Accounting for Business Combinations

Question 1

Because of the adoption of the FAS141R and FAS, several effects may be experienced on the business combinations that the parent company and the interest in subsidiaries. This also includes the present non-controlling interests and testing goodwill impairment. The financial ratios that may experience an effect as a result of the implementation entail the return of equity, which measures the profit percentage after taxation and divided shareholders’ equity. The second effect attributed to the implementation is the debt to equity ratio, gauging the company’s percentage and leverage. This is achieved by taking the total liabilities and divided by stakeholders’ equity. Also, the adoption will impact the book to book market ratio, using an assessment tool of the market value and securities’ value of a corporation.

Question 2

By adopting the two mechanisms, FAS141R and FAS would affect the corporation’s acquisitions. This would mean that every future acquisition would be valued at a full market rate. If the acquisitions are prized at 100% of the value, it may increase the non-controlling interest. Undervaluation of the assets will result in a rise in the assets. If the assets are overestimated and because they are priced at a full market rate, it would mean a decrease in the full valuation. The acquisition of assets may be considered as costly to the corporation. According to James (2010), the assets’ cost may be expensed as incurred, leading to a decline in income. Therefore, for the corporation to realize the desired profit margin, a change in the acquisition strategy may need to be altered. The main reason is to avert the negative impacts on growth.

Question 3

A principal aim for the issuance of FAS 141R and FAS 160 was to develop several adjustments between both the IFRS and U.S. GAAP utilized to streamline the universal merging of accounting principles and processes. Moreover, they were dispensed as a development in the significance and comparability of data, and centering application affairs by auditors on accounting procedures, revealing assets and liabilities ensuing from eventualities in business mergers. FAS 160’s fundamental duty was the establishment of accounting and reporting principles to guarantee reliability in the release of non-controlling interest in merged financial statements. FAS 160 was also meant for collecting  NCI accounting ad IFRS prerequisites for refining the comparability, directness, and financial data in the merged financial statements.

Question 4

According to James (2010), qualifying SPEs are extra-legal expenditures coherent with the FAS 140 conditions. The qualifying SPEs have a mortgage securitization and are also do not exist under the IFRS authority as the IASB fails to acknowledge the qualifying SPEs. The FAS 166 effects entail bringing a convergence in accounting as a result of the IASB failing to acknowledge the SPEs.  The case study indicates that Irma has two accounts. The first report entails the FAS 166 “Accounting for allocation of financial resources” and FAS 167 “Alterations to FASB analysis no. 46R”. The FAS 166 eliminates any notification of qualifying SPEs, and FAS 167 sanctions the merging.

Question 5

If the corporation opts to incorporate the IFRS, specific alterations are expected in the management and financial statements. The IFRS is likely to affect the firm’s source of revenue. One of the adjustments would be experienced in affiliates’ liabilities and assets. Previously, the asset revaluation would be carried out on a percentage basis, reliant on the possession.  Nonetheless, the new standard necessitates that they are re-evaluated at a market rate for any particular date they were procured (James 2010). Secondly, the alterations would also necessitate the negative goodwill will be viewed as a gain for the year of acquisition.  According to James (2010), NCI should not be acknowledged as a liability but as equity in the new principles. This means that the NCI’S shall be presented as distinct deductions from the combined revenue of the company. It is imperative to notice they were earlier categorized as other income, expenditure gains, or losses. Also, as compared to the old system, the NCI shall now be exponentiation of the NCI percentage and the reasonable market rate of the affiliates’ resources.

Question 6

The critical variations between IFRS and the U.S GAAP are founded on various aspects. They comprise of deferred taxes, balance sheets, financial statements, bank overdrafts, and minority interest. According to James (2010), US GAAP indicates that deferred excises may be incorporated in the enterprise’s overall assets and liabilities. On the other hand, IFRS indicates that deferred excises are illustrated as a distinct line on a balance sheet.  U.S GAAP offers financial statements the capacity to incorporate the balance sheets, income statements, and cash flow. IFRS, only authorizes the balance sheets, alterations in equity, and income statements. Another contrast is seen in the balance sheet, which depicts the current and non-current assets. Liabilities are illustrated as a separate expenditure. In U.S GAAP, bank overdrafts are generally recorded as financial activities while IFRS approves the inclusion of overdrafts in cash if used in asset management.

 

 

References

James, M. L. (2010). Accounting for business combinations and the convergence of International Financial Reporting Standards with the U.S. Generally Accepted Accounting Principles: A case study. Journal of the International Academy for Case Studies, 16(1), 95-108.

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