S. GAAP at variousdates. Be sure to consider the cumulative effects of prior yeartransactions for each year.

Intangible Assets (Impairment)

As part of a business combination in January 2005, the companyacquired a brand for $10,000,000. The brand is classified as anintangible asset with a 10 year useful life. At year-end 2008, thebrand is determined to have a selling price of $5,500,000 with zerocost to sell. Expected future cash flows from continued use of thebrand are $6,200,000 (undiscounted) and the present value of futurecash flows is 5,700,000

Research and Development Costs

The company incurred research and development costs of $500,000in 2008. Of this amount, 70% related to development activitiessubsequent to the point at which criteria had been met that anintangible asset existed. The development costs were completed atthe end of 2008 and will be amortized over 10 years beginning2009.

Property Plant and Equipment

On January 1, 2009 a building that had an original cost of$5,000,000 and (Purchase date January 1 2004) and was beingdepreciated over 25 years was determined to have a fair value of$6,000,000. The company uses the revaluation model for suchassets.

Sale Leaseback

On January 1, 2005 the company realized a gain on a salesleaseback of $1,000,000. The term of the lease (starting the dateof the sale) is 20 years.