Question

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HolmesWatson (HW) is considering what the effect would be of reporting its liabilities under IFRS rather than U.S. GAAP. The following facts apply: a. HW is defending against a lawsuit and believes it is virtually certain to lose in court. If it loses the lawsuit, management estimates it will need to pay a range of damages that falls between $5,200,000 and $10,200,000, with each amount in that range equally likely. b. HW is defending against another lawsuit that is identical to item (a), but the relevant losses will only occur far into the future. The present values of the endpoints of the range are $3,200,000 and $8,200,000, with the timing of ncertain. HW considers these effects of the time value of money to be material. C. HW is defending against another lawsuit for which management believes HW has a slightly worse than 50/50 chance of losing in court. If it loses the lawsuit, management estimates HW will need to pay a range of damages that falls between $3,200,000 and $9,200,000, with each amount in that range equally likely. d. HW has $10,200,000 of short-term debt that it intends to refinance on a long-term basis. Soon after the balance sheet date, but before issuance of the financial statements, HW obtained the financing necessary to refinance the debt. Required: 1. For each item, indicate how treatment of the amount would differ between U.S. GAAP and IFRS. 2. Consider the total effect of items a-d. If HW's goal is to show the lowest total liabilities, which set of standards, U.S. GAAP or IFRS, best helps it meet that goal?

Answer 1

Answer:

1 .

a)

Here the loss is reasonable and most likely evaluated so the organization needs to collect liability ,however it will change in US GAAP and IFRS.

In US GAAP it is $ 52,00,000 and in IFRS it is ($52,00,000+$1,02,00,000)/2=$77,00,000

b)

Under US GAAP present worth isn't utilized in view of unsure planning ,so it is lower end and it is $32,00,000 and in IFRS it is mid point and it is (4$2,00,000+$82,00,000)/2=$62,00,000

c)

As per IFRS this thing is plausible and accumulated as midpoint and it seems to be ($32,00,000+$92,00,000)/2=$62,00,000 according to US GAAP it is zero.

d)

It is named long term in US GAAP and short term according to IFRS.

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2)

Total liability under,

• US GAAP = $ 52,00,000+$32,00,000+$0+$1,02,00,000 =$1,86,00,000
• IFRS =$77,00,000 +$62,00,000 +$62,00,000+$1,02,00,000 =$3,03,00,000

Least liability is as per US GAAP.