Galena Petrovich, CFA, is an analyst in the New York office of TRS Investment Management, Inc. Petrovich is an expert in the industrial electrical equipment sector and is analyzing Fisher Global. Fisher is a global market leader in designing, manufacturing, marketing, and servicing electrical systems and components, including fluid power systems and automotive engine air management systems.Fisher has generated double-digit growth over the past ten years, primarily as the result of acquisitions, and has reported positive net income in each year. Fisher reports its financial results using International Financial Reporting Standards (IFRS).Petrovich is particularly interested in a transaction that occurred seven years ago, before the change in accounting standards, in which Fisher used the pooling method to account for a large acquisition of Dartmouth Industries, an industry competitor. She would like to determine the effect of using the purchase method instead of the pooling method on the financial statements of Fisher. Fisher exchanged common stock for all of the outstanding shares of Dartmouth.Fisher also has a 50% ownership interest in a joint venture with its major distributor, a U.S. company called Hydro Distribution. She determines that Fisher has reported its ownership interest under the proportioned consolidation method, and that the joint venture has been profitable since it was established three years ago. She decides to adjust the financial statements to show how the financial statements would be affected if Fisher had reported its ownership under the equity method. Fisher is also considering acquiring 80% to 100% of Brown and Sons Company. Petrovich must consider the effect of such an acquisition on Fisher's financial statements.Petrovich determines from the financial statement footnotes that Fisher reported an unrealized gain in its most recent income statement related to debt securities that are designated at fair value. Competitor firms following U.S. GAAP classify similar debt securities as available-for-sale.Finally, Petrovich finds a reference in Fisher's footnotes regarding a special purpose entity (SPE). Fisher has reported its investment in the SPE using the equity method, but Petrovich believes that the consolidation method more accurately reflects Fisher's true financial position, so she makes the appropriate adjustments to the financial statements.If Fisher Global decides to purchase only 80% of Brown and Sons, under 1FRS they will have the option to:
Answer(s): C
All business combinations (e.g., merger, purchase, or consolidation) are reported under the acquisition method. Identifiable assets and liabilities must be reported at fair value at the time of the acquisition. Under IFRS, Fisher has the option of calculating the goodwill for the acquisition under either the full goodwill or partial goodwill methods. Goodwill is less under the partial goodwill method. (Study Session 5, LOS 21.b)
Galena Petrovich, CFA, is an analyst in the New York office of TRS Investment Management, Inc. Petrovich is an expert in the industrial electrical equipment sector and is analyzing Fisher Global. Fisher is a global market leader in designing, manufacturing, marketing, and servicing electrical systems and components, including fluid power systems and automotive engine air management systems.Fisher has generated double-digit growth over the past ten years, primarily as the result of acquisitions, and has reported positive net income in each year. Fisher reports its financial results using International Financial Reporting Standards (IFRS).Petrovich is particularly interested in a transaction that occurred seven years ago, before the change in accounting standards, in which Fisher used the pooling method to account for a large acquisition of Dartmouth Industries, an industry competitor. She would like to determine the effect of using the purchase method instead of the pooling method on the financial statements of Fisher. Fisher exchanged common stock for all of the outstanding shares of Dartmouth.Fisher also has a 50% ownership interest in a joint venture with its major distributor, a U.S. company called Hydro Distribution. She determines that Fisher has reported its ownership interest under the proportioned consolidation method, and that the joint venture has been profitable since it was established three years ago. She decides to adjust the financial statements to show how the financial statements would be affected if Fisher had reported its ownership under the equity method. Fisher is also considering acquiring 80% to 100% of Brown and Sons Company. Petrovich must consider the effect of such an acquisition on Fisher's financial statements.Petrovich determines from the financial statement footnotes that Fisher reported an unrealized gain in its most recent income statement related to debt securities that are designated at fair value. Competitor firms following U.S. GAAP classify similar debt securities as available-for-sale.Finally, Petrovich finds a reference in Fisher's footnotes regarding a special purpose entity (SPE). Fisher has reported its investment in the SPE using the equity method, but Petrovich believes that the consolidation method more accurately reflects Fisher's true financial position, so she makes the appropriate adjustments to the financial statements.For comparison purposes, Petrovich decides to reclassify Fisher GlobaPs debt securities as available-for-sale. Ignoring any effect on income taxes, which of the following best describes the effects of the necessary adjustments?
U.S. GAAP requires that unrealized gains and losses on available-for-sale securities be reported in comprehensive income as part of shareholders' equity. The appropriate adjustment to Fishers statements is to decrease net income by the amount of the gain. Lower net income will result in lower ROA and ROE (lower numerators). Lower net income results in lower retained earnings. However, the gain increases other comprehensive income; thus, total equity does not change. In summary, assets, liabilities and total equity are not affected by the adjustment; thus, asset turnover, debt-to-equity and debt-to-total capital are not impacted. (Study Session 5, LOS 21.a,b)
Galena Petrovich, CFA, is an analyst in the New York office of TRS Investment Management, Inc. Petrovich is an expert in the industrial electrical equipment sector and is analyzing Fisher Global. Fisher is a global market leader in designing, manufacturing, marketing, and servicing electrical systems and components, including fluid power systems and automotive engine air management systems.Fisher has generated double-digit growth over the past ten years, primarily as the result of acquisitions, and has reported positive net income in each year. Fisher reports its financial results using International Financial Reporting Standards (IFRS).Petrovich is particularly interested in a transaction that occurred seven years ago, before the change in accounting standards, in which Fisher used the pooling method to account for a large acquisition of Dartmouth Industries, an industry competitor. She would like to determine the effect of using the purchase method instead of the pooling method on the financial statements of Fisher. Fisher exchanged common stock for all of the outstanding shares of Dartmouth.Fisher also has a 50% ownership interest in a joint venture with its major distributor, a U.S. company called Hydro Distribution. She determines that Fisher has reported its ownership interest under the proportioned consolidation method, and that the joint venture has been profitable since it was established three years ago. She decides to adjust the financial statements to show how the financial statements would be affected if Fisher had reported its ownership under the equity method. Fisher is also considering acquiring 80% to 100% of Brown and Sons Company. Petrovich must consider the effect of such an acquisition on Fisher's financial statements.Petrovich determines from the financial statement footnotes that Fisher reported an unrealized gain in its most recent income statement related to debt securities that are designated at fair value. Competitor firms following U.S. GAAP classify similar debt securities as available-for-sale.Finally, Petrovich finds a reference in Fisher's footnotes regarding a special purpose entity (SPE). Fisher has reported its investment in the SPE using the equity method, but Petrovich believes that the consolidation method more accurately reflects Fisher's true financial position, so she makes the appropriate adjustments to the financial statements.What are the likely effects on return on assets (ROA) and net profit margin (ignoring any tax effects) of correctly adjusting for Fisher Global's investment in the SPE using the acquisition method?ROA Net profit margin
The acquisition method results in higher assets and higher sales, but the same net income. Therefore, both ROA (net income divided by assets) and net profit margin (net income divided by sales) will decrease. (Study Session 5. LOS 21.c)
Jenna Stuart is a financial analyst for Deuce Hardware Company, a U.S. company that reports its results in U.S. dollars. Wayward Distributing, Inc., is a foreign subsidiary of Deuce Hardware, which began operations on January 1,2007. Wayward is located in a foreign country and reports its results in the local currency called the Rho. Selected balance sheet information for Wayward is shown in the following table.Stuart has been asked to analyze how the reported financial results of Wayward will be affected by the choice of the all-current or temporal methods of accounting for foreign operations. She has gathered the following exchange rate information on the $/Rho exchange rate:• Spot rate on 1/01/08: $0.35 per Rho• Spot rate on 12/31/08: $0.45 per Rho• Average spot rate during 2008: $0.42 per RhoWill the all-current method report a translation gain or loss for 2008, and will that gain or loss be reported on Deuce's income statement or the balance sheet?
Answer(s): A
Exposure under the all-current method is equity. Beginning equity is positive ($4,000) and the change in equity during the year is positive ($6,000 - $4,000 = $2,000). Because the Rho appreciated during the year, the all-current method will report a translation gain for 2008. Under the all-current method gains and losses are reported as part of the cumulative translation adjustment in the equity section of the balance sheet. (Study Session 6, LOS 23.d,e)
Jenna Stuart is a financial analyst for Deuce Hardware Company, a U.S. company that reports its results in U.S. dollars. Wayward Distributing, Inc., is a foreign subsidiary of Deuce Hardware, which began operations on January 1,2007. Wayward is located in a foreign country and reports its results in the local currency called the Rho. Selected balance sheet information for Wayward is shown in the following table.Stuart has been asked to analyze how the reported financial results of Wayward will be affected by the choice of the all-current or temporal methods of accounting for foreign operations. She has gathered the following exchange rate information on the $/Rho exchange rate:• Spot rate on 1/01/08: $0.35 per Rho• Spot rate on 12/31/08: $0.45 per Rho• Average spot rate during 2008: $0.42 per RhoWill the temporal method report a translation gain or loss for 2008, and will that gain or loss be reported on Deuce's income statement or the balance sheet?
Answer(s): B
Exposure under the temporal method is cash and accounts receivable minus current liabilities and long-term debt. Beginning exposure is negative ($5,000 - $11,000 = -$6,000) and the change in exposure is also negative [-$6,300 - (-$6,000)] = -$300. Because the Rho appreciated during the year, the temporal method will report a translation loss for 2008. Gains and losses are reported on the income statement under the temporal method. (Study Session 6, LOS 23.d,e)
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