What key financial ratios will be affected by the adoption of FAS 141R and FAS 160? What will be the likely effect?
The adoption FAS 141R and FAS 160 would possibly affect the two key ratios of debt to asset and debt to equity ratios. It would happen because of the reason that these new standards will have a significant impact on goodwill impairment, non-controlling interest, and parent’s ownership. Under the requirements of both FAS 141R and FAS 160, non-controlling interest would be classified as equity in the balance sheet of Klugen Corporation due to which equity value in the balance sheet would be an increase. This increase in equity will eventually decrease the debt to asset and debt to equity ratios. These ratios would also decrease because of the revaluation of higher market values for subsequent acquisitions under these FAS 141R and FAS 160. It would happen because of the likely increase in the company’s assets and equity (James, 2010).
Could any of the recent and forthcoming changes affect the company’s acquisition strategies and potentially its growth?
Acquisition strategies and particularly the growth could be changed due to recent or forthcoming changes because after implementing FAS 160 and FAS 141R acquisition would be valued at full market value in the future that eventually will result in an increase of non-controlling interest and goodwill. In this way, the assets of the company would decrease with the full amount based on overvaluation and assets would be increased based on undervaluation. Income will be decreased because significant costs associated with the acquisition would need to be expensed as incurred. An acquisition decision in this way could be affected in the case Klugen Corporation is trying to meet the targets of earnings. The growth of the company in this way could be impacted negatively due to a change in acquisition strategy and decision.
What were the FASB’s primary reasons for issuing FAS 141R and FAS 160?
The primary objective of FASB for issuing FAS 141R and FAS 160 was to improve reporting by abolishing certain level of pervasive and significant differences between U.S. GAAP and IFRS. The reason was to make a certain level of adjustments in both the U.S. GAAP and IFRS to bridge the global conjunction of accounting procedures and standards. According to FASB, FAS 141R will bring a greater level of consistency in the financial and accounting reporting, which eventually will enable to have relevant, comparable and complete information for not only for investors but also for the other users of financial statements. The reason of issuing FAS 160 was to improve the transparency, comparability, and relevance of financial information by requiring the companies to report NCI (Non-controlling interest) in their subsidiaries similarly as they report in their consolidated financial statements. Moreover, the reason of FAS 160 was to eliminate the diversity that existed in transaction accounting between NCI and entity (FASB, 2007).
What are qualifying SPEs? Do they exist under IFRS? What is the effect of FAS 166 eliminating the concept of qualifying SPEs on the convergence of accounting standards?
Qualifying SPEs are trusts and other legal entities that are in line with the conditions outlined in FAS 140. These qualifying purpose entities were established to acquire funding advantages from external sources, providing liquidity and to measure the business operations that require knowledge of risks and transparency. Securitization of mortgages is involved in these special purpose entities, and the concept of qualifying SPEs is not recognized by the IASB. FAS 166 facilitates the risks associated with the transfer of financial assets by requiring more information about the transfer of financial assets such as information about securitization transactions. In this way, the concept of qualifying SPEs is eliminated by it in the form of a requirement of additional disclosures and making changes in the requirements for derecognizing the financial assets (Journal Of Accountancy, 2009).
If the company adopts IFRS, what changes should management be aware of?
Some changes that should be known to the management of Klugen Corporation after adopting IFRS are given below:
- Management should know about the way of valuation of non-controlling interest under IFRS because under IFRS, management would have to calculate the non-controlling interest at fair value of net assets of subsidiary and it will then multiply by the rate of NCI.
- The second thing is that under IFRS, non-controlling interest should be recognized in the balance sheet of Klugen Corporation as only equity rather than as a liability or equity.
- The management should know the reporting of negative goodwill because it should need to recognize it as a gain for the year of acquisition rather than to be recognized as a proportionate reduction of long-term assets of Klugen Corporation.
- Management should have an understanding of presentation of the NCI’s share of income in the income statement because, under IFRS, it should be presented as a separate deduction from consolidated income to acquire income to main investors instead of recording in losses, gains, expenses, and other income.
- Instead of reporting assets and liabilities according to the percentage of ownership, Klugen Corporation would require reporting all of its assets and liabilities at fair value at acquisition date with 100% revaluation (James, 2010).
What are the principal differences between IFRS and U.S. GAAP?
Certain principle and significant differences between IFRS and U.S. GAAP are given below:
- IFRS uses a one-step approach in the context of the goodwill impairment test while U.S. GAAP used a two-step approach for writing-down of impairment of goodwill.
- The second difference exists regarding the initial measurement of contingencies. IFRS include recognition of contingent liability even if the probability test doesn’t meet while in contrast to it, under U.S. GAAP, contractual contingent liabilities and assets are valued at fair market value.
- Under IFRS, NCI is calculated based on a choice between the proportionate share of the fair value of net identifiable assets and fair value, but under U.S. GAAP, NCI is calculated at a fair value of company’s total net assets. The important thing is that the US. GAAP require, including the sharing of goodwill.
- According to IFRS, minority interest should be included in the equity section as a separate item while by the U.S. GAAP; minority interest should be included in the liabilities section as a distinct line item.
- According to IFRS, the deferred tax should be treated as a separate item in the balance sheet while according to U.S. GAAP; deferred tax should be included with the liabilities and assets of Klugen Corporation (James, 2010).
References
FASB. (2007, April 12). FASB issues FASB statements no. 141 (R), business combinations and no. 160, non-controlling interests in consolidated financial statements. Retrieved from https://www.fasb.org/news/nr120407.shtml
James, M. L. (2010). Accounting for business combinations and the convergence of International Financial Reporting Standards with U.S. Generally Accepted Accounting Principles: A case study. Journal of the International Academy for Case Studies, 16(1), 95-108.
Journal Of Accountancy. (2009, June 12). FASB Issues Standards on Securitizations, SPEs. Retrieved from https://www.journalofaccountancy.com/news/2009/jun/20091801.html
