Question

In: Accounting

HolmesWatson (HW) is considering what the effect would be of reporting its liabilities under IFRS rather...

HolmesWatson (HW) is considering what the effect would be of reporting its liabilities under IFRS rather than U.S. GAAP. The following facts apply:

  1. HW is defending against a lawsuit and believes it is virtually certain to lose in court. If it loses the lawsuit, management estimates it will need to pay a range of damages that falls between $5,500,000 and $10,500,000, with each amount in that range equally likely.
  2. HW is defending against another lawsuit that is identical to item (a), but the relevant losses will only occur far into the future. The present values of the endpoints of the range are $3,500,000 and $8,500,000, with the timing of cash flow somewhat uncertain. HW considers these effects of the time value of money to be material.
  3. HW is defending against another lawsuit for which management believes HW has a slightly worse than 50/50 chance of losing in court. If it loses the lawsuit, management estimates HW will need to pay a range of damages that falls between $3,500,000 and $9,500,000, with each amount in that range equally likely.
  4. HW has $10,500,000 of short-term debt that it intends to refinance on a long-term basis. Soon after the balance sheet date, but before issuance of the financial statements, HW obtained the financing necessary to refinance the debt.

   
Required:
1. For each item, indicate how treatment of the amount would differ between U.S. GAAP and IFRS.
2. Consider the total effect of items a–d. If HW’s goal is to show the lowest total liabilities, which set of standards, U.S. GAAP or IFRS, best helps it meet that goal?

Solutions

Expert Solution

U.S

GAAP

IFRS
a

Accure

liabilty

5,500,000

Accure

liabilty

80,00,000
b

Accure

liabilty

5,500,000

Accure

liabilty

60,00,000
c

Do not

accure

liability

Accure

liabilty

65,00,000
d

Long-term

liability

10,500,000 Short-term liability 10,500,000

Explanation:

a.The loss is probable and can be reasonably estimated.

U.SGAAP=accrue a liability=5,500,000

IFRS=accrue a liability=midpoint of the range=80,00,000

b.U.S.GAAP=present values would not be concidered due to uncertain timing of cash flows=lower end of the undiscounted range=5,500,000

IFRS=present values would be used =relevant mid point of the range=60,00,000

c.Only probable according to IFRS's use of the term.

IFRS=relevant midpoint of the range=65,00,000

d.Financing was obtained prior to financial statement issueance but not before the balnce sheet data

U>S GAAP=long-term liability

IFRS=short-turm liyability

part2

Which set of standerds help to meet that goal?

U.S GAAP

U.S

GAAP

IFRS
a

Accure

liabilty

5,500,000

Accure

liabilty

80,00,000
b

Accure

liabilty

5,500,000

Accure

liabilty

60,00,000
c

Do not

accure

liability

Accure

liabilty

65,00,000
d

Long-term

liability

10,500,000 Short-term liability

10,500,000

Total 2,15,00,000 Total 3,10,00,000

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