Chapter 8 additional financial reporting issues


Purchase Historical Restatement Historical



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Purchase Historical Restatement Historical

Date Item Cost Ratio Cost


1/15/Y1 Machine X $ 20,000 140/100 $ 28,000

3/20/Y1 Machine Y 55,000 140/110 70,000

10/10/Y1 Machine Z 130,000 140/130 140,000

$205,000 $238,000


December 31, Year 2

Original Restated

Purchase Historical Restatement Historical

Date Item Cost Ratio Cost


3/20/Y1 Machine Y $ 55,000 180/110 $ 90,000

10/10/Y1 Machine Z 130,000 180/130 180,000

$185,000 $270,000
Alternatively, the restated historical cost at December 31, Year 2 could be determined as follows:
December 31, Year 2

Restated Restated

Historical Historical

Purchase Cost Restatement Cost

Date Item (12/31/Y1) Ratio (12/31/Y2)


3/20/Y1 Machine Y $ 70,000 180/140 $ 90,000

10/10/Y1 Machine Z 140,000 180/140 180,000

$210,000 $270,000

Ignoring depreciation, machinery and equipment would be reported on the balance sheet at:

12/31/Y1 $238,000

12/31/Y2 $270,000



2. Antalya Company




a. The nominal interest expense is TL 600,000 (TL 1,000,000 x 60% x 1 year).

b. The purchasing power gain is TL 550,000 (TL 1,000,000 x 387.5/250 = TL 1,550,000 – 1,000,000).

c. The real interest expense is TL 5,000, which equates to a real interest rate of 0.5% (TL 5,000/ TL 1,000,000)



3. Doner Company
Calculation of Purchasing Power Loss

Net monetary assets, 1/1/Y1 $5,000 x 150/100 = $ 7,500

Plus: Increase in net monetary assets 15,000 x 150/120 = 18,750

Net monetary assts, 12/31/Y1 $20,000 $26,250



20,000

Purchasing power loss $ 6,250


GPP Income Statement

Year 1

Revenues $50,000 x 150/120 = $ 62,500

Depreciation (5,000) x 150/100 = (7,500)

Other expenses (incl. income taxes) (35,000) x 150/120 = (43,750)


Purchasing power loss (6,250)

Net income $ 5,000


4. Petrodat Company

Subsidiary in Mexico





GPI










1/1/Y1







100

Average







105

12/31/Y1







110


a.


Balance Sheet, 1/1/Y1




Historical

Restatement

Restated to







Cost

Factor

12/31/Y1 GPP

Machinery and equipment




1,000,000.00

110/100

1,100,000.00

Total assets




1,000,000.00




1,100,000.00
















Contributed capital




1,000,000.00

110/100

1,100,000.00

Total stockholders’ equity




1,000,000.00




1,100,000.00

Income Statement, Year 1
















Historical

Restatement

Restated to







Cost

Factor

12/31/Y1 GPP

Revenues




400,000.00

110/105

419,047.62

Depreciation expense




(200,000.00)

110/100

(220,000.00)

Other expenses




(150,000.00)

110/105

(157,142.86)

Purchasing power loss










(11,904.76)

Income




50,000.00




30,000.00




Calculation of Purchasing Power Loss







Net monetary assets, 1/1




0.00

110/100

0.00

plus: Increase in NMA, Y1*

250,000.00

110/105

261,904.76

Net monetary assets, 12/31

250,000.00




261,904.76













250,000.00

Purchasing power loss










(11,904.76)

* Revenues less other expenses












Balance Sheet, 12/31/Y1

Historical

Restatement

Restated to







Cost

Factor

12/31/Y1 GPP

Cash




250,000.00

none

250,000.00

Machinery and equipment




1,000,000.00

110/100

1,100,000.00

Less: accumulated depreciation




(200,000.00)

110/100

(220,000.00)

Total assets




1,050,000.00




1,130,000.00
















Contributed capital




1,000,000.00

110/100

1,100,000.00

Retained earnings




50,000.00

above

30,000.00

Total stockholders' equity




1,050,000.00




1,130,000.00




Calculation of Average Stockholders' Equity







January 1, Year 1 (restated)







1,100,000.00

December 31, Year 1










1,130,000.00













2,230,000.00

Average stockholders’ equity







1,115,000.00




b. Calculation of profit margin and return on equity on an inflation-adjusted basis

Profit margin




30,000.00

7.16%










419,047.62






















Return on Equity




30,000.00

2.69%










1,115,000.00







Subsidiary in Venezuela


GPI













1/1/Y1







100




Average







115




12/31/Y1







130





a.


Balance Sheet, 1/1/Y1




Historical

Restatement

Restated to







Cost

Factor

12/31/Y1 GPP

Machinery and equipment




150,000,000.00

130/100

195,000,000.00

Total assets




150,000,000.00




195,000,000.00
















Contributed capital




150,000,000.00

130/100

195,000,000.00

Total stockholders’ equity




150,000,000.00




195,000,000.00




Income Statement, Year 1
















Historical

Restatement

Restated to







Cost

Factor

12/31/Y1 GPP

Revenues




60,000,000.00

130/115

67,826,086.96

Depreciation expense




(30,000,000.00)

130/100

(39,000,000.00)

Other expenses




(22,500,000.00)

130/115

(25,434,782.61)

Purchasing power loss










(4,891,304.35)

Income




7,500,000.00




(1,500,000.00)




Calculation of Purchasing Power Loss







Net monetary assets, 1/1




0.00

130/100

0.00

plus: Increase in NMA, Y1*

37,500,000.00

130/115

42,391,304.35

Net monetary assets, 12/31

37,500,000.00




42,391,304.35













37,500,000.00

Purchasing power loss










(4,891,304.35)

* Revenues less other expenses












Balance Sheet, 12/31/Y1

Historical

Restatement

Restated to







Cost

Factor

12/31/Y1 GPP

Cash




37,500,000.00

none

37,500,000.00

Machinery and equipment




150,000,000.00

130/100

195,000,000.00

Less: accumulated deprec




(30,000,000.00)

130/100

(39,000,000.00)

Total assets




157,500,000.00




193,500,000.00
















Contributed capital




150,000,000.00

130/100

195,000,000.00

Retained earnings




7,500,000.00

above

(1,500,000.00)

Total stockholders' equity




157,500,000.00




193,500,000.00



Calculation of Average Stockholders' Equity







January 1, Year 1 (restated)







195,000,000.00

December 31, Year 1










193,500,000.00













388,500,000.00

Average stockholders’ equity







194,250,000.00



b. Calculation of profit margin and return on equity on an inflation-adjusted basis

Profit margin




(1,500,000.00)

-2.21%










67,826,086.96






















Return on Equity




(1,500,000.00)

-0.77%










194,250,000.00








c. Both subsidiaries had the same profit margin and return on equity when these ratios were calculated from unadjusted historical cost information. After adjusting for inflation, the Mexican subsidiary appears to be substantially more profitable than the Venezuelan subsidiary.

5. Auroral Company






Name of Company

% Voting

Rights


IFRSs


U.S. GAAP




Accurcast

100%

Full consolidation

Full consolidation




Bonello

45%

Equity method – unless there is evidence that Auroral exercises effective control

Equity method




Cromos

30%

Equity method

Equity method




Fidelis

100%

Do not consolidate – fair value method

Do not consolidate – fair value method




Jenna

100%

Full consolidation

Full consolidation




Marek

40%

Full consolidation

Equity method




Phenix

90%

Full consolidation

Full consolidation




Regulus

50%

Proportional consolidation or equity method

Equity method




Synkron

15%

Fair value method

Fair value method




Tiksed

70%

Full consolidation

Full consolidation




Ypsilon

51%

Full consolidation

Full consolidation



6. Sandestino Company
a. Restated financial statements:
1. Proportionate Consolidation Method
Sandestino Company

Income Statement

Year 1
Revenues $840,000

Expenses 475,000

Income before tax 365,000

Tax expense 105,000

Net income $260,000
Sandestino Company

Balance Sheet

December 31, Year 1
Cash $150,000 Liabilities $280,000

Inventory 230,000 Common stock 600,000

Property, plant, & equipment (net) 810,000 Retained earnings 310,000

Total $1,190,000 Total $1,190,000



2. Equity Method
Sandestino Company

Income Statement

Year 1
Revenues $800,000

Expenses (450,000)

Equity in Grand Sand’s net income 10,000

Income before tax 360,000

Tax expense (100,000)

Net income $260,000


Sandestino Company

Balance Sheet

December 31, Year 1
Cash $130,000 Liabilities $250,000

Inventory 200,000 Common stock 600,000

Property, plant, & equipment (net) 650,000 Retained earnings 310,000

Investment in Grand Sand 180,000 Total $1,160,000

Total $1,160,000

b. Calculation of ratios:
Proportionate Consolidation Equity Method

Profit margin 260,000/840,000 = 0.3095 260,000/800,000 = 0.325

Debt/equity 280,000/910,000 = 0.3077 250,000/910,000 = 0.275
Sandestino’s profit margin would be higher and its debt-to-equity ratio would be lower if it used the equity method to account for its investment in Grand Sand.
7. Horace Jones Company
The first step in determining which business segments must be reported separately is to determine whether a majority of revenues are generated from external customers. As shown below, this criterion is met by all segments other than C. Therefore, segment C will not be reported separately.


Majority of Revenues Test

A

B

C

D

E

F

Revenues:



















External sales revenue

1,030

350

20

140

130

120

Intersegment sales revenue

30

20

200

10

0

0

Total revenues

1,060

370

220

150

130

120

External revenues as % of total revenues

97%

95%

9%

93%

100%

100%

The next step is to apply the three significance tests to determine whether the second criterion for a reportable segment is met.




Revenue Test

Total

Percentage




Segment

Revenues

of Total




A

1,060

52%

reportable

B

370

18%

reportable

C

220

11%




D

150

7%




E

130

6%




F

120

6%




Total

2,050

100%






Profit or Loss Test

Segment

Segment

Segment Result




Segment

Revenues

Expenses

Profit

Loss




A

1,060

824

236




reportable

B

370

560




(190)

reportable

C

220

158

62







D

150

144

6







E

130

73

57




reportable

F

120

101

19







Total

2,050

1,860

380

(190)






Asset Test

Total

Percentage




Segment

Assets

of Total




A

1,650

47%

reportable

B

650

19%

reportable

C

500

14%




D

280

8%




E

300

9%




F

120

3%




Total

3,500

100%



Of the five business segments that meet the criterion of having a majority of revenues from external sources, only three segments meet at least one of the significance tests. Segments A, B, and E will be reported separately; segments C, D, and F will be combined into Other Segments. However, if total external revenues attributable to separately reportable segments is less than 75% of total consolidated revenue, additional segments must be reported even if they do not meet any of the significance tests.




75% Test

External

Percentage of

Segment

Revenues

Consolidated Revenues

A

1,030

58%

B

350

20%

C

20

n/a

D

140

n/a

E

130

7%

F

120

n/a

Total consolidated revenues

1,790

84%

Because A, B, and E collectively comprise more than 75% of total consolidated revenues, segments C, D, and F will be combined.


The schedule below provides a suggestion for how the information items required to be presented for primary format segments might be presented. A reconciliation is provided for the amounts that appear in the consolidated income statement.





Segment

Segment

Segment

Other

Corp-

Elimin-

Consoli-




A

B

E

Segments

orate

ations

dated

Total revenues



1,060

370

130

490

-

(260)

1,790

Cost of goods sold

600

300

60

300

-

(200)

1,060

Depreciation and amortization

80

100

5

35

10




230

Other operating expenses

120

150

5

55

50




380

Allocated corporate expense

24

10

3

13

-

(50)

-

Segment profit or loss

236

(190)

57

87







120

Interest expense



















30

Income taxes





















30

Net income





















60

























Other information:






















Segment assets

1,650

650

300

900

100




3,600

Segment liabilities

750

300

140

510

-




1,700

Capital expenditures

200

50

20

105

10




385

Depreciation and amortization

80

100

5

35

10




230


8. Schering AG
Schering’s Primary Reporting Format is geographic. The following table indicates the heading used by Schering to report information required by IAS 14 for each reportable primary reporting format segment:


IAS 14 Requirement

Schering heading

Segment revenue

Segment net sales

Segment profit or loss

Segment result

Carrying amount of segment assets

Segment assets

Segment liabilities

Segment liabilities

Cost during the period to acquire property, plant, and equipment, and intangible assets

Investments in intangibles and property, plant and equipment

Depreciation and amortization

Depreciation

Significant noncash expenses, other than depreciation and amortization

Other significant non-cash expenses

Aggregate share of profit or loss and aggregate investment in equity method associates and joint ventures.

Not found, might not be applicable


IAS 14 also requires a reconciliation between the information disclosed for primary segments and the aggregate information in the consolidated financial statements. Schering provides this reconciliation; consolidated amounts are referred to as “Schering AG Group.”
When the primary reporting format is geographical segments, three items of information as shown below should be provided for each business segment whose external revenues are 10% of total external revenues or whose segment assets are 10% or more of total segment assets.


IAS 14 Requirement

Schering heading

Revenue from external customers

External net sales

Carrying amount of segment assets

Segment assets

Capital expenditures

Investments in intangibles and property, plant and equipment

Geographical segments can be determined on the basis of where assets are located or on the basis of where customers are located. If the primary reporting format is geographical segments based on location of assets and customer location is different from asset location, the company should disclose revenues from external customers for each customer-based geographical segment that has 10% or more of total external revenues. If the primary reporting format instead is geographical segments based on customer location and assets are located in geographical areas different from customers, the company should disclose:



  • the carrying amount of segment assets for each asset-based geographical segment that has 10% or more of total external revenues, and

  • capital expenditures during the period for each asset-based geographical segment that has 10% or more of total capital expenditures.






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