What key financial ratios will be affected by the adoption of FAS 141R and FAS 160? What will be the likely effect?
There are a number of key ratios that are likely to be affected by the adoption of FAS 141R and FAS 160. These are the debt to equity ratios and debt to asset ratios. Based on the study, it can be observed that the aforementioned components, FAS 141R and FAS 160 are likely to lead to a decrease in the ratios. This is due to the fact that non-controlling and reclassifying assets result in increased equity (Marianne, 2010). In addition to this, the assets that are acquired later on, in addition to the equity are likely to increase since they will have to be revalued in the industry at a higher price, thus leading to an additional decline in the ratios. Besides, the book-to-market ratio will also be affected. It is used in measuring the value of securities of a particular Company, in addition to the market value of its commodities.
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Could any of the recent and forthcoming changes affect the company’s acquisition strategies and potentially its growth?
It is likely that this is true. As mentioned above the adoption of FAS 141R and FAS 160 would imply that all acquisitions made later on will receive a valuation based on the entire market value (Marianne, 2010). In a situation where acquisitions are achieved at a full market value, there is no goodwill involved. The non-controlling interests, nevertheless, increase. Also, undervaluation of assets manages to raise such assets. The overvaluation, on the other hand, manages to decrease the assets, and due to the fact that they are valued at full value in the market, this would mean that the end up declining in a similar manner. Generally, acquisition assets emerges as one of the Company`s expenses. In such a case, this implies that costs incurred in the acquisition of assets will end up being expensed as they are incurred (Marianne, 2010). As a result, the Companies income will end up reducing in the long-run. If the organization needs to attain maximum profit, the strategy stated earlier will have to be ignored to avoid having a negative impact on its growth. The negative goodwill is also likely to end up being recognized as a positive return as opposed to the proportionate reduction of assets.
What were FASB’s primary reasons for issuing FAS 141R and FAS 160?
The main reasons whey FAS 141R and FAS 160 are issued is due to the fact that they increase the relevance of financial statements. Also, the components are regarded as having the ability to influence the comparability and reliability of the same financial statements (Marianne, 2010). In addition to this, projects undertaken jointly with the initiatives managed to facilitate convergence in accounting (Marianne, 2010). This ends up making the FAS 141R and FAS 160 vital components of such undertakings.
What are qualifying SPEs?
According to the Financial Accounting and Standards Board (FASB), SPEs are defined as other legal entities in line with the FAS 140 (Marianne, 2010).
Do they exist under IFRS?
They do not exist under IFRS. In order for SPEs to be qualified, mortgage securitization has to be reinforced. As a result, they cannot exist under IFRS due to the fact that the International Accounting Standards Board (IASB) does not recognize the concept of having to qualify SPEs.
What is the effect of FAS 166 eliminating the concept of qualifying SPEs on the convergence of accounting standards?
Based on the idea that the International Accounting Standards Board fails to recognize and qualify SPEs, there is a probability that the elimination of the concept of having to offer such qualification to SPEs will result into a convergence in the accounting domain.
If the company adopts IFRS, what changes should management be aware of?
There are a number of changes that are likely to occur in the event that the company adopts IFRS. Some of the alterations that the management has to be aware of pertain to the changes in the financial statements. This is due to the fact that they have the capability of affecting the overall net income attained by the firm. Some of the changes that are expected to occur are elaborated below.
Negative goodwill: A proportionate decline in the long-term assets of the firm is what this factor basically entails. When changes are, however, experienced it is expected that this negative factor should be accounted for in the financial statements as an additive or contributor for that particular year ( Afterman, 2009 ).
Alterations in the assets and liabilities of the subsidiaries. Prior to the adoption of IFRS, the assets were revalued based on the percentage of ownership at the firm. Now that the changes have taken place, there would be a requirement that such valuations are done at 100% market value based on the specific date of their acquisition ( Afterman, 2009 ).
What are the principle differences between IFRS and U.S. GAAP?
It is important to first understand that IFRS stands for international Financial Reporting Standards whereas, GAAP is the Generally Accepted Accounting Principles. The significant disparity between the two elements lies on how various factors are treated in both cases. Such factors involve overdrafts, balance sheet, financial statement, documents, minority interests and deferred taxes in addition to other components ( Needles & Powers, 2013 ).
In IFRS deferred taxes are revealed distinctively on the balance sheet, whereas in the U.S GAAP, they are included along with the assets and liabilities of a particular Company ( Needles & Powers, 2013 ). Also, another disparity lies on the idea that IFRS permits financial statements to include the balance sheet, income statement, changes in equity, and cash flow statement contrary to the U.S GAAP which allows the inclusion of balance sheet, income statement, cash flow statement, and statement of comprehensive income. Besides, balance sheets in both cases are treated differently ( Needles & Powers, 2013 ).
The IFRS is for the idea that current and non-current assets should be put alongside each other contrary to the U.S GAAP which requires that such elements are placed separately. In a situation where bank overdrafts are used in managing cash assets, the IFRS allows for their inclusion in cash whereas, the U.S GAAP charges the overdrafts as financial activities. The IFRS also requires that minority interests are included as equity in a separate line but the U.S GAAP prefers that they are included as part of liability incurred. Extraordinary occurrences are allowed by the U.S GAAP, although under unusual occurrences whereas the IFRS does not allow for such an inclusion ( Needles & Powers, 2013 ).
References
Afterman, A. (2009). U.S. GAAP and IFRS (1st Ed.). New York: WG & L, Thomson Reuters.
Marianne, J. 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.
Needles, B. & Powers, M. (2013). International financial reporting standards (1st Ed.). Mason, OH: South-Western, Cengage Learning
