International business

The implementation of FAS 160 and FAS 141R tends to have a significant impact on the business parts including testing for goodwill impairment, parent ownership interest in subsidiaries, and also existing non-controlling interest (James, 2015). With its implementation, the financial ratios that will be affected include debt-to-equity ratio and debt to asset ratio. The ratios will be affected because of the increase in equity through Reclassification of non-controlling assets. The assets that are acquired in the future and also the equity will probably increase because the rules follow that they are revalued at higher market value. Hence, it will lead to further decline in the ratios.

Effect on company acquisition strategies

With the recent changes, Klugen Corporation would have a long-term change in its acquisition strategy and also the potential for growth. The adoption of the standards will mean that all the acquisition done will be valued at full market value (James, 2015). When the acquisition is valued at the full market value, the goodwill will increase and also the noncontrolling interests will also increase. The undervaluation of the assets tends to raise the assets. When the assets are overvalued, it indicates that they will decline at the full value. The acquisition of assets is normally considered as being an expense to the organization, and with regards to the new standards, the cost of acquiring the assets will be an expense incurred and that will means that the income will decline. For Klugen to meet its profits, the acquisition strategy will need to change so as to avoid negatively impacting the growth.

Reason for FAS 141R and FAS 160

FASB provided the standards that were aimed at improving the reliability, comparability, and relevance of the financial statements. The issuance of the standards was aimed at improvement on comparability and relevance of information and focus application matters by accountants on the accounting means and also disclosing the liabilities and assets resulting from contingencies in the business combinations. FAS 141R and FAS 160 were components of IASB and FASB joint project that aimed at accelerating conjunction in the field of accounting (James, 2015). FAS 160 was introduced so as to redefine what is considered as consolidated net income and group income under the GAAP. FAR 141R provides a broader definition of business and does not allow mutual entities to use the pooling of interest accounting as the merge (Carcello & Williams 2008). With these standards, they tend to ensure consistent reporting standards when disclosing non-controlling interests in the statements.

Qualifying SPEs

Based on FASB Codification, the qualifying SPEs are the trusts or legal entities that do meet the conditions set in FAS 140. The entities involve the securitization of the mortgages. The entities were established to measure business operation, acquire external funding advantage that needs transparency, provide liquidity, and also acquire knowledge of risks. The concepts are not available under IFRS. When FAS 166 does eliminate the concept of qualifying SPEs, it will facilitate convergence in this area of accounting (Carcello & Williams 2008). As a result, there will be improved transparencies for the investors on the activities of business and risk outcome in the financial assets.

Changes for management

With the adoption of IFRS, the management needs to consider certain issues like the cost of business combination whereby the direct cost is considered as an expense during acquisition rather than reporting capitalized amount in acquisition cost. Another factor that the management needs to consider is the negative goodwill. The negative goodwill that is recognized by the firm is considered as a gain and not a reduction in long-term assets for the year of acquisition (Shamrock, 2012). Therefore, the management has to recognize the negative goodwill as being a gain rather than a reduction of the long-term assets. The third thing to consider is non-controlling interest share of the income. The firm will have to recognize the NCI as being a deduction from the consolidated income to acquire income to major investors rather than recording in the other income, expense, losses, and gains in the income statement. The management must also be aware of the assets and liabilities of the subsidiaries. With the new accounting, it is going to report all the liabilities and assets in the fair value for 100% of evaluation at the acquisition date rather that at ownership percentage.

Differences between IFRS and US GAAP

As identified in the case study, the difference that exists related to the calculation of goodwill at the time of acquisition, definition of control, the classification of extraordinary items, research and development costs, and shares considered for determining control. Despite the differences, the principle difference that can be identified is that GAAP is rule based while IFRS is principle based (Shamrock, 2012). With the treatment of inventory costing, GAAP tends to allow the LIFO assumption to be applied in inventory costing. In the case of IFRS, LIFO is not allowed as IFRS normally require the component of depreciation.

Reference

James, M (2015). Accounting for business combinations and the convergence of the international financial reporting standards with the US Generally Accepted Accounting Principles, Journal of International Academy for Case Studies, 16(1)

Shamrock, S (2012). IFRS and US GAAP with the website. John Wiley & Sons.

Carcello, J & Williams, J (2008). GAAP guide level A 2009 CCH.

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