Question

HolmesWatson (HW) is considering what the effect would be of reporting its liabilities under IFRS rather than U.S. GAAP. The following facts apply:

1. 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 $6,600,000 and $11,600,000, with each amount in that range equally likely.
2. 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 $4,600,000 and $9,600,000, with the timing of cash flow somewhat uncertain. HW considers these effects of the time value of money to be material.
3. HW is defending against another lawsuit for which management believes HW has a slightly better 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 $4,600,000 and $10,600,000, with each amount in that range equally likely.
4. HW has $11,600,000 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?
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Answer 1

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?

Refer to the below images for more detailed solution with explanation.

ment amount for would each item, indicate how treatment differ between u.s. GAAP and of the IFRS- Reapytirement to Item accrue a (a): would be reagoired Holmer Watson liability probable of the under both u.s. GAAP and can be reasonably lability would differ and TERS, because the loss is estimated, but the amount under the two- under os GAAP, the liability would be for 6600000, the but end of the range, while under the liability would be for I 9100000 [s 116000 + $ 6600000] the midpant saverage of the range. -* - - Item (b): under IFRS, present values would be osd, so the relevant midpoint of the range would be aarved as a liability would be $ 7600000 (19600 boot 46000o ]. Under U.S. GAAP prekent values would not be use given the uncertain timing of cash flows. So Holmes watson would still use the lower end of the undiscounted range, lor) & 6600000 Item (C). This item is only probable according to SERS use of the term So would only be accroed as a Liability under IFRS for the midpoint of the range (Averge of the range $(7600000) [ 10600 000 + 1 4 60000 7.

Item (d): This under US GAAP, the financing was but not before item would be classified as long-term but short-term under IFRS, given that obtained prior to financial statement issuance the balance sheet date. o consider the total effect of items ard. It tow's goal is to show the lowest total liabilities, which set of Standards, os. GAAR (ON) TERS best helps it meet the goal ? Reajustement a Total liabilities under + 80 & 11600000 o.s. GAAR equal $6600000 + & 6600000 = $ 24800 000 Toral liabilities under IFRS + 8 7600000 + $ 160.000 evval & 9 100 000 + $7.100.000 & 35400000 provides In the given present case, u.s. GAAP the lower total krabilities.