Question

6

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 certain. 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 oses 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

solutions (a) Here the loss is resonable and probable estimate it will The company has to accosue liability but vary in US GAAP and IFRS. In US GAAP it is $5200000 and Pires et os (5200000+ 102.00000) $7700000 (b) > under US GAAP present value is not used because of uncertain timing, so it is lower end and it is $3200000 and in IFRS it is mid point and it is 3200000 +8200000 = $5100000 As per IFRS this as mid point and le paobable (C) accoued and item of ie 3200000 + 9200 000 – $6200000 as per US GAAP it is zero:

GAAP and (d) = It is Classified as long term in us Short team as per DFRS. 9 Total liability under us. - GAAP= 5200000 + 3200000 + 10200 000 = $18600000 Total liability under DFRS - = 7700000 + 5 700 + 6200000 + 10200000 = $29800 000 Lowest liability is according to us GAAP.