INTERNATIONAL TAXATION

1.IFRS for SMEs

You are the CFO of Takodana, U.S. mid-size private company. Last year your company purchased 30% of the stock of Jakku Company, and you determined that Takodana has significant influence over Jakku (which is therefore an associate).

a) What is the correct accounting method to treat the investment in Jakku under US GAAP?

b) You are considering adopting IFRS for SMEs. What would be the accounting treatment for the investment under IFRS for SMEs? For your answer assume the associate company does not have a published price quotation for its stock (its stock is not traded) and its fair value cannot be measured reliably. Are there a few alternative methods allowed?

Note: in answering part b you should look at the IFRS for SMEs

a) Assume Jakku reported positive earnings this year, but did not distribute dividends. What would be the effect of that on Takodana’s earnings under US GAAP (the method you indicated in part a)? Under IFRS for SMEs (the method/s you indicated in part b)?

You only need to determine whether earnings go up, down, or stay the same. Assume no impairment was needed this year.

b)  If your goal as a CFO is to simplify your accounting methods, which standard system (US GAAP or IFRS for SMEs) allows you to use a simpler method?

2.

Financial Statements Presentation

a. Balance Sheet

Look at the annual reports for the following two companies:

· Union Pacific 2017 annual report: UP 2017 – (link https://www.sec.gov/Archives/edgar/data/100885/000010088518000048/unp-20171231x10k.htm#FinancialStatementsAndSupplementaryData)

· SJ 2017 annual report: SJ 2017 – (link https://drive.google.com/file/d/1B7eRV3YJ_Zy0BAnjcKwmrUPk8csCEqJD/view)

Answer the following:

i. What is the industry of each company? Which accounting standards does each company use?

ii. What is the main structure of each company’s balance sheet? What are the main differences in this presentation structure? (recall our discussion from class)

b. Income Statement:

Look at the annual reports for the following two companies:

· Apple 2017 annual report: Apple 2017 – ( link https://www.sec.gov/Archives/edgar/data/320193/000032019317000070/a10-k20179302017.htm#sCE31BDFF50DA58B8962157DE8467840C)

· Samsung 2017 annual report: Samsung 2017-( link https://images.samsung.com/is/content/samsung/p5/global/ir/docs/2017_con_quarter04_all.pdf)

Answer the following:

i. What is the industry of each company? Which accounting standards does each company use?

ii. Look at the income statements of both companies: Are the expenses classified by function or by nature?

iii. Find in Samsung the following three amounts for 2017: 1) Total wages and salaries; 2) Raw materials and goods used during the period; 3) Depreciation expense for the period (note: find the depreciation expense for the year and not the accumulated depreciation, and also do not include amortization).

iv. Can you find the above three amounts from b(iii) for Apple?

c. Cash Flow Statement

Look at the 2018 Annual report of Vodafone, a UK company that uses IFRS:

https://www.sec.gov/Archives/edgar/data/839923/000110465918039071/a18-6491_120f.htm

Find the cash flow statement. We learned in class that IFRS allows more freedom as to the classification of some cash flow items (whether they are operating, investing, or financing), while US GAAP uniquely prescribes the category with no choices available. In Vodafone’s cash flow statement find four items/lines where the company classified a cash flow in a category that may be different than the category prescribed in US GAAP, and answer the following:

i. What are the four items? (note that dividends paid would not be one of the four differences in Vodafone’s case, because Vodafone classified those payment in the financing category, which is also the only category allowed in US GAAP. You need to find four items that may be classified differently in US GAAP).

ii. For each of the items, explain what the choices for presentation in IFRS are, and what the requirement in US GAAP is.

iii.  If those items would have been presented as required in US GAAP, what would be the percentage change in the cash flow from operating activities for Vodafone in 2018? (Calculate the cash flow from operating activities as it would be in US GAAP and compare it to the cash flow from operating as it is currently presented in IFRS).

3.

IFRS Hierarchy: IAS 8 and the IFRS Framework

The Fun-Guy company acquires a mushroom farming business. The CFO of the company is considering how to account for the mushrooms. IFRS has a standard on agriculture (IAS 41) which requires that animals and plants should be presented at their fair value. However, when visiting the mushroom farming operation, the CFO is surprised to learn that mushrooms are neither plants nor animals—they are fungi. Furthermore, he cannot find where in IFRS it is specified how to account for the fungi that Fun-Guy is farming (i.e. the living mushrooms) as IAS 2 (which deals with inventory) and IAS 16 (which deals with PP&E) exclude biological assets from their scope.

Explain in brief what are the sources that IFRS requires Fun-Guy’s CFO to consider when making his accounting policy choice, and what do you think would be the likely choice of policy (Note: you are not required to know the relevant IFRS standards and rules, and so your discussion should be general and should not be more than 3/4 – 1 page long).

4. IFRS in the US?

Many regard international comparability and the avoidance of dual reporting for parent and subsidiaries as the two most important benefits from a possible adoption of IFRS in the US. Find a large U.S. domestic company that you believe will receive both of the above benefits from IFRS adoption. Specifically, show the following:

a) The company has international presence and foreign subsidiaries:

Look into the company’s financial statement (or other information sources) to see where the company operates in the world and what percent of its operations are international. Are there foreign subsidiaries? (if available, present a list of subsidiaries). Are these subsidiaries operate in IFRS using countries?

b) The company’s main competitors are using IFRS:

In this company’s industry, are the main competitors using IFRS? US GAAP? or other GAAPs?  (List the main competitors and show whether they are using IFRS, US GAAP, or other GAAPs). The more competitors that are using IFRS in the industry, the more the company will benefit from adopting IFRS, due to increased comparability.

Important notes:

i. You can look up countries and what GAAP they are using in the following web address (that we also looked at in class):

https://www.ifrs.org/use-around-the-world/use-of-ifrs-standards-by-jurisdiction/#profiles

(note: if the link does not open, copy the address to your browser)

ii. Try to find a company that satisfies both requirement: (a) and (b) above, not just one of the requirements