Question 2. Required Assume REH AG, a hypothetical company, incurs expenditures of 1,000 per month during the fiscal year ended 31 December 2009 to develop software for internal use. Under IFRS, the company must treat the expenditures as an expense until the software meets the criteria for recognition as an intangible asset, after which time the expenditures can be capitalized as an intangible asset. (1) What is the accounting impact of the company being able to demonstrate that the software met the criteria for recognition as an intangible asset on 1 February versus 1 December? (ii) How would the treatment of expenditures differ if the company reported under U.S. GAAP and it had established in 2008 that the project was likely to be completed? (15 marks) (b) The Volvo Group (OMX Nordic Exchange: VOLVB), based in Gteborg, Sweden, is a leading supplier of commercial transport products such as construction equipment, trucks, buses, and drive systems for marine and industrial applications as well as aircraft engine components. Excerpts from Volvo's consolidated financial statements along with notes pertaining to Volvo's inventories are presented in the tables below. (1) What inventory values would Volvo have reported for 2017, 2016, and 2015 if it had no allowance for inventory obsolescence? (u) Assuming that any changes to the allowance for inventory obsolescence are reflected in the cost of sales, what amount would Volvo's cost of sales be for 2017 and 2016 if it had not recorded inventory write-downs in 2017 and 2016? (iii) What amount would Volvo's profit (net income) be for 2017 and 2016 if it had not recorded inventory write-downs in 2017 and 2016? Assume tax rates of 28.5 percent for 2017 and 30 percent for 2016. (iv) What would Volvo's 2017 profit (net income) have been if it had reversed all past inventory write-downs in 2017? This question is independent of (1). (ii) and (iii). Assume a tax rate of 28.5 percent for 2017. (35 marks) Tables printed on the next page Table 1 Volvo Group Consolidated Income Statements (Swedish Krona in millions except per share data) For the Years Ended 31 December 2017 2016 2015 Net sales 303,667 285,405 258.835 Cost of sales (237 578) (219,600) (199,054) Gross income 66,089 65,805 59,781 Operating income Interest income and similar credits Income expenses and similar charges Other financial income and expenses Income after financial items Income taxes Income for the period Attributable to: Equity holders of the parent company Minority interests Profit 15.851 1.171 (1.935) (1.077) I 14.010 3.994) 10,016 2 2,231 9 52 (1.122) (504) 21.557 (6.529 15.028 666 (585) (181) 20.299 (3.981) 16.318 9.942 74 10.016 1 4,932 I 96 15.028 16,268 50 16,318 Table 2 Volvo Group Consolidated Balance Sheets (Swedish Krona in millions) Year Ended 31 December 2017 2016 2015 Assets Total noncurrent assets 196,381 162,487 124,039 Current assets: Inventories 55,045 43.645 34,211 17.712 176.038 372,419 14.544 159 160 321,647 10.757 134 388 258,427 Cash and cash equivalents Total current assets Total assets Shareholders' equity and liabilities Shareholders' equity Share capital Reserves Retained earnings Income for the period Equity attributable to equity holders of the parent company Minority interests Total shareholders' equity Total noncurrent provisions Total noncurrent liabilities Total current provisions Total current liabilities Total shareholders' equity and liabilities 12554 5.078 66.436 9.942 84,010 2.554 2.146 62,570 14,932 82,202 2.554 1,664 66,418 16,268 86.904 1630 84.640 29,031 192.608 11.750 154 390 372,419 579 82,781 26.202 71.729 10.656 130.279 321,647 284 87,188 19.864 45.457 9.799 196.119 258,427 Page 4 of 8 Table 3 Volvo Group Selected Notes to Consolidated Financial Statements NOTE L. ACCOUNTING PRINCIPLES Inventories Inventories are reported at the lower of cost, in accordance with the first-in, first-out method (FIFO). or net realizable value. The acquisition value is based on the standard cost method, including costs for all direct manufacturing expenses and the apportionable share of the capacity and other related manufacturing costs. The standard costs are tested regularly and adjustments are made based on current conditions. Costs for research and development, selling, administration, and financial expenses are not included. Net realizable value is calculated as the selling price less costs attributable to the sale. NOTE 2. KEY SOURCES OF ESTIMATION UNCERTAINTY Inventory obsolescence Inventories are reported at the lower of cost, in accordance with the first-in, first-out method (FIFO), or net realizable value. The estimated net realizable value includes management consideration of outdated articles, overstocking, physical damages, inventory-lead-time, handling, and other selling costs. If the estimated net realizable value is lower than cost, a valuation allowance is established for inventory obsolescence. The total inventory value net of inventory obsolescence allowance is per 31 December 2017, SEK (in millions) 55,045. 2017 2016 2015 NOTE 18. INVENTORIES Year Ended 31 December (millions of krona) Finished products Production materials, etc. Total 39.137 15,908 55,045 28.077 15,568 43,645 20,396 13.815 4,211 Increase (decrease in allowance for inventory obsolescence Year Ended 31 December (millions of 2017 2016 2015 krona) Balance sheet, 31 December, preceding 2,837 2,015 2,401 year Increase in allowance for inventory 1,229 757186 obsolescence charged to income Scrapping (325) (239) (169) Translation differences 305 12 (130) Reclassifications, etc. (524) 302 (273) Balance sheet, 31 December 3.522 2.837 2.015 (Total marks: 50 marks) Question 2. Required Assume REH AG, a hypothetical company, incurs expenditures of 1,000 per month during the fiscal year ended 31 December 2009 to develop software for internal use. Under IFRS, the company must treat the expenditures as an expense until the software meets the criteria for recognition as an intangible asset, after which time the expenditures can be capitalized as an intangible asset. (1) What is the accounting impact of the company being able to demonstrate that the software met the criteria for recognition as an intangible asset on 1 February versus 1 December? (ii) How would the treatment of expenditures differ if the company reported under U.S. GAAP and it had established in 2008 that the project was likely to be completed? (15 marks) (b) The Volvo Group (OMX Nordic Exchange: VOLVB), based in Gteborg, Sweden, is a leading supplier of commercial transport products such as construction equipment, trucks, buses, and drive systems for marine and industrial applications as well as aircraft engine components. Excerpts from Volvo's consolidated financial statements along with notes pertaining to Volvo's inventories are presented in the tables below. (1) What inventory values would Volvo have reported for 2017, 2016, and 2015 if it had no allowance for inventory obsolescence? (u) Assuming that any changes to the allowance for inventory obsolescence are reflected in the cost of sales, what amount would Volvo's cost of sales be for 2017 and 2016 if it had not recorded inventory write-downs in 2017 and 2016? (iii) What amount would Volvo's profit (net income) be for 2017 and 2016 if it had not recorded inventory write-downs in 2017 and 2016? Assume tax rates of 28.5 percent for 2017 and 30 percent for 2016. (iv) What would Volvo's 2017 profit (net income) have been if it had reversed all past inventory write-downs in 2017? This question is independent of (1). (ii) and (iii). Assume a tax rate of 28.5 percent for 2017. (35 marks) Tables printed on the next page Table 1 Volvo Group Consolidated Income Statements (Swedish Krona in millions except per share data) For the Years Ended 31 December 2017 2016 2015 Net sales 303,667 285,405 258.835 Cost of sales (237 578) (219,600) (199,054) Gross income 66,089 65,805 59,781 Operating income Interest income and similar credits Income expenses and similar charges Other financial income and expenses Income after financial items Income taxes Income for the period Attributable to: Equity holders of the parent company Minority interests Profit 15.851 1.171 (1.935) (1.077) I 14.010 3.994) 10,016 2 2,231 9 52 (1.122) (504) 21.557 (6.529 15.028 666 (585) (181) 20.299 (3.981) 16.318 9.942 74 10.016 1 4,932 I 96 15.028 16,268 50 16,318 Table 2 Volvo Group Consolidated Balance Sheets (Swedish Krona in millions) Year Ended 31 December 2017 2016 2015 Assets Total noncurrent assets 196,381 162,487 124,039 Current assets: Inventories 55,045 43.645 34,211 17.712 176.038 372,419 14.544 159 160 321,647 10.757 134 388 258,427 Cash and cash equivalents Total current assets Total assets Shareholders' equity and liabilities Shareholders' equity Share capital Reserves Retained earnings Income for the period Equity attributable to equity holders of the parent company Minority interests Total shareholders' equity Total noncurrent provisions Total noncurrent liabilities Total current provisions Total current liabilities Total shareholders' equity and liabilities 12554 5.078 66.436 9.942 84,010 2.554 2.146 62,570 14,932 82,202 2.554 1,664 66,418 16,268 86.904 1630 84.640 29,031 192.608 11.750 154 390 372,419 579 82,781 26.202 71.729 10.656 130.279 321,647 284 87,188 19.864 45.457 9.799 196.119 258,427 Page 4 of 8 Table 3 Volvo Group Selected Notes to Consolidated Financial Statements NOTE L. ACCOUNTING PRINCIPLES Inventories Inventories are reported at the lower of cost, in accordance with the first-in, first-out method (FIFO). or net realizable value. The acquisition value is based on the standard cost method, including costs for all direct manufacturing expenses and the apportionable share of the capacity and other related manufacturing costs. The standard costs are tested regularly and adjustments are made based on current conditions. Costs for research and development, selling, administration, and financial expenses are not included. Net realizable value is calculated as the selling price less costs attributable to the sale. NOTE 2. KEY SOURCES OF ESTIMATION UNCERTAINTY Inventory obsolescence Inventories are reported at the lower of cost, in accordance with the first-in, first-out method (FIFO), or net realizable value. The estimated net realizable value includes management consideration of outdated articles, overstocking, physical damages, inventory-lead-time, handling, and other selling costs. If the estimated net realizable value is lower than cost, a valuation allowance is established for inventory obsolescence. The total inventory value net of inventory obsolescence allowance is per 31 December 2017, SEK (in millions) 55,045. 2017 2016 2015 NOTE 18. INVENTORIES Year Ended 31 December (millions of krona) Finished products Production materials, etc. Total 39.137 15,908 55,045 28.077 15,568 43,645 20,396 13.815 4,211 Increase (decrease in allowance for inventory obsolescence Year Ended 31 December (millions of 2017 2016 2015 krona) Balance sheet, 31 December, preceding 2,837 2,015 2,401 year Increase in allowance for inventory 1,229 757186 obsolescence charged to income Scrapping (325) (239) (169) Translation differences 305 12 (130) Reclassifications, etc. (524) 302 (273) Balance sheet, 31 December 3.522 2.837 2.015 (Total marks: 50 marks)