case study

Financial Statements Make-up Assignments

Quiz 9/30 (20 points) and Essay Statement of Financial Position (25 points)

for Angel Hill

Makeup Due Friday, October 16

THE CASE OF THE MISSING DEFINITIONS

Note: In the following exercise, you are required to review pre-codification standards. Pre-codified standards are accessible on the FASB website at www.fasb.org or, in the event that your school participates in the American Accounting Association’s Academic Accounting Access program, they may be found there as well.

Background

You just obtained an internship at Sherlock Detective Agency for the summer. You, along with your fellow intern, Dr. “Wannabe” Watson (a promising accounting PhD student) are given an assignment to assess key financial measures for reporting financial information on the statement of income based on requirements for US GAAP, the SEC and IFRS. You are told there might be some definitions missing for these key financial measures. Watson, the skeptic that he is, does not believe this could be possible because these key financial measures are so critical to the capital markets. You want to prove him wrong using your skills in deductive reasoning. Your boss, Sherlock, has given you the following premises and conclusions for your review. Additionally, he has provided you his file of background information.

Premise 1: US GAAP does not define “operating profit.”

Premise 2: The SEC defines certain key measures that are to be reported on the face of the statement of income but these measures do not include operating profit.

Premise 3: The SEC refers to US GAAP measures within its reporting requirements.

Premise 4: IFRS does not define operating profit or require it to be reported.

Conclusion 1: While operating profit is not defined using US GAAP, it is reported as “operating income” less “operating expenses” through common practice and is understood to be US GAAP by the SEC.

Conclusion 2: While operating profit is not defined and required to be reported using IFRS, similar to US GAAP, it is understood and reported through common practice.

After opening the case file, you find the following:

· An information sheet with statements and sources partially completed as shown below.

· Direction to do an internet search for the definition of operating profit/income.

· Directions to gather the most recent US GAAP statements of income for the following US companies that file with the SEC (Form 10-K):

· Amazon.com – www.amazon.com

· Coca-Cola – www.cocacola.com

· Hewlett-Packard – hp.com

· Directions to gather the most recent statements of income for the following foreign companies:

· SAP – www.sap.com

· Orange – www.orange.com/en/home

· H&M – www.hm.com

· Lufthansa AG – www.lufthansa-financials.de

· Nestle – www.nestle.com

· Airbus Group – www.airbusgroup.com

Sherlock Detective Agency

“The Case of the Missing Definitions”

CONFIDENTIAL FILE

Premise 1
Premise 2	· SEC Regulation S-X, Article 5, Section 210.5-03 (ASC 225-10-S99)
Premise 3	· SEC Regulation G, Section 244.100-102
Premise 4	· IAS 1, Presentation of Financial Statements · “Additional line items may be needed to fairly present the enterprise's results of operations.”

Required

· Research the information provided in the case file and supplement this information as necessary to support your thoughts on the following:

· Is Premise 1 an accurate statement? If so, why or why not?

· Is Premise 2 an accurate statement? If so, why or why not?

· Is Premise 3 an accurate statement? If so, why or why not?

· Is Premise 4 an accurate statement? If so, why or why not?

· Do you agree with Conclusion 1? If so, why or why not?

· What additional observations did you make from reviewing the US GAAP financial statements and the definition provided in your internet search?

· Do you agree with Conclusion 2? If so, why or why not?

· What additional observations did you make from reviewing the IFRS financial statements?

1

Financial statements – case studies

© 2014 Ernst & Young Foundation (US). All Rights Reserved.

SCORE No. MM4165I

2

Financial statements – case studies

© 2014 Ernst & Young Foundation (US). All Rights Reserved.

SCORE No. MM4165I

Financial statements

The Presentation Observation Station

Background

You have been asked to take a ride on Financial Reporting Railways to The Presentation Observation Station (the Station). At the Station, you will find the financial reports of railway companies from around the world. Once you’ve arrived at the station, your role is to observe and gain insights into the presentation of the balance sheets for some of these companies.

To find the railway companies’ financial reports, the conductor directs you to the internet café in the Station. Once you arrive at the café, you receive a menu of select rail companies. Select at least three for each of the US and European companies and go to their websites. You may also research any railway companies “off the menu” as well, if you prefer. Locate their financial reports, specifically the balance sheet. Keep in mind that for some of the European railways, their reports might not be in English; however, that shouldn’t prevent you from making necessary observations.

The Presentation Observation Station internet café

Menu

(Links accessed August 14, 2014)

Name	Acronym	Country
Burlington Northern Santa Fe Corporation	BNSF	United States
http://bnsf.com/about-bnsf/financial-information/form-10-k-filings/pdf/10k-railway-2013.pdf
Danske Statsbaner	DSB	Denmark
http://www.dsb.dk/Global/PDF/%c3%85rsrapport/2013/DSB%20Annual%20Report%202013.pdf
GATX Corporation	GATX	United States
http://ir.gatx.com/phoenix.zhtml?c=70051&p=IROL-reportsannual
Iarnrod Eireann	IE	Ireland
http://www.irishrail.ie/media/ie_annual_report_2013.pdf?v=ga3dcce
Network Rail		United Kingdom
http://www.networkrail.co.uk/publications/annual-report-and-accounts/2014/
Norfolk Southern Corp.	NS	United States
http://www.nscorp.com/content/dam/nscorp/get-to-know-ns/investor-relations/annual-reports/annual-report-2013.pdf
Société Nationale Des Chemins de Fer Francais	SCNF	France
http://www.sncf.com/ressources/reports/sncf_financier_gb_2013_13.pdf
Statens Järnvägar	SJ	Sweden
http://www.sj.se/content/1/c6/17/56/85/SJ%20Annual%20&%20Sustanability%20Report%202013.pdf
Union Pacific Corporation	UP	United States
http://www.up.com/investors/attachments/secfiling/2014/upc10k_020714.pdf

Required

· Obtain and review the balance sheets for three rail companies in Europe whose financial statements are prepared using IFRS. Obtain and review the balance sheets for three rail companies in the US whose financial statements are prepared using US GAAP. Compare the following:

The IFRS balance sheets to the US GAAP balance sheets.

The IFRS balance sheets to each other.

· Answer the following questions:

Are the IFRS balance sheet classifications presented the same as the US GAAP balance sheet classifications?

· If different, which presentation do you believe is better? Explain why.

Are the IFRS balance sheet classifications the same between each of the companies?

What does IAS 1 require for a particular presentation format or order of items on the balance sheet?

· Does this agree with your observations? Discuss any differences.

Do you believe that one presentation format for balance sheets should be required of all companies throughout the world? Explain why or why not.