In: Accounting
7.
HolmesWatson (HW) is considering what the effect would be of
reporting its liabilities under IFRS...
7.
HolmesWatson (HW) is considering what the effect would be of
reporting its liabilities under IFRS rather than U.S. GAAP. The
following facts apply:
- 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
$6,300,000 and $11,300,000, with each amount in that range equally
likely.
- 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
$4,300,000 and $9,300,000, with the timing of cash flow somewhat
uncertain. HW considers these effects of the time value of money to
be material.
- HW is defending against another lawsuit for which management
believes HW has a slightly better 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 $4,300,000 and
$10,300,000, with each amount in that range equally likely.
- HW has $11,300,000 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?