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.          

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

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.

Answer ;

The following paragraphs look into the advantages of harmonization more closely.

(1) Investors and financial analysts need to be able to understand the financial statements of foreign companies whose shares they might wish to buy. They would like to be sure that statements from different countries are reliable and comparable or at least to be clear about the nature and magnitude of the differences. They also need confidence in the soundness of the auditing. For this reason, various inter governmental transnational bodies from the EC Commission to the United Nations are interested in protecting investors within their spheres ofinfluence.

(2) For multinationals, the advantages of harmonization are much more important. The great effort of financial accountants to prepare and consolidate financial statements would be much simplified if statements from all round the world were prepared on the same basis. Similarly, the task of preparing comparable internal information for the appraisal of the performance of subsidiaries in different countries would be made much easier. Many aspects of investment appraisal, performance evaluation, and other decisionmaking uses of management accounting information would benefit from harmonization. The appraisal of foreign companies for potential takeovers would also be greatly facilitated. Multinational companies would also find it easier to transfer accounting staff from one country to another.

(3) Another group which would benefit from harmonization are the international accountancy firms. Many of the clients of the large AngloAmerican accountancy firms have at least one foreign subsidiary or branch. consolidation and auditing of these companies’ financial statements would become less onerous if accounting practices were harmonized. Also, the accountancy firms would benefit from the added mobility of staff.

(4) The revenue authorities throughout the world have their work greatly complicated when dealing with foreign incomes by differences in the measurement of profit in different countries.

(5) Governments in developing countries might find it easier to understand and control the operations of multinationals if financial reporting were harmonized, particularly as this would imply greater disclosure in some cases.

(6) International credit grantors like the World Bank must also face the difficulties of comparison. Harmonization of accounting rules would prove a relief to them.

(7) Other organizations that would benefit from greater international comparability of company information are labour unions who face multinational employers.

(8) In cases where foreign shares are quoted on the domestic stock exchange, that stock exchange will often demand financial statements which are consistent with domestic practices. Similarly, those companies which wish to issue new shares more widely than on their domestic markets will see the advantages ofstandardized practices in the promotion oftheir issues.

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.   

Answer ;

Answer to Switzerland is not a member of the European Union (EU). You are the Business Development Officer (BDO) of a successful Officer (BDO) of a successful medium-size Swiss company that has grown rapidly in recent years. The company has now grown to thepoint where the owners can no longer supply all

• Make sure that IFRSs have been translated into the local language without losing the spirit of the financial reporting requirements.
• Develop an educational and training program to educate accountants about IFRSs.
• Propose reorientation of the system of professional accounting education focusing on market based economic imperatives.
• Emphasize the need for an effective enforcement mechanism with appropriate disciplinary procedures to deal with non-compliance.
• Propose setting up a web page for the accounting oversight body to respond to on-going issues.
• Introduce measures such as seminars to convince the business community of the benefits of adopting IFRSs.
• Ensure that the accounting oversight body remains independent from outside interference.
• Request adequate funding to allow the oversight body to discharge its responsibilities effectively.
• The preparers of financial statements need to interpret and understand the requirements included in financial reporting standards in a consistent manner. Language will be a major issue in this regard. The IFRSs are written in English and need to be translated into different languages. It is possible that the meanings of some of the terms used may be lost in translation, because of the absence of any equivalent terms in a particular language. This would be an impediment to achieving comparable financial statements.
• Another major challenge is the absence of an adequate accounting infrastructure, particularly in most of the new member countries. Successful adoption of IFRSs requires, among other things, a well-developed accounting profession, a business sector that supports IFRSs, and an effective enforcement mechanism. The EU will have challenges in all these areas given the backgrounds of its member countries.

A. They are too complicated for some companies.

B.   Using them as the basis for taxation could be a problem.

C. Some IFRSs, for example, those related to financial instruments and fair value                                    accounting, are controversial.

D. Guidance for first-time adopters is inadequate

E.   In countries which do not have well-developed capital markets, and where the users are satisfied with the local standards, the adoption of IFRSs would be of little benefit.

F.   There could be language translation issues.

Question 2

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

Answer ;

Overview

IAS 2 Inventories contains the requirements on how to account for most types of inventory. The standard requires inventories to be measured at the lower of cost and net realisable value and outlines acceptable methods of determining cost, including specific identification first-in first-out (FIFO) and weighted average cost.

Objective

The objective of is to prescribe the accounting treatment for inventories. It provides guidance for determining the cost of inventories and for subsequently recognising an expense, including any write-down to net realisable value. It also provides guidance on the cost formulas that are used to assign costs to inventories.

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

Answer ;

It also provides guidance on the cost formulas that are used to assign costs to ... This Standard does not apply to the measurement of inventories held by: ... (b) commodity broker-traders who measure their inventories at fair value less costs to .... standard cost method or the retail method, may be used for convenience if the.