Statement of comprehensive income* Statement of comprehensive income Trading investments Financial assets at fair value through profit or loss Excess of issue price over par Share premi
Trang 1DISCUSSION QUESTIONS 1.
Statement of comprehensive income* Statement of comprehensive income
Trading investments Financial assets at fair value through profit or loss
Excess of issue price over par Share premium
Examples: Accumulated other comprehensive
income, treasury stock, unrealized gain (loss)
on available-for-sale investments
Reserves
Wages and salaries payable, payroll taxes
*Note: U.S GAAP and IFRS have converged on the title and disclosure requirements for other comprehensive
in-come items, such as Unrealized Gain (Loss) on Available-for-Sale Investments.
2 The nature of an expense is how the expense
would naturally be recorded in a journal entry
reflecting the economic benefit received for
that expense An example is wages expense
The function of an expense identifies the
purpose of the expense, such as selling ex-
pense or administrative expense.
3 If an expense is classified by function on
the income statement, then the natural
classification must be disclosed in the
footnotes Both classifications cannot be
comingled on the income statement.
4 Under U.S practice, the term “provision”
usually denotes an expense, as in provision
for income taxes (income tax expense)
Inter-national practice uses the term “provision”
to denote a liability Thus, an income tax
provision would be income taxes payable.
5 First, under IFRS, LIFO is prohibited, whereas
it is acceptable under U.S GAAP Second, in
using a lower-of-cost-or-market valuation, IFRS
define “market” as net realizable value U.S
GAAP, in contrast, defines “market” as
replacement cost in most circumstances.
and valued using fair value They can be sepa- rately disclosed in a footnote.
7 IFRS allow property, plant, and equipment to
be valued at either historical cost or fair value This is in contrast to U.S GAAP, which requires historical cost for property, plant, and equipment.
8 A share premium is an international term for
“excess of issue price over par value.”
9 A reserve under IFRS denotes an element of
stockholders’ equity Most reserve items are accumulated other comprehensive income
An example would be the revaluation reserve for the accumulated unrealized gains and losses from plant and equipment revaluation or unrealized gain (loss) from available-for-sale investments The term “reserve” typically denotes a liability in the United States, such as
“reserve for restructuring.”
10 Treasury stock need not be disclosed on an
IFRS balance sheet as a separate line item It may be included as a reduction within reserves
or share premium U.S GAAP favors disclo- sure of treasury stock as a separate line item,
Trang 2IFRS ACTIVITIES
IFRS Activity 1
a Turnover is a European and British term for “Sales” or “Revenue.” It is com- monly the first line of the income statement.
b The most striking aspect of this income statement is the lack of detail The statement begins with “Turnover,” and the second line is “Operating profit.” None of the operating expenses that appear in a GAAP statement, including cost of goods sold, are shown on the statement These items of expense are provided in the footnotes under both functional and natural classifications There is wide latitude in the choice of subtotals and items included, or not included, in the income statement under IFRS The items that are shown are financing costs and investment income, affiliate earnings, and unique
charges and credits These are required disclosures on the face of the state-ment This income statement nearly represents the minimal disclosure
allowed on the face of the statement under IFRS.
c The subtotal for net finance costs is presented at the top of the column This
is a European presentation approach that would not be found in most U.S financial statements In U.S financial statements, subtotals are at the bottom
of the column.
IFRS Activity 2
a The statement of financial position (balance sheet) of LVMH is clearly ordered differently than a U.S company statement of financial position (balance
sheet) would be On the asset side of the statement of financial position
prepared under IFRS (balance sheet), the non-current items are listed prior to the current items Within the non-current items, intangible assets are listed first, followed by property, plant, and equipment On Mornin’ Joe’s statement
of financial position (balance sheet), the intangible assets are listed last, not first.
Within the current assets, the least liquid current assets are listed first Thus, inventories are identified first, followed by accounts receivable and cash On Mornin’ Joe’s statement of financial position (balance sheet), the current assets begin with cash, followed by accounts receivable and inventories.
Trang 3IFRS Activity 2 (Concluded)
For LVMH, the equities are listed first on the liabilities and equity side of the statement of financial position (balance sheet) The liabilities are listed after the equities The liabilities begin with non-current liabilities, followed by current liabilities So again, the statement of financial position (balance sheet)
is listing long-term elements first On Mornin’ Joe’s statement of financial position (balance sheet), the liabilities precede the stockholders’ equity, and the current liabilities precede the noncurrent liabilities.
In the stockholders’ equity section of the statement of financial position for LVMH (balance sheet), treasury shares (treasury stock) are separately identi- fied, but are not placed as the last line of the stockholders’ equity section, as would be the case under U.S GAAP.
Retained earnings do not appear to be separately identified on the LVMH statement “Other reserves” clearly includes retained earnings, as can be de- termined by the size of the balance The current period’s “net profit, group share” (synonymous with net income under GAAP) is included as a separate line item in the stockholders’ equity section, rather than being included in the ending balance of retained earnings.
b.
and salaries payable
c The revaluation reserve is the adjustment to stockholders’ equity for accumu-lated unrealized gains and losses from changes in fair market value for
selected assets, such as available-for-sale investments This account is simi- lar to “Unrealized gain (loss) on available-for-sale investments,” which is discussed in the Investments chapter However, under IFRS, fair market valuation is available for a wider selection of assets than under U.S GAAP For example, LVMH values its vineyards at fair value.
Trang 4IFRS Activity 3
a and b.
(1) FIFO less LIFO
(2) IFRS Net Income
(3) (FIFO less L I FO) Total Current Assets
(4) IFRS Net In ome C o l (2) Reported Net Income
c Exxon Mobil has the largest difference between FIFO and LIFO inventory valuation as a percent of current assets This is because Exxon Mobil has significant inventories of oil, gasoline, and other oil-related products in
proportion to its current assets In addition, the difference between FIFO and LIFO valuation is large because of the difference between the current price of oil and the historical average price for oil reflected in the LIFO
inventory.
d A change to IFRS would cause Kroger’s net income to increase to 105% of its LIFO-reported net income This is the largest relative impact among the three firms Kroger’s net income, as a percent of its inventory, is small This is because the percent of net income to sales is smaller for Kroger than for the other two firms Thus, the earnings impact of a change from LIFO to FIFO is large, relative to its reported net income.
e In periods of rising prices, net income reported under LIFO would normally be less than as reported under FIFO This is because LIFO matches current period costs with sales If the net income reported under LIFO is greater than what would be reported under FIFO, then there are two possible explanations First, the company experienced declining purchase prices during the period, relative to prior periods Second, the company sold from (liquidated) inven- tory and, hence, matched older cost layers to revenues Crude oil prices fluc- tuate; thus, Exxon Mobil may have operated in a period of declining crude oil prices during this reporting period, causing its LIFO net income to exceed FIFO net income Ford reduced operations and liquidated inventory Thus, it used old historical cost layers that were established at lower costs than
current replacement cost As Ford stated in its annual report:
At December 31, 2010, inventory quantities were reduced, resulting in a
liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as compared with the cost of 2010 purchases, the effect of which