Case Study 1 After spending many years working in the Gulf region as Chief Accountant, Michael decided to move to his hometown in the United States. While working in the Gulf region, Michael was involved in the preparation of financial statements for a conglomerate based in Dubai, with branches in all parts of the world. The company followed IFRS standards while preparing the financial statements. After settling in his hometown in Chicago, Michael joined a leading publishing company in the US which hired him for the post of Senior Accountant, in charge of preparing financial statements for its US division. The company followed accounting standards (US GAAP) prepared by the Financial Accounting Standards Board. As Michael's experience basically was on IFRS based financial reporting, this posed a serious challenge while treating different activities. Michael felt that it is very easy to follow IFRS than US GAAP. Further, since most of the companies in US raise funds overseas and carries international operations, he felt that IFRS is more relevant for companies in the US with international operations. While preparing the financial statements, he got confused regarding the specific provisions in US GAAP and considered it as very detailed and overly complex. During the year, the internal audit department conducted an intemal audit to examine whether the books of accounts prepared by Michael adhere to the standard guidelines. Based on the audit, the following observations were made. During the year, the company spend S150,000 on renovating the offices. While preparing the financial reports, Michael considered the expenditure as an operational expense. The auditors observed that Michael is found strict in reporting revenues. In few projects which are currently going on, the revenue based on percentage of work completed is not calculated and reported in the financial statements. Though the company used LIFO in the last few years for valuing inventory, Michael has decided to change the inventory valuation method from LIFO to FIFO. He has informed the auditors that the change is done since the company has stocks materials which are bought at the beginning of the last year at a higher price. During the year, the company has taken a loan for capital expenditure, but due to a temporary cash crunch the money was used the cash to pay salaries to the staff. The bank has issued a letter to repay the loan on the grounds of violation of the covenant/loan agreement. Michael has reported the loan as non-current liability in the financial statements. 1. 2. 3. 4. 5. While writing off impairment losses, Michael has used two-step method for write-offs. Michael argued that any impairment losses should be written off in stages and hence a two-stage approach is more appropriate. The management called Michael for an explanation of the above observations. Thomas, a friend of Michael, has been always a critic of using accounting standards. He considered that conceptual frameworks are not necessary to produce reliable financial statements. As the purpose of financial statements is to communicate the financial results of the business to internal and external stakeholders, the organization should follow a customized accounting framework that best suits it, instead of using an accounting standard set by international bodies. Based on the above case, answer the following; (Maximum word count for Case Study is 400 Words) (4+4+2 = 10 Marks) 1. Explain each of the observation and state whether Michael has followed the relevant accounting standard? Justify your answer. 2. Do you think the convergence of accounting standards are required to standardize the accounting reports? Justify the answer with relevant information from the case. 3. Based on this case, explain your arguments on a. The observations made by Thomas. b. What are the areas where IFRS and US GAAP differ? The answer should cite examples from the case
