In: Accounting
Evaluate the proper accounting for transactions with respect to interim and segment reporting using the accounting codification and other accounting research tools.
Scenario
CM Corporation (CMC) was founded six years ago by Phil Connor and Eric Martin. The company designs, installs, and services security systems for high-tech companies. The founders, who describe themselves as "entrepreneurial geeks," met in a computer lab when they were teenagers and found they had common interests in working on security systems for critical industries. CMC hired you as a junior accountant this year.
Lately, Connor and Martin have been working with "radio frequency identification" (RFID) technology. They have developed a detailed system designed to track inventory items using RFID tags embedded invisibly in products. This technology has numerous inventory applications in multiple industries.
One of the most basic applications is tracking manufacturing components; if tagged components "go walking" (if employees attempt to take them), companies can easily track and find them. Connor and Martin have sold their system to several high-tech companies in the area. These companies have a number of government contracts that require extensive security systems to protect sensitive data from infiltration by terrorists and others. To date, CMC's cash flow from sales and services has adequately funded its operations.
CMC expects much growth potential for its products. As a result, they are considering going public and expanding internationally in the near future. Many of the issues you will address in this course project involve researching topics involving these anticipated events.
Instructions
Connor and Martin have heard that IFRS is used internationally for financial statements, but they know very little about it. Since they will most likely be going public and expanding internationally in the near future, they are considering switching to IFRS from GAAP and would like more information. They also realize if they go public and expand their business, they will have to deal with some issues they have not had to deal with previously, such as interim and segment reporting. Prepare a research memorandum for Connor and Martin addressing their questions below:
What are the similarities between GAAP and IFRS?
What are the major differences between GAAP and IFRS?
What are the requirements for interim reporting under both GAAP and IFRS?
Are there any problems or issues associated with interim reporting?
What are the advantages and disadvantages of providing segmented reporting?
What are the requirements for segment reporting under both GAAP and IFRS? Include the definition of an operating segment.
Memorandum Mechanics should be as follows:
The body of the memorandum should be a professional presentation centered on clear and concise writing. The responses to the questions should be detailed, well researched, and specifically related to CMC's industry.
Use the FASB Codification and IFRS to address all technical accounting issues presented in the questions, being certain to reference the applicable sections of the Codification and IFRS in your report. You may quote directly from the Codification and IFRS as long as all direct quotes are included in quotation marks.
Any other sources used to support your responses should similarly be properly documented. You should have other credible sources in addition to the Codification and IFRS.
For the ASC FASB Codification content, please reference asc.fasb.org.
For the Authoritative IFRS standards content, please reference eifrs.ifrs.org.
The major similiarities between GAAP and IFRS are listed below:
The financial statements consist of an income statement, a balance sheet and a cash flow statement in both the scenarios.
Both follow accrual method of accounting.
Differences between IFRS and GAAP:
IFRS is principle based allowing scope for interpretation whereas US GAAP is rule based making it a rigid set of standards.
Extraordinary items reporting is prohibited in IFRS but this practice exists in US GAAP
IFRS does not accept the LIFO method of inventory valuation.
Interim reporting in US GAAP and IFRS:
In GAAP, interim period are viewed as integral part of accounting period whereas in IFRS(I AS 34) it is viewed as a discrete reporting period.
Costs that benefit more than one period may be allocated to particular periods in GAAP. However, in IFRS the cost has to meet the definition of an asset at the end of an interim period to be deferred.
Issues in interim reporting:
The entity has the option to submit condensed financial statements instead of full financial statements.However, if it furnishes full financial statements they have to comply with I AS 1.
As per I AS 34, the interim financial statements should be submitted no later than 60 days after the end of the interim period.
If the reporting entity's recent annual financial statements we're submitted on a consolidated basis, then the interim financial statements have to be submitted on a consolidated basis as well.
I AS 34 requires that no adjustments should be made for events that are expected to occur at the end of the interim period.