W3

Discussion# 1

Compare and contrast financial statements made on the cost versus equity versus consolidated methods. Include an actual example of each from corporate financial reports

Comment# 1 DN

The cost method is used when making a long-term, passive investment that does not create in influence over the company and the investment results in less than 20% ownership stake, however, this is not a mandatory rule since influence is the more important factor. Under the cost method, the stock purchased is reported at the historical purchase price as a non-current asset on a balance sheet and is not changed until shares are exchanged, sold, or new shares are purchased. Any received dividends are recorded as income, and may be taxed as such (Corporate Finance Institute, 2020).

The accounting equity method should generally be used when an investment results in a 20 to 50% stake in another company, unless it can be clearly demonstrated that the investment does not result in a significant amount of influence or control. In the equity method, initially the investment is reported in the same way as the cost method, however, the amount is changed to adjust for the share of the company’s profits and losses. In this approach dividends are not treated as earnings, they are considered an investment return, and reduce the listed value of the shares (FASB, 2016).

According to PwC (2019) this method “is important to investors because when one entity consolidates another, it reports the other entity’s assets, liabilities, revenues, and expenses together with its own, as if they are a single economic unit” (p. 6), therefore, this approach can only be used if the investor has significant influence over the investor or the subsidiary, assuming that the investor holds at least 50.1 percent of the subsidiary shares or voting rights. The consolidation method works by reporting the balances of the subsidiary in a combined statement along with the balances of the parent company, a parent company combines its own revenue with the 100% of the subsidiary's revenue (PwC, 2019).

I am comparing the balance sheets of the GAP, INC which uses the consolidated method versus Performance Food Group Company which uses the equity method. As showed in figure 1, the GAP, INC records short term investments while the Performance Food Group Company records accounts receivable, less allowances of $22.0 and $19.3 (figure 2). Another big difference is that Performance Food Group Company reports Goodwill since they use the equity method while the GAP, INC records other long-term assets.

Figure 1 the Gap, Inc. Balance Sheet

Note: data obtained from Gap, Inc. (2019).

Figure 2 Performance Food Group Company Balance Sheet

Video

Go to the Financial Accounting Standards Board YouTube website: https://www.youtube.com/user/FASBLiveEvent

Select any FASB meeting recording and post a substantive discussion describing the contents of the video and what you learned from watching the FASB at work.  Please include the complete reference information including the URL to the video in your discussion post.

 

Respond to any one of your classmates on the information they've posted about their video for a total of two (2) posts.

Comment to DN

The video I selected from is called “FASB Share-Based Compensation and Private Companies”. The video talks about how difficult is to determinate the value of the underlying share used in share-based compensation for private companies due to the lack of marketability of the share since there is no determinable fair value for the underlying share; therefore, the valuation of the share can be costly and complex. According to the Financial Accounting Standards Board (FASB) (2020, min. 0:25), “in a public company the valuation of their shares is available from multiple sources” therefore, it is more complicated for private companies that for public companies to value the underlying share.

According to the FASB (2015, par. 2) “The FASB is looking for ways to reduce cost and complexity in accounting for share-based payments, while maintaining or improving the quality of information provided to investors and other financial statement users.” consequently, the FASB has made simplification in this area for the past several years, in particular for private companies. The PCC working with the FASB are trying to simplify one key input to value share-based payment awards for private companies by providing practical expedient that could reduce cost.

According to Tysiac (2020, par. 5), “current GAAP provides private companies with practical expedients for the valuation of expected volatility and the expected term of share-based payments. But no practical expedient exists for valuation of the underlying share price, which generally is the most costly and complex input to determine and audit” therefore, the expedient will allow private companies to better leverage what it does for tax purposes in valuing the underlying share on the grant date for GAAP purposes. The FASB knows that there are other areas where shared-based compensation for private companies could be simplified, such as profits interest awards due to the fact that there is no a lot of specific guidance and they will be talking about that topic with Board in the future.

Case Study

A vice president for operations at Poncho Platforms asks for your help on a financial reporting issue concerning goodwill. Two years ago, the company suffered a goodwill impairment loss for its Chip Integration reporting unit. Since that time, however, the Chip Integration unit has recovered nicely and its current cash flows (and projected cash flows) are at an all-time high. The vice president now asks whether the goodwill loss can be reversed given the reversal of fortunes for the Chip Integration reporting unit.

1. Is impairment of goodwill reversible under U.S. GAAP? Four Accounting Standards Updates (ASUs) were covered in the Welcome to Week 3 Keiser Live! recording and should be used as reference list items. How about under IFRS? (Refer to FASB Topic 350, “Intangibles—Goodwill and Other,” and IAS 36, “Impairment of Assets.” and IAS 38 as discussed in the Welcome to Week 3 Keiser Live! recording). Discuss

2. Are goodwill impairment testing procedures the same under IFRS and U.S. GAAP? If not, how is goodwill tested for impairment under IFRS? (Refer to IAS 36 and IAS 38). Discuss

Paper Format:

·  Minimum 3 pages total (not including title page, abstract or reference page)

·  Proper APA format

·  Minimum of 4 scholarly sources including limited use of your textbook.