Question

yout References Mailings Review ViewH elp Grammarly Search 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 $5,300,000 and $10,300,000, 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 $3,300,000 and $8,300,000, with the timing of cash flow somewhat uncertain. 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 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 $3,300,000 and $9,300,000, with each amount in that range equally likely. d. HW has $10.300,000 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. US GAAP IFRS A Accrue Liability/ do not accrue liability/ long-term Accrue Liability/ do not accrue liability/ liability/ short-term liability long-term liability/ short-term liability B Accrue Liability/ do not accrue liability/ long-term Accrue Liability/ do not accrue liability/ liability/ short-term liability long-term liability/ short-term liability C Accrue Liabilityl do not accrue liability/ long-term Accrue Liability/ do not accrue liability/ liability/ short-term liability long-term liability/ short-term liability Accrue Liability/ do not accrue liability/ long-term Accrue Liability/ do not accrue liability/ liability/ short-term liability long-term liability/ short-term liability TOTAL LIABILITIES D 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? o 9 © © E

Answer 1

Part 1

	U.S. GAAP	IFRS
a.	Accrue liability	5300000	Accrue liability	7800000
b.	Accrue liability	5300000	Accrue liability	5800000
c.	Do not accrue liability		Accrue liability	6300000
d.	Long-term liability	10300000	Short-term liability	10300000
Total liabilities		$20900000		$30200000

Item A

U.S. GAAP = low end of the range =5300000

IFRS = midpoint of the range =(5300000+10300000)/2 = 7800000

Item B

U.S. GAAP = lower end of the undiscounted range = 5300000

IFRS = midpoint of the range =(3300000+8300000)/2 = 6700000

Item C

It is only probable

IFRS = midpoint of the range =(3300000+9300000)/2 = 6300000

Item D

U.S. GAAP = long-term liability

IFRS = Short-term liability

Part 2

Which set of standards helps to meet that goal?

U.S. GAAP

Because it provides the lower total liabilities.