Accounting for Combinations: Impact of IFRS and GAAP on Business

This report examines the accounting for business combinations, focusing on the convergence of International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (GAAP). It highlights the impact of FAS 141R and FAS 160 on key financial ratios like Return on Equity (...Read More

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Accounting for Combinations of Business
UNIVERSITY NAME
STUDENT NAME
STUDENT ID
COURSE
DATE

Accounting for Combinations of Business 2
EXECUTIVE SUMMARY.
The key purpose for this report is to display vividly the changes that are seen in the
accounting for various fields but mainly business combinations. More so, the convergence of
IFRS and also GAAP which is in line with US. The case study stresses the principle impacts
on business’ financial statements across the world and indicating the crucial critical decisions
which are created by the management. The differences between US. GAAP and IFRS are
brought to light to enable learners to understand them perfectly.

Accounting for Combinations of Business 3
Table of Contents
Introduction.........................................................................................................................................4
Key Financial Ratios and Effects............................................................................................................5
Effects of forthcoming Changes on Business’ Acquisition and Growth.................................................6
Primary reasons for Issuing FAS 141R and FAS160...............................................................................6
The meaning of qualifying SPEs............................................................................................................6
Existence of qualifying SPEs IFRS..........................................................................................................6
The impact of FAS166 in Elimination of Qualifying SPEs.......................................................................6
Differences between IFRS and US. GAAP..............................................................................................7
References............................................................................................................................................8

Accounting for Combinations of Business 4
Introduction.
The accounting field is a wide and important part in business. In case the company has weak
strategies in recording of various transactions which take part in the company, there is high
chances that huge amount of losses will automatically occur. This is the reason for conducting
this case study and come up with good ideas which will improve this field of accounting in
respect with the rules which are stated in US. GAAP and IFRS.It is well known that GAAP
refers to the commonly documented set of rules as well as the procedures that are strategically
intended to administer company accounting and reporting of financial records. IFRS forbids
retroactive use of IFRS principles in some situations. The issue of SPEs which are termed as
qualifying are recognized and advising the management in any change that may be caused by
these(Courtis,2013). These accounting standards work as one in provision of guidelines in the
financial statements of any business (Flesher & Flesher,2016).

Accounting for Combinations of Business 5
Key Financial Ratios and Effects.
In the year 2009, the financial ratios which were highly affected by FAS 141R and FAS 160
were the companies’ assets together with liabilities. Assets refers to various items that are
maintained by an individual or an organization which are viewed as having worth and
available to encounter obligations, bequests and even commitments. For example, company’s
machines, buildings and workers among the others. In the other hand, liabilities are termed as
what the company owes to other parties. It always results in outflow of funds from the
business. To period after enactment of FAS 141R and FAS 160, the possession subsidiary
interests have substantial effects upon the performance of the business (Barth, 2018).
Therefore, the affected financial ratios: -
Return on equity(ROE) expressed as ROE=Net annual income/Stakeholders’ equity. This
ratio refers to the measurement of profits which the business receives in their operations with
relationship of the equity. It also shows the rate at which the organization uses its investments
accordingly to cause the growth of earnings.
The debt-to-equity ratio is simply determined by first summing up all liabilities in the
business then divide the resultant value by total stakeholder’s equity. This type of ratio is
applied by the company to estimate its monetary leverage overtime. In some situations, the
company may experience high-debt-to-equity ratio which is adversely affect its operational
level. This means that the firm is not in a position to produce enough sums of funds to satisfy
its bad debt obligations.
The book-to-market ratio is also known as price to book ratio. It is mainly used in valuation of
the present market worth of a company in relation to its book value. It aimed at ascertaining if
the stock of a corporation is valued highly or valued below the marketable price. This activity
is realized by comparing price of shares which are outstanding in the corporation with the net
assets of that corporation. This ratio is applied mostly in financial institutions such as
banks(Robert,2015). To determine this ratio, we start by finding the difference between the
total value of assets in the company and the total liabilities. The resultant amount is divided
by the total amount of outstanding shares on such a particular date.

Accounting for Combinations of Business 6
Effects of forthcoming Changes on Business’ Acquisition and Growth.
IASB together with FASB have eradicated a number of differences which existed between
IFRS and GAAP of US through introduction of recent standards (Beaver, 2016). These
standards are responsible for effective financial reporting of the business entity and
accounting for various daily records. The reclassification of assets in the business which are
not in control will causes a relative increase in the level of equity thus improvement in its
growth. This will mean that there is a report of more assets and also liabilities at reasonable
worth, hence Klugen will recognize a high acquisition strategy in a near future.
Primary reasons for Issuing FAS 141R and FAS160
According to FAS 141R and FAS16, the need for financial statements which possess high
level of significance and consistency give rise to these crucial standards. Moreover, they
played a key role in financial accounting ground in acceleration of convergence through the
combined tasks that were undertaken by IASB together with FAS141R (Calum & Richard,
2016)
The meaning of qualifying SPEs.
Altman (2018), argued that these are trusts or supplementary lawful entities which are in
respect to the conditions and guidelines of FAS140.Qualifying SPEs are financial term which
entails specific kind of variable interest. All the various activities of SPEs are substantially
limited as well as specified completely in the lawful booklets that established the body.
Existence of qualifying SPEs IFRS
They do not exist. This is because they involve in securitization of mortgage which is not
recognized by IASB.

Accounting for Combinations of Business 7
The impact of FAS166 in Elimination of Qualifying SPEs.
As stated above that IASB does not identify qualifying SPEs is vivid that through the actions
of FAS 166 in elimination of qualifying SPEs by FAS166 would aid the convergence in
accounting (Osteryoung, Constand & Nast, 2012).
Issues to be taken into consideration are:
I. Direct and indirect Cost in the business: Klugen company is in high chances of
recognizing direct costs which occurs in the business as expensed during the date of
acquisition. This record is incorrect because such costs should be considered as
partial capitalized value in the cost of acquisition.
II. The properties and obligations of affiliates: Instead of new accounting reports total
amount of properties and obligations in fair worth for 100% of reassessment at the
percentage of Klugen’s ownership, it does so mistakenly at the date of acquisition.
III. Adverse goodwill: instead of the company identifying adverse goodwill as a decrease
in the assets which are considered as long-term, it recognizes such situation as an
achievement.
IV. Non-controlling interest in statement of financial position: The Klugen will fully spot
NCI as equity instead of recording it as either equity or liability (Mishler, Mark ,2017).
V. Assessment book of non-controlling interest: Klugen will work out NCI at fair
worth of company’s disposable assets then multiplying by NCI rate instead of
determining it at book value (James, 2010).
Differences between IFRS and US. GAAP.
IFRS portrays a high level of principled-based charactestic while US GAAP is normally seen
as huge rule- based. The main difference that is very visible between these standards is under
the area of inventory. Mostly, US GAAP authorizations assumption of LIFO, which means
that the last inventory to be purchased are the first to be consumed while IFRS does not allow
the criteria of LIFO. IFRS needs decline of component which is not for case of GAAP
(Agiomirgianakis, Voulgaris & Papadogonas,2016).

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References
Accounting Ethics: Crisis in accounting ethics, 4(3), 38.
Agiomirgianakis, G., Voulgaris, F., & Papadogonas, T. (2016). Financial factors affecting
profitability and employment growth: the case of Greek manufacturing. International
Journal of Financial Services Management, 1(2-3), 232-242.
Altman, E. I. (2018). Financial ratios, discriminant analysis and the prediction of corporate
bankruptcy. The journal of finance, 23(4), 589-609.
Barth, M. E. (2018). Global financial reporting: Implications for US academics. The
Accounting Review, 83(5), 1159-1179.
Beaver, W. H. (2016). Financial ratios as predictors of failure. Journal of accounting
researcAltman, E. I. (1968).
Calum, F. & Richard, C. (2016). There may be troubled ahead. Journal of Accounting &
Finance,4(3),1-4.
Courtis, J. K. (2013). Modelling a financial ratios categorical framework. Journal of Business
Finance & Accounting, 5(4), 371-386.
Flesher, D. L., & Flesher, T. K. (2016). Ivar Kreuger's contribution to US financial reporting.
James, M. L. (2010). Accounting for Business Combinations and the Convergence of
International Financial Reporting Standards with US Generally Accepted Accounting
Principles: A Case Study. Journal of the International Academy for Case Studies, 95-
108.
Mishler, Mark D. "Currency turmoil, price, and profit in global markets: How to manage the
risks of volatile foreign currency exchange rates." Journal of Accountancy 223.3
(2017): 50

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Robert, H. (2015). How are we doing? FASB chairman Robert Herz says that meeting the
demand for improved financial reporting standards is a matter of balance. Internal
Auditor, 64(1), 51-55.