Question

Question 1

A. Discuss two (2) advantages of global harmonizing of accounting standards. Has there been any recent success with regards to the harmonizing of accounting standards? Provide details.

B. Switzerland is not a member of the European Union (EU). You are the Business Development Officer (BDO) of a successful medium-size Swiss company that has grown rapidly in recent years. The company has now grown to the point where the owners can no longer supply all the capital needed for further expansion. The owners have asked you to look into the option of the company raising capital in the EU capital markets. You have commenced discussion with banks and investors in Paris, Zurich and Frankfurt. You have spoken with several investment bankers about the possibility of an Initial Public Offering (IPO) on the Euronext. Currently your company prepares its financial statements in conformity with Swiss GAAP. Swiss law allows for the use of IFRS instead of Swiss GAAP. The owners of the company have been reluctant to switch to IFRS because of the cost involved to make such a change. Present a compelling case to the owners of the company in favour of switching to IFRS.

Question 2

A. Provide the history, overview and objective of the standard that provides guidance on the measurement and recognition of inventory.

B. What guidance does this standard provide on the cost methods and formulas to be used to cost inventory?

C. Read the opening case in Chapter 7 of your course text captioned ‘Too Much Inventory’. Citing from the relevant standard, explain why BB Ltd had to undertake massive write-downs in 2014.

Too Much Inventory

BlackBerry Ltd. faced a rough week in late September 2013. Within a seven-day period, the company not only announced a potential buyer for the company but also reported a quarterly loss of close to a billion dollars. The loss was generated primarily by write-down of BlackBerry 10 handsets (BB 10), the company’s new flagship product. Prior to this result, the company had been struggling to keep up with other smartphone competitors, and sales of the new phone had not met expectations. As a result of the news reported during this week, the company’s share price fell over 20 percent on the market.

When the company reported its annual financial results for the year ended March 1, 2014, the gross profit on hardware sales was actually negative. In fact, it was – $2.5 billion. How can a company report a negative gross profit? In BlackBerry’s case, a further write-down of the BB 10 handset occurred in the third quarter, resulting in total write-downs for the year of approximately $2.4 billion. As described in the company’s Management Discussion and Analysis of Financial Condition report, evaluations of inventory require an assessment of future demand assumptions (BlackBerry Ltd., 2014). Sales of the new BlackBerry product were significantly lower than expected, resulting in a large number of unsold handsets. As the goal of financial reporting is to portray the economic truth of a company, BlackBerry Ltd. had no choice but to accept the reality that their inventory of BB 10 phones could not be sold for the amount reported on the balance sheet. The company described the causes of the write-down as these: the maturing smartphone market, very intense competition, and uncertainty created by the company’s strategic review process.

Regardless of the causes, it was clear that this massive write-down had a profound effect on BlackBerry Ltd.’s financial results and share price. Although the write-down was a symptom of other deeper problems in the company, it is clear that management of inventory levels can be a significant issue for many businesses. For the accountant, understanding the importance of the reported inventory amount is paramount, and critically analyzing the valuation assumptions is essential to fair reporting of inventory balances.
(Sources: BlackBerry Ltd., 2014; Damouni, Kim & Leske, 2013)

D. Based solely on the data given in the opening case, prepare the typical journal entry BB Ltd would probably have made to record its write-downs in 2014.

Total 30 marks

Answer 1

1.

A. Advantages of harmonizing the accounting standards are as follows:

1.Inventors in companies can easily compare the economic statements of international corporations because all businesses is going to be adhering to the exact same set of standards. This may lead to a rise in international investments and general economic development.

2.It will deliver investors with information and facts which is precise, timely, comparable and reliable.

3. It will provide consistency across international markets. This will enable accountantants and investors to analyse businesses across the globe regardless of the country in which they operate.

The profession has also witnessed some improvements in recent years in the process of global convergence putting some ray of hope. Internatational and even local standard setting bodies have come up with projects of harminization and in most of the cases became successful. The day is not far away when we will observe that accounting world is controlled and guided by a single set of standards giving it a status of legal discipline in true sense.

B.

Major advantages of adopting IFRS are as follows:

1.With IFRS in place, investors get greater financial and operational transparency so they can more accurately compare the health and performance of the company with that of others, and, as a result, make better fact based investment decisions. If a business can convey a promising outlook, the pool of potential investors and lenders will expand.

2.There will be improved financial reporting and tax planning by adoption of the IFRS

3. There will be lowered cost of capital. Increased insight into financial results and adherence to high quality financial standards, as specified by IFRS, can benefit both companies and their investors with reduced cost of capital

4. There will be improvement in financial controls and improved day to day operations as well as better managed resources for the company by adoption of IFRS.

Looking to the above mentioned advantages company must switch to IFRS.