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 ed 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 $6,100,000 and $11,100,000, 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 $4,100,000 and $9,100,000, 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 $4,100,000 and $10,100,000, with each amount in that range equally likely. d. HW has $11,100,000 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. rices 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 o-d. If HW's goal is to show the lowest total liabilitles, which set of standards, U.S. GAAP or IFRS, best helps it meet that goal?

Answer 1

1. Treatment of the amount would differ between U.S. GAAP and IFRS.

	U.S. GAAP	IFRS
a.	Accure Liability	6,100,000	Accure Liability	8,600,000
b.	Accure Liability	4,100,000	Accure Liability	6,600,000
c.	Do Not Accrue Liability		Accure Liability	7,100,000
d.	Long term Liability	11,100,000	Short Term Liability	11,100,000
	Total liabilities	21,300,000		33,400,000

2.U.S. GAAP helps to meet HW’s goal is to show the lowest total liabilities

Explanation:

a.Holmes watson(HW) would be required to accrue a liability under both U.S.GAAP and IFRS. But the amount of the liability would differ betwwen U.S.GAAP. Under U.S.GAAP, the liability would be $6,100,000 the low end of the range, while under IFRS the liability would be $8,600,000 the midpoint of the range (6,100,000+11,100,000 / 2).

b.Under U.S.GAAP, present values would not be used so the liability would be $4,100,000 the low end of the range.

Under IRRS, present values would be used so the liability would be $6,600,000 the midpoint of the range (4,100,000+9,100,000 / 2).

c.This item is probable according to IFRS only, so the liability will accrue only under IFRS and the liability would be $7,100,000 the midpoint of the range (4,100,000+10,100,000 / 2).

d.Under U.S.GAAP, it would be classified as long term liabilities, But short term liabilities under IFRS