Chap008 - Chapter 08 Additional Financial Reporting Issues...

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Chapter 08 - Additional Financial Reporting Issues CHAPTER 8 ADDITIONAL FINANCIAL REPORTING ISSUES Chapter Outline I. In addition to issues involving the accounting for foreign currency, three financial reporting issues of international importance are: (a) accounting for changing prices (inflation accounting), (b) accounting for business combinations and consolidated financial statements, and (c) segment reporting. II. Historical cost accounting in a period of inflation understates asset values (and related expenses) and overstates income. Historical cost accounting also ignores the gains and losses in purchasing power caused by inflation that arise from holding monetary assets and liabilities. III. Two methods of accounting for inflation have been used in different countries – general purchasing power (GPP) accounting and current cost (CC) accounting. A. Under GPP accounting, nonmonetary assets and stockholders’ equity accounts are restated for changes in the general price level. Cost of goods sold and depreciation/amortization are based on restated asset values and the net purchasing power gain/loss on the net monetary liability/asset position is included in income. GPP income is the amount that can be paid as a dividend while maintaining the purchasing power of capital. B. Under CC accounting, nonmonetary assets are revalued to current cost, and cost of goods sold and depreciation/amortization are based on revalued amounts. CC income is the amount that can be paid as a dividend while maintaining physical capital. IV. IAS 29 requires the use of GPP accounting by firms that report in the currency of a hyperinflationary economy. IAS 21 requires the financial statements of a foreign operation located in a hyperinflationary economy to first be adjusted for inflation in accordance with IAS 29 before translation into the parent company’s reporting currency. V. Issues that must be resolved in accounting for a business combination relate to (a) selection of an appropriate method, (b) recognition and measurement of goodwill, and (c) measurement of minority interest. A. IFRS 3 and US. GAAP both require the purchase method in accounting for business combinations; the pooling of interests method is not allowed. B. Goodwill is recognized on the consolidated balance sheet as an asset and tested annually for impairment under both IFRS 3 and U.S. GAAP. C. When less than 100% of a company is acquired, IFRS 3 requires the acquired assets and liabilities to be recorded at full fair value and minority interest is initially measured at the minority shareholders’ percentage ownership in the fair value of the acquired company’s net assets. This is known as the economic unit or entity concept. 8-1
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Chapter 08 - Additional Financial Reporting Issues 1. In addition to the economic unit or entity concept, U.S. GAAP also allows use of the parent company concept in which the acquired assets and liabilities are initially measured at book value plus the parent’s ownership percentage in the difference between fair value and book value.
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