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: 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 $5,000,000 and $10,000,000, 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 $3,000,000 and $8,000,000, 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 $3,000,000 and $9,000,000, with each amount in that range equally likely. d. HW has $10,000,000 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? Complete this question by entering your answers in the tabs below. Required 1 Required 2 For each item, indicate how treatment of the amount would differ between U.S. GAAP and IFRS. U.S. GAAP IFRS a. Accrue liability b d.

Answer 1

	US GAAP	IFRS
a	Accure Liability	50,00,000	Accure Liability	7500000
b	Accure Liability	50,00,000	Accure Liability	5500000
c	Do Not Accrue Liability	0	Accure Liability	60,00,000
d	Long term Liability	10,000,000	Short Term Liability	10,000,000
	Total	180,00,000		290,00,000

a)

Here the loss is reasonable and most likely evaluated so the holmes westorn needs to Accure liability ,but it will change in US GAAP and IFRS so in both situation laibility is diiffer

In US GAAP it is $ 50,00,000 =  low end of the range

in IFRS it is ($50,00,000+$10,000,000)/2=$75,00,000 = midpoint of the range( avarge of the range)

b)

here relevent loss will occur in future , but timing of cash flow will uncertain so in laibility is

Under US GAAP = 5000000 it is lower end, as per (a)

in IFRS it is mid point and it is ($3000000+$8000000)/2=$ 5500000

c)

US GAAP it is zero.

It is only probable under

IFRS = midpoint of the range =(3000000+9000000)/2 = 6000000

d) financing was obtained before issuance of financial statement It is named long term in US GAAP and short term according to IFRS.

2)

Total liability under

US GAAP  =$180,00,000

IFRS =$ 290,00,000

Least liability is as per US GAAP.