IMChap 009

Chapter 09 - Additional Financial Reporting Issues
CHAPTER 9
ADDITIONAL FINANCIAL REPORTING ISSUES
Chapter Outline
I.
In addition to issues involving the accounting for foreign currency, three financial reporting
issues of international importance are: (a) accounting for changing prices (inflation
accounting), (b) accounting for business combinations and consolidated financial
statements, and (c) segment reporting.
II.
Historical cost accounting in a period of inflation understates asset values (and related
expenses) and overstates income. Historical cost accounting also ignores the gains and
losses in purchasing power caused by inflation that arise from holding monetary assets
and liabilities.
III.
Two methods of accounting for inflation have been used in different countries general
purchasing power (GPP) accounting and current cost (CC) accounting.
A. Under GPP accounting, nonmonetary assets and stockholders equity accounts are
restated for changes in the general price level.
Cost of goods sold and
depreciation/amortization are based on restated asset values and the net purchasing
power gain/loss on the net monetary liability/asset position is included in income. GPP
income is the amount that can be paid as a dividend while maintaining the purchasing
power of capital.
B. Under CC accounting, nonmonetary assets are revalued to current cost, and cost of
goods sold and depreciation/amortization are based on revalued amounts.
CC
income is the amount that can be paid as a dividend while maintaining physical capital.
IV.
IAS 29 requires the use of GPP accounting by firms that report in the currency of a
hyperinflationary economy. IAS 21 requires the financial statements of a foreign operation
located in a hyperinflationary economy to first be adjusted for inflation in accordance with
IAS 29 before translation into the parent companys reporting currency.
V.
Issues that must be resolved in accounting for a business combination relate to (a)
selection of an appropriate method, (b) recognition and measurement of goodwill, and (c)
measurement of minority interest.
A. IFRS 3 and US. GAAP both require the purchase method in accounting for business
combinations; the pooling of interests method is not allowed.
B. Goodwill is recognized on the consolidated balance sheet as an asset and tested
annually for impairment under both IFRS 3 and U.S. GAAP.
C. When less than 100% of a company is acquired, IFRS 3 requires the acquired assets
and liabilities to be recorded at full fair value and minority interest is initially measured
at the minority shareholders percentage ownership in the fair value of the acquired
companys net assets. This is known as the economic unit or entity concept.
1. In addition to the economic unit or entity concept, U.S. GAAP also allows use of
the parent company concept in which the acquired assets and liabilities are initially
measured at book value plus the parents ownership percentage in the difference
between fair value and book value. Under this approach, minority interest is
initially measured at the minority shareholders percentage ownership in the book
value of the subsidiarys net assets.
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Education.
VI.
IAS 28 and US. GAAP require use of the equity method when an investor has the ability to
exert significant influence over an investee; significant influence is presumed when the
investor owns 20% or more of the investees voting shares.
VII. In accounting for an investment in a joint venture, IAS 31 prefers the use of proportionate
consolidation, but also allows the equity method. The equity method is required under
U.S. GAAP.
VIII. Questions arise as to (a) when an investee should be considered a subsidiary and (b)
which subsidiaries should be consolidated when a parent company prepares consolidated
financial statements.
A. IAS 27 defines a subsidiary as an enterprise controlled by another enterprise known as
the parent. Control is defined as the power to govern the financial and operating
policies of an entity so as to obtain benefits from its activities. Control can exist
without owning a majority of shares of stock, for example, when one company has
power over more than half of the voting rights through agreements with other
shareholders.
1. Historically, U.S. companies have relied on majority stock ownership as evidence of
control.
B. IAS 27 requires a parent to consolidate all subsidiaries unless (a) the subsidiary was
acquired with the intent to dispose of it within 12 months and (b) management is
actively seeking a buyer.
1. U.S. GAAP requires all subsidiaries to be consolidated unless the parent has lost
control due to bankruptcy or severe restrictions imposed by a foreign government.
IX.
The aggregation of all of a companys activities into consolidated totals masks the
differences in risk and potential existing across different lines of business and in different
parts of the world. To provide information that can be used to evaluate these risks and
potentials, companies disaggregate consolidated totals and provide disclosures on a
segment basis.
X.
IFRS 8 was issued in 2006 to converge with U.S. GAAP. Both IFRS and U.S. GAAP follow
the so-called management approach in determining operating segments, which are
components of a business that:
Engage in activities from which they earn revenues and incurs expenses.
Are regularly reviewed by the chief operating decision maker to assess performance
and make resource allocation decisions.
Have discrete financial information available.
A. An operating segment is reportable if it meets one of three significance tests: 10% or
more of combined segment revenues, 10% or more of the greater of combined
segment profit or combined segment loss, or 10% or more of combined segment
assets.
B. A sufficient number of segments must be separately reported to disclose at least 75%
of consolidated revenues.
C. Disclosures to be provided for each operating segment include: revenues (external
and Intercompany), interest income and interest expense, depreciation and
amortization expense, unusual items, income tax expense, and profit or loss; total
segment assets, equity method investments, and expenditures for noncurrent assets.
IFRS 8 also requires disclosure of segment liabilities, but SFAS 131 does not.
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XI.
IFRS and U.S. GAAP also require enterprise-wide disclosures related to:
A. Products and services if operating segments are not organized along these lines.
External revenues derived from each major product or service line must be disclosed
when the company has only one operating segment or operating segments are based
on something other than products/services.
B. Major customers any customer from which the enterprise generates 10% or more of
revenues.
The existence of major customers must be disclosed along with the operating segment
generating the revenues, but the identity of the customer need not be revealed.
C. Geographic areas if operating segments are not organized geographically.
If operating segments are not based on geography, revenues and long-lived assets
must be disclosed for (a) the domestic country, (b) all foreign countries in total, and (c)
for each foreign country in which a material amount of revenues or long-lived assets
are located. A quantitative threshold for determining materiality is not specified.
1. Whereas U.S. GAAP requires disclosure of long-lived assets (often interpreted as
fixed assets only), IFRS requires disclosure of non-current assets, which is
specifically intended to include intangibles.
2. There is considerable diversity in the level of detail provided by U.S. companies
with respect to individual country disclosures. Some companies have determined
that no single foreign country has a material amount of revenues or long-lived
assets.
Answers to Questions
1. Historical cost accounting causes assets to be significantly understated in a country
experiencing high inflation. Understated assets, such as inventory and fixed assets, leads to
understated expenses, such as cost of goods sold and depreciation, which in turn leads to
overstated income and stockholders equity.
Understated asset values can have a negative impact on a companys ability to borrow
because the collateral is understated. Understated asset values also can be an invitation for
a hostile takeover to the extent that the current market price of a companys stock does not
reflect the current value of assets.
Overstated income results in more taxes being paid to the government than would otherwise
be paid, and could lead to stockholders demanding a higher level of dividend than would
otherwise be expected. Through the payment of taxes on inflated income and the payment
of dividends out of inflated net income, both of which result in cash outflows, a company
may find itself in a liquidity crisis.
To the extent that companies are exposed to different rates of inflation, the understatement
of assets and overstatement of income will differ across companies; this can distort
comparisons across companies. For example, a company with older fixed assets will report
a higher return on assets than a company with newer assets because income is more
overstated and assets are more understated than for the comparison company. Because
inflation rates tend to vary across countries, comparisons made by a parent company across
its subsidiaries located in different countries can be distorted.
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2. Non-monetary assets and non-monetary liabilities are restated for changes in the general
purchasing power of the monetary unit. Most non-monetary items are carried at historical
cost. In these cases, the restated cost is determined by applying to the historical cost the
change in general price index from the date of acquisition to the balance sheet date. Some
non-monetary items are carried at revalued amounts, for example, property, plant and
equipment revalued according to the allowed alternative treatment in IAS 16, Property,
Plant and Equipment. These items are restated from the date of the revaluation.
All components of owners equity are restated by applying the change in the general price
index from the beginning of the period or the date of contribution, if later, to the balance
sheet date.
Monetary assets and monetary liabilities (cash, receivables, and payables) are not restated
because they are already expressed in terms of the monetary unit current at the balance
sheet date.
All income statement items are restated by applying the change in the general price index
from the dates when the items were originally recorded to the balance sheet date.
The gain or loss on net monetary position (purchasing power gain or loss) is included in net
income.
3. Monetary assets (cash and receivables) give rise to purchasing power losses and monetary
liabilities (payables) give rise to purchasing power gains.
4. Historical costs of nonmonetary assets (inventory, fixed assets, intangibles) are replaced
with current replacement cost and expenses (cost of goods sold, depreciation, amortization)
are based on these current costs. The amount by which nonmonetary assets are revalued
to replacement cost on the balance sheet is also reflected in stockholders equity as a
revaluation surplus (or reserve).
5. Current cost accounting generally results in a larger amount of nonmonetary assets, as well
as a larger amount of stockholders equity, being reported on the balance sheet. Expenses
based on the current cost of nonmonetary assets (carried at larger amounts) generally
results in a smaller amount of net income being reported under current cost accounting.
With smaller income and larger stockholders equity, return on equity measured under
current cost accounting is generally smaller than under historical cost accounting.
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6. IAS 15, Information Reflecting the Effects of Changing Prices, required supplementary
disclosure of the following items reflecting the effects of changing prices:
1. the amount of adjustment to depreciation expense,
2. the amount of adjustment to cost of sales,
3. the amount of purchasing power gain or loss on monetary items,
4. the aggregate of all adjustments reflecting the effects of changing prices, and
5. if current cost accounting is used, the current cost of property, plant, and equipment.
The standard only applied to enterprises whose levels of revenues, profits, assets or
employment are significant in the economic environment in which they operate, and
allowed those enterprises to choose between making adjustments on a GPP or a CC basis.
Because of a lack of international support for inflation accounting disclosures, in 1989, the
IASC decided to make IAS 15 optional. However, the IASB encourages presentation of
inflation-adjusted information as required by IAS 15.
IAS 29, Financial Reporting in Hyperinflationary Economies, was issued in 1989 and
applies to the primary financial statements of any company that reports in a currency of a
hyperinflationary economy.
IAS 29 requires the use of GPP accounting following
procedures outlined above in the answer to question 2.
IAS 21, The Effects of Changes in Foreign Exchange Rates, requires application of IAS 29
to restate the foreign operations financial statements to a GPP basis. The GPP adjusted
financial statements are then translated into the parent companys reporting currency using
the current exchange rate. This approach is referred to as the restate/translate method.
7. IAS 27, Consolidated Financial Statements and Accounting for Investments in
Subsidiaries, defines a group as a parent and all its subsidiaries, and requires parents to
present consolidated financial statements.
8. The concept of a group relates to a business combination in which one company obtains
control over another company but the acquired company continues its separate legal
existence.
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9. IAS 27 states that control exists when the investor owns more than 50 of the stock of
another company. However, control also can exist for an investor owning less than 50% of
the stock of another company when the investor has power:
Over more than half of the voting rights through agreements with other shareholders,
To set the companys financial and operating policies because of existing statutes or
agreements,
To appoint or remove majority of the members of the governing body (board of directors
or equivalent group), or
To cast the majority of votes at meetings of the companys governing body.
10. Because of their extensive cross-ownership of companies, identifying the legal ownership
patterns of Japanese company groups (Keiretsu) can be extremely difficult.
11. IAS 27 requires a parent to consolidate all subsidiaries, foreign and domestic, unless (a)
control of the subsidiary is temporary because it is held with a view to its disposal in the near
future, or (b) the subsidiary operates under severe long-term restrictions that significantly
affect its ability to send funds to its parent. IAS 27 does not allow a subsidiary to be
excluded from consolidated financial statements solely because its operations are dissimilar
to those of the other companies that comprise the group. In publishing its equivalents to
IFRS 3 and IAS 27 in early 2008, the FASB has made fundamental changes to its
accounting for business combinations, bringing the accounting requirements for business
combinations in IFRS and U.S. GAAP closer together.
12. IFRS 8 defines an operating segment as a component of a company that (a) engages in
activities from which it earns revenues and incurs expenses, (b) is regularly reviewed by the
chief operating decision maker to assess performance and make resource allocation
decisions, and (c) for which discrete financial information available.
An operating segment is a reportable segment if it meets any one of the following three
significance tests:
Revenue test. Segment revenues, both external and intersegment, are 10% or more of
the combined revenue, internal and external, of all segments.
Profit or loss test. Segment result (profit or loss) is 10% or more of the greater (in
absolute value terms) of the combined profit of segments with a profit or combined loss
of segments with a loss.
Asset test. Segment assets are 10% or more of the combined assets of all segments.
If total external revenue attributable to reportable segments constitutes less than 75% of the
total consolidated revenue, additional segments should be reported even if they do not meet
the 10% threshold. All segments that are neither separately reported nor combined should
be included in the segment reporting disclosures as an unallocated reconciliation item or in
an all other category.
13. Only three substantive differences exist in the segment reporting required by IFRS and U.S.
GAAP:
a. IFRS requires the disclosure of operating segment liabilities, and U.S. GAAP does not.
b. For geographic areas, U.S. GAAP requires disclosure of long-lived assets, which many
companies interpret as fixed assets only. IFRS requires disclosure of non-current
assets, which specifically includes intangibles.
c. Companies with a matrix form of organization may identify operating segments either by
products and services or geographic areas under IFRS. U.S. GAAP requires segments
to be defined on the basis of products and services in this situation.
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14. IFRS and U.S. GAAP require enterprise-wide disclosures related to:
A. Products and services if operating segments are not organized along these lines.
External revenues derived from each major product or service line must be disclosed
when operating segments are based on something other than products/services or the
company has only one operating segment and otherwise would not provide segment
information.
B. Major customers which is any customer from which the enterprise generates 10% or
more of its revenues.
The existence of major customers must be disclosed along with the operating segment
generating the revenues, but the identity of the customer need not be revealed.
C. Geographic areas if operating segments are not organized geographically.
If operating segments are not based on geography, revenues and long-lived assets
(IFRS 8 - noncurrent assets) must be disclosed for (a) the domestic country, (b) all
foreign countries in total, and (c) for each foreign country in which a material amount of
revenues or long-lived assets (noncurrent assets) are located. A quantitative threshold
for determining materiality is not specified.
15. Neither IFRS nor U.S. GAAP provides a quantitative threshold for determining the materiality
of an individual foreign country. Companies are expected to apply the general concept that
an item is material if its omission could change a users decision about the enterprise as a
whole.
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Solutions to Exercises and Problems

1. Sorocaba Company
December 31, Year 1
Purchase
Date Item
1/15/Y1
3/20/Y1
10/10/Y1
Cost
Machine X
Machine Y
Machine Z
Original
Historical
Ratio
$ 20,000
55,000
130,000
$205,000
Restatement
Cost
140/100
140/110
140/130
Original
Historical
Ratio
$ 55,000
130,000
$185,000
Restatement
Cost
180/110
180/130
Restated
Historical
$ 28,000
70,000
140,000
$238,000
December 31, Year 2
Purchase
Date Item
3/20/Y1
10/10/Y1
Cost
Machine Y
Machine Z
Restated
Historical
$ 90,000
180,000
$270,000
Alternatively, the restated historical cost at December 31, Year 2 could be determined as
follows:
December 31, Year 2
Restated
Historical
Purchase
Date Item (12/31/Y1)
3/20/Y1
Machine Y
10/10/Y1
Machine Z
Cost
Ratio
$ 70,000
140,000
$210,000
Restated
Historical
Restatement
(12/31/Y2)
180/140
180/140
Cost
$ 90,000
180,000
$270,000
Ignoring depreciation, machinery and equipment would be reported on the balance sheet at:
12/31/Y1
$238,000
12/31/Y2
$270,000
2. Antalya Company
a. The nominal interest expense is TL 600,000 (TL 1,000,000 x 60% x 1 year).
b. The purchasing power gain is TL 550,000 (TL 1,000,000 x 387.5/250 = TL 1,550,000
1,000,000).
c. The real interest expense is TL 50,000, which equates to a real interest rate of 5% (TL
50,000/ TL 1,000,000)
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3. Doner Company
Calculation of Purchasing Power Loss
Net monetary assets, 1/1/Y1
Plus: Increase in net monetary assets
Net monetary assts, 12/31/Y1
$5,000
15,000
$20,000
x 150/100 =
x 150/120 =
Purchasing power loss

GPP Income Statement
Year 1
Revenues
$50,000
Depreciation
(5,000)
Other expenses (incl. income taxes) (35,000)
Net income
x 150/120 =
x 150/100 =
x 150/120 =
$ 7,500
18,750
$26,250
20,000
$ 6,250
$ 62,500
(7,500)
(43,750)
(6,250)
$ 5,000
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4. Petrodat Company
Subsidiary in Mexico
GPI
1/1/Y1
Average
12/31/Y1
100
105
110
a.
Balance Sheet, 1/1/Y1
Machinery and equipment
Historical
Cost
1,000,000.00
Total assets
1,000,000.00
Contributed capital
1,000,000.00
Total stockholders equity
1,000,000.00
Restatement
Factor
110/100
Restated to
12/31/Y1 GPP
1,100,000.00
1,100,000.00
110/100
1,100,000.00
1,100,000.00
Income Statement, Year 1
Revenues
Depreciation expense
Other expenses
Income
Historical
Restatement
Cost
Factor
400,000.00
110/105
(200,000.00)
110/100
(150,000.00)
110/105
50,000.00

Net monetary assets, 1/1
0.00
plus: Increase in NMA, Y1*
250,000.00
250,000.00
* Revenues less other expenses
Restated to
12/31/Y1 GPP
419,047.62
(220,000.00)
(157,142.86)
(11,904.76)
30,000.00
110/100
110/105
0.00
261,904.76
261,904.76
250,000.00
11,904.76
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4. (continued)
Cash
Less: accumulated depreciation
Historical Restatement
Cost
Factor
250,000.00
none
1,000,000.00
110/100
(200,000.00)
110/100
Restated to
12/31/Y1 GPP
250,000.00
1,100,000.00
(220,000.00)
Total assets
1,050,000.00
1,130,000.00
Contributed capital
Retained earnings
1,000,000.00
50,000.00
Total stockholders' equity
1,050,000.00
110/100
above
Calculation of Average Stockholders' Equity

January 1, Year 1 (restated)
December 31, Year 1
1,100,000.00
30,000.00
1,130,000.00
1,100,000.00
1,130,000.00
2,230,000.00
/2
1,115,000.00
Average stockholders equity
b. Calculation of profit margin and return on equity on an inflation-adjusted basis

Profit margin
30,000.00
7.16%
419,047.62
Return on Equity
30,000.00
1,115,000.00
2.69%
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4. (continued)
Subsidiary in Venezuela
GPI
1/1/Y1
Average
12/31/Y1
100
110
120
a.
Historical
Cost
150,000,000.00
Total assets
150,000,000.00
Contributed capital
150,000,000.00
Total stockholders equity
150,000,000.00
Restatement
Factor
120/100
Restated to
12/31/Y1 GPP
180,000,000.00
180,000,000.00
120/100
180,000,000.00
180,000,000.00
Income Statement, Year 1
Revenues
Depreciation expense
Other expenses
Income
Historical
Restatement
Cost
Factor
60,000,000.00
120/110
(30,000,000.00)
120/100
(22,500,000.00)
120/110
7,500,000.00

plus: Increase in NMA, Y1*
* Revenues less other expenses
0.00 120/100
37,500,000.00 120/110
37,500,000.00
Restated to
12/31/Y1 GPP
65,454,545.45
(36,000,000.00)
(24,545,454,55)
(3,409,090.91)
1,500,000.00
0.00
40,909.090.91
40,909,090.91
37,500,000.00
3,409,090.91
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Education.
4. (continued)

Cash
Less: accumulated deprec
Historical
Restatement
Cost
Factor
37,500,000.00
none
150,000,000.00
120/100
(30,000,000.00)
120/100
Total assets
157,500,000.00
Contributed capital
Retained earnings
150,000,000.00
7,500,000.00
Total stockholders' equity
157,500,000.00
Restated to
12/31/Y1 GPP
37,500,000.00
180,000,000.00
(36,000,000.00)
181,500,000.00
120/100
above
180,000,000.00
1,500,000.00
181,500,000.00
Calculation of Average Stockholders' Equity

January 1, Year 1 (restated)
December 31, Year 1
180,000,000.00
181,500,000.00
361,500,000.00
180,750,000.00
Average stockholders equity
b. Calculation of profit margin and return on equity on an inflation-adjusted basis

Profit margin
1,500,000.00
2.29%
65,454,545.45
Return on Equity
1,500,000.00
180,750,000.00
0.83%
c. Both subsidiaries had the same profit margin and return on equity when these ratios were
calculated from unadjusted historical cost information. After adjusting for inflation, the
Mexican subsidiary appears to be substantially more profitable than the Venezuelan
subsidiary.
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5. Auroral Company
Name of
Company
Accurcast
Bonello
% Voting
Rights
100%
45%
Cromos
Fidelis
30%
100%
Jenna
Marek
Phenix
Regulus
Synkron
Tiksed
Ypsilon
100%
40%
90%
50%
15%
70%
51%
IFRS
Full consolidation
Equity method unless there is
evidence that Auroral exercises
effective control
Equity method
Do not consolidate fair value
method
Full consolidation
Full consolidation
Full consolidation
Equity method
Fair value method
Full consolidation
Full consolidation
U.S. GAAP
Full consolidation
Equity method
Equity method
Do not consolidate fair
value method
Full consolidation
Equity method
Full consolidation
Equity method
Fair value method
Full consolidation
Full consolidation
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6. Sandestino Company
Financial statements restated to properly reflect the Investment in Grand Sand using the equity
method:
Sandestino Company
Income Statement
Year 1
Revenues
Expenses
Equity in Grand Sands net income
Income before tax
Tax expense
Net income
$800,000
(450,000)
10,000
360,000
(100,000)
$260,000
Sandestino Company
Balance Sheet
December 31, Year 1
Cash
$130,000
Inventory
200,000
Property, plant, & equipment (net) 650,000
Investment in Grand Sand
180,000
Total
$1,160,000
Liabilities
Common stock
Retained earnings
Total
$250,000
600,000
310,000
$1,160,000
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7. Horace Jones Company

Three tests are applied in determining which operating segments must be reported separately.
Only one test must be met.
Revenue Test
Segment
A
B
C
D
E
F
Total
Total
Revenues
1,060
370
220
150
130
120
2,050
Percentage
of Total
52% reportable
18% reportable
11% reportable
7%
6%
6%
Profit or Loss Test

Segment
A
B
C
D
E
F
Total
Segment
Revenues
1,060
370
220
150
130
120
2,050
Segment
Expenses
830
515
175
145
95
110
1,860
Segment Result
Profit
Loss
230
145
45
5
35
10
325
(145)
reportable
reportable
reportable
reportable
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Education.
7. (continued)
Combined profit for the profitable segments exceeds the combined loss of the non-profitable
segments, so any segment with a profit or loss greater than $32.5 ($325 x 10%) is separately
reportable.
Asset Test
Segment
A
B
C
D
E
F
Total
Total
Assets
1,750
680
520
310
310
125
3,695
Percentage
of Total
47% reportable
18% reportable
14% reportable
8%
8%
3%
Of the six operating segments, only four meet at least one of the significance tests. Segments
A, B, C, and E will be reported separately; segments D and F will be combined into All Other.
However, if total external revenues attributable to separately reportable segments is less than
75% of total consolidated revenue, additional segments must be reported even if they do not
meet any of the significance tests.
75% Test
Segment
A
B
C
D
E
F
Total consolidated revenues
External
Revenues
1,030
350
20
140
130
120
1,790
Percentage of
Consolidated Revenues
58%
20%
1%
n/a
7%
n/a
85%
Because A, B, C, and E collectively comprise more than 75% of total consolidated revenues,
segments D and F will be combined.
The schedule below provides an example of how the required items might be presented.
External revenues
Intersegment revenues
Segment profit (loss)
Interest expense
Depreciation and amortization
Income tax expense (benefit)
Segment assets
Expenditures for additions to
noncurrent assets
Segment liabilities
Operating Segments
B
C
E
350
20
130
20
200
0
(145)
45
35
5
5
5
100
10
5
(40)
20
20
680
520
310
A
1,030
30
230
10
80
20
1,750
200
750
50
300
50
250
20
140
All Other
260
10
15
5
25
10
435
55
260
9-17
Education.
8. Iskender Company
Schedule showing the percentage of total revenues generated by each operating segment and
the percentage of external sales generated by each country.
Operating Segments
Automotive
Food
Retail
Finance
Consumer durable
Energy
Real estate
Total
Total
Revenues
23,093
22,875
13,987
7,895
7,182
6,642
% of Total
26.52%
26.27%
16.06%
9.07%
8.25%
7.63%
Countries
Turkey
Germany
Bulgaria
Russia
Italy
Switzerland
5,400
87,074
6.20%
100.00%
Uzbekistan
Sales to
External
Customers
28,876
18,765
12,076
9,897
7,654
6,757
% of Total
33.16%
21.55%
13.87%
11.37%
8.79%
7.76%
3,049
87,074
3.50%
100.00%
Operating Segments
The revenue test is the only test that can be made given the information provided to determine
separately reportable operating segments. The revenue test indicates that only automotive,
food, and retail are separately reportable operating segments (total revenues greater than 10%
of the total). However, from Note 30 it can be determined that these three operating segments
combined account for only 71% ($55,446/$77,843) of total external sales. IFRS 8 requires a
minimum of 75% of total external sales to be disclosed by operating segment. Therefore, at
least one additional operating segment must be disclosed separately to reach the 75%
threshold.
The company discloses six items of information for each operating segment. Other items that
must be disclosed (if applicable) are:
Revenues from transactions with other operating segments.
Interest revenue and interest expense.
Other significant noncash items included in segment profit or loss.
Unusual items (discontinued operations and extraordinary items).
Income tax expense or benefit.
Segment liabilities.
Some of these items will not exist for individual operating segments, but those that do must be
disclosed by segment.
9-18
Education.
8. (continued)
Geographic Areas
The company provides disclosures for three countries, each of which has 13% or more of total
external revenues. Russia has 11% of total revenues, but is not disclosed separately, which
suggests that the company is using 12% or 13% as its cutoff point for determining materiality.
IFRS 8 does not impose a quantitative threshold for determining when an individual country is
material, so a cutoff of 12% is not in violation of IFRS 8 per se. However, given the 10%
materiality threshold common in accounting (and used in determining reportable operating
segments), it would be reasonable for financial statement readers to expect Russia to be
disclosed separately.
In providing disclosures on noncurrent assets, the company reports property, plant, and
equipment only. IFRS 8 specifically requires intangible assets to be included in the measure of
noncurrent assets.
9. IBM, Johnson & Johnson, and Ford Motor Company
a. A commonly used measure of multinationality is the percentage of total sales that are
generated in countries other than the United States: Foreign Sales/Total Sales. This
ratio can be calculated for each company by subtracting U.S. sales from total sales and
then dividing by total sales:
IBM
($104,507 - $36,270) / $104,507 = 65.3%
Johnson & Johnson
($67,224 - $29,830) / $67,224 = 55.6%
Ford Motor Company
($134,252 - $76,418) / $134,252 = 43.1%
Based on this measure, IBM is the most multinational company among the three in
Exhibit 9.9.
b. International diversification refers to the extent to which a companys operations are
spread across different countries and regions of the world. Ford Motor Company
appears to be concentrated in a relatively small number of countries, and is therefore not
very diversified internationally. 82% of Fords sales are generated from operations in
only eight countries (U.S., Canada, U.K., Germany, Italy, France, Spain, and Belgium).
From Johnson & Johnsons segment disclosure, it is impossible to know the number of
countries in which the company has operations. For example, Europe could imply
operations in anywhere from one to 30+ countries. One can determine that about 45%
of IBMs revenues are generated in only two countries (U.S. and Japan), but it is
impossible to know where in the world the remaining 55% of its sales are generated.
We do know that there are no other countries in which IBM has a material amount
(defined by the company as 10%) of total revenues, because it would be required to
disclose this country separately. (Note that if Ford had used a 10% materiality criterion,
it would have provided separate disclosures for no country other than the United States.)
This exercise demonstrates the difficulty in assessing international diversification given
current segment reporting practices that allow companies to define materiality in different
ways.
9-19
Education.
10. BMW and Volkswagen

a. A commonly used measure of multinationality is the percentage of total sales that are
generated in countries other than the home country: Foreign Sales/Total Sales. This
ratio can be calculated for each company by subtracting sales in Germany from total
sales and then dividing by total sales:
BMW
(76,848 12,186) / 76,848 = 84.1%
Volkswagen
(159,337 34,600) / 159,337 = 78.3%
Based on this measure, BMW is slightly more multinational than Volkswagen. Both
companies rely very heavily on sales made outside of their home country Germany.
b. One way to measure international diversification is the extent to which sales are spread
out over different regions of the world. Column B in the table below shows that BMWs
sales are more evenly spread over its segments than are VWs. For example, whereas
VW generated 60.2% of its sales in Europe in 2012, including 19.6% in Germany, BMW
generated only 45.8% of its sales in Europe, including 15.9% in Germany.
External Revenues
Col. A
Col. B
Col. C
Col. D
2012
2011
Col. E
Year-toyear %
change
Germany
12,186
15.9%
22,954
49.1%
-46.9%
USA
13,447
17.5%
11,195
24.0%
+20.1%
China
14,448
18.8%
15
0%
+96,220.0%
Rest of Europe
22,971
29.9%
9,887
21.2%
+132.3%
2,824
3.7%
1,548
3.3%
+82.4%
10,972
14.3%
1,137
2.4%
+865.0%
76,848
100.0%
46,736
100.0%
+64.4%
BMW
Rest of the Americas

Other
Group (before
eliminations)
Volkswagen
20129
2011
Year-toyear %
change
Germany
37,734
19.6%
34,600
21.7%
+9.1%
Europe and Other Regions
77,650
40.3%
69,291
43.5%
+12.1%
North America
25,046
13.0%
17,553
11.0%
+42.7%
South America
18,311
9.5%
14,910
9.4%
+22.8%
Asia/Oceania
33,936
17.6%
22,983
14.4%
+47.7%
192,677
100.0%
159,337
100.0%
+20.9%
Group
9-20
Education.
c. For the group as a whole, BMW experienced a 64.4% positive revenue growth in 2012
(Col. E in table above). The greatest percentage increase in revenues incurred in China
(+96,220%), and the smallest in USA (+20.1%). Only Germany experienced negative
sales growth (-46.9%).
Volkswagen experienced an overall increase in revenues in 2012 of 20.9% (Col. E). The
pattern of revenue growth for Volkswagen is very different from that for BMW. Sales for
VW grew in all regions, including Germany, with North America and Asia/Oceania
experiencing the greatest percentage increases.
It should be noted that direct comparisons of regional growth are not possible because
of the different ways in which BMW and VW have defined the geographic regions in
which they operate.
9-21
Education.

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Chapter 09 - Additional Financial Reporting Issues

Chapter 09 - Additional Financial Reporting Issues

Chapter 09 - Additional Financial Reporting Issues

Chapter 09 - Additional Financial Reporting Issues

Chapter 09 - Additional Financial Reporting Issues

Chapter 09 - Additional Financial Reporting Issues

Chapter 09 - Additional Financial Reporting Issues

Chapter 09 - Additional Financial Reporting Issues

Solutions to Exercises and Problems

Chapter 09 - Additional Financial Reporting Issues

Purchasing power loss

Chapter 09 - Additional Financial Reporting Issues

Total stockholders equity

Income Statement, Year 1

Calculation of Purchasing Power Loss

Chapter 09 - Additional Financial Reporting Issues

Total stockholders' equity

Calculation of Average Stockholders' Equity

Average stockholders equity

b. Calculation of profit margin and return on equity on an inflation-adjusted basis

Chapter 09 - Additional Financial Reporting Issues

Total stockholders equity

Income Statement, Year 1

Calculation of Purchasing Power Loss

Chapter 09 - Additional Financial Reporting Issues

Balance Sheet, 12/31/Y1

Total stockholders' equity

Calculation of Average Stockholders' Equity

Average stockholders equity

b. Calculation of profit margin and return on equity on an inflation-adjusted basis

Chapter 09 - Additional Financial Reporting Issues

Chapter 09 - Additional Financial Reporting Issues

Chapter 09 - Additional Financial Reporting Issues

7. Horace Jones Company

Profit or Loss Test

Chapter 09 - Additional Financial Reporting Issues

Chapter 09 - Additional Financial Reporting Issues

Chapter 09 - Additional Financial Reporting Issues

Chapter 09 - Additional Financial Reporting Issues

10. BMW and Volkswagen

Rest of the Americas

Europe and Other Regions

Chapter 09 - Additional Financial Reporting Issues

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