The Key Financial Ratios Affected by the Adoption of FAS 141r and FAS 160

Q1 the key financial ratios that will be affected by the adoption of FAS 141r and FAS 160 are listed below; 

i.) Debt to Asset Ratio: This is the ratio of total debt (long-term liabilities) and total assets (the sum of current assets, fixed assets, and other assets such as 'goodwill'). Companies with high debt/asset ratios are said to be highly leveraged. The higher the ratio, the greater risk will be associated with the firm's operation. In addition, high debt to assets ratio may indicate low borrowing capacity of a firm, which in turn will lower the firm's financial flexibility. Like all financial ratios, a company's debt ratio should be compared with their industry average or other competing firms. In the case of Klugen corporation, it’s clear that the debt to asset ratio will decrease. 

ii.) Debt to Equity Ratio: This is simply the division of debt to equity. It’s to show the amount of proportion of shareholders capital/equity. When debt is used to finance operations more income will be realized without necessarily the need for external financing. If this concept realizes more revenue, then the shareholders will receive more earnings among themselves but if the debts financing surpasses the revenue earned by the firm on the debt through business operations and business investments then the shareholders may feel the pinch. If the cost of debt is too huge, this could lead to liquidity problems and eventually bankruptcy. This could dive rating to the shareholders as they might lose everything. 

iii.) Book-to-Market ratio: This ratio basically measures the value of a company by comparing the book value of the company vs the market value. The market value is usually derived from the stock market. a company will be said to have been overvalued if the performance in the market is higher than that of the book value, otherwise, it will be undervalued if the book value is trading higher than the market value. Company’s use of this ration when trying to compare the net asset value vs its market value. 

In the case of a klugen company, this ration will be affected adversely because when and if assets are recognized at the full market value the ratios will change in respects to the changes in the markets values. This could either lead to a higher value or a lower value 

Question 2. Could any of the recent and forthcoming changes affect the company’s acquisition strategy and potentially its growth? 

Yes. Reason being that accusation will be done using full fair market value, ideally, this will affect goodwill and Non-controlling by increasing them, (Alexander, 2008). Also, the market value will cause major effects in the valuation of assets, basically assets will be overvalued since this will be at fair market value hence decline in the full value of assets, the opposite of this is true also. acquisition of assets will affect the company’s expenditure, with the new standards this expense is captured as incurred, therefore there will be a reduction in income, (Marianne, 2018). So, for the company to achieve its set target for profits, then they would have to re-evaluate their strategy again. 

Question 3. What are the primary reasons for issuing FAS 141R and FAS 160? 

FASB issued FAS 141R and FAS 160 to change longstanding accounting rules for business combinations and non-controlling interests, respectively. this is to basically eliminate the existing differences between GAAP and IFRS and to more faithfully represent economic events, (Marianne, 2018). 

There are and there have been significant differences in the U.S GAAP and IFRS. This differences sometimes affect adversely the operations between two entities that subscribe to U.S GAAP and IFRS separately majorly in terms of the acquisition. As evident in the example of Klugen corporation. Companies that have subsidiaries in regions or countries that subscribe to IFRS standards pose a major challenge to their parent companies when compiling consolidated financial statements of the company 

Question 4. 

a.) What are the qualifying SPEs? 

It’s an entity used as a methodology to isolate risk by the parent company. Its operations are very limited and its off-the-balance-sheet. 

SPEs are crucial and important finance tools. the banking community and the investment community at large have benefited as SPEs facilitated bank balance sheet management and facilitated the creation of new investment asset classes. Reaction to recent financial scandals threatens to cripple some of the legitimate and beneficial uses of SPEs while failing to address the underlying causes of the problem. 

Because of their normally off-balance sheet, bankruptcy remote, and private nature SPEs can be used for both legitimate and illegitimate uses. Several structures lend themselves to money laundering, disguising loans as revenue to misstate earnings, concealment of losses, embezzlement, and other accounting improprieties. Even when used legitimately, the way the issuance of SPEs is represented is sometimes ethically marginal. 

b.) Do they exist under IFRS? 

Qualifying SPEs does not exist under IFRS, as it’s not recognized under ISAB 

c.) What is the effect of FAS 160 eliminating the concept of qualifying SPEs on the convergence of accounting standards? 

Thus, the elimination of qualifying SPEs by FAS 166 facilitates convergence in this area of accounting. 

Question 5. If the company adopts IFRS, what changes should the management be aware of? 

If the company adopts IFRS there will be a significant impact, this is so because IASB provides for valuing non- controlling interest at fair value in the following scenarios 

i.) Using a share of goodwill 

ii.) Excluding the goodwill 

In this case, (Nobes, 2006), the consolidated entities total assets and equity will be adversely affected. Also, because exercisable shares are factored in under IFRS when calculating for control, a currently unconsolidated entity could be subject to consolidation under IFRS. Contingent assets acquired in an acquisition are not recognized under IFRS but may be recognized under current U.S. GAAP. This difference could increase assets. 

Question 6 What are the principal differences between IFRS and U.S GAAP? 

The principal difference between GAAP AND IFRS is the fact that GAAP is rule-based, on the other hand, IFRS is principle based. 

Principle-based framework opens possibilities for divergent opinions and interpretations of similar transactional. As a result, this could prompt extensive disclosures in the financial statements, (Marianne, 2018). Another notable difference is the methodology used to asses an accounting treatment, under GAAP, it inclines more to literature for its research whereas under IFRS the review focusses thoroughly on the pattern. 

Some of the difference between the IFRS and US GAAP are; 

i.) Development costs — They are recognized as the cost under GAAP while if the conditions are met under IFRS then they can be capitalized. 

ii.) Earning-per-Share — while computing earnings- per share under IFRS, it does not average to interim period calculation, however under GAAP the opposite is true 

iii.) Statement of Income — Statement of income as considered Under IFRS, extraordinary items are not segregated in the income statement. With GAAP, they are shown below the net income. 

iv.) Inventory — The concept of ‘Last in first Out’ is not recognized under IFRS, but GAAP leaves the option for companies to decide on which to take on. 

v.) Consolidation — control models are used mostly under IFRS, but GAAP tends to feature risk-reward models mostly. 

References 

Alexander, D., & Archer, S. (2008).  International Accounting/Financial Reporting Standards Guide 2009 . Cch. 

Marianne, L., J., (2018). Accounting for business combinations and the convergence of the international financial reporting standards with U.S. generally accepted accounting principles: a case study.

Nobes, C., (2006). The survival of international differences under IFRS: towards a research agenda.  Accounting and business research ,  36 (3), 233-245.