International Accounting: Ruckman - Coursework Example

 International accounting Introduction Ruckman, Inc. is a global company priding itself in retailing high quality technology equipment and services to the compound semiconductor and conductor market. Additionally, the company provides pulp and paper products globally. The company’s global presence demands the creation of synchronies financial statements among other vital documents of operations. Just as the name suggests, Generally Accepted Accounting Principles, USA GAAP are a set of accounting principles applicable in the United States only. Ruckman, Inc. has a large presence in the United States. The company’s headquarters is in the United States a feature that influenced its financial statements since they had to comply with the demands of the GAAP. In order to develop synchronized company accounts, the company must therefore convert all its financial statements from the GAAP format to the globally accepted International Financial Reporting Standards (IFRS). Chris Gilmore is the company’s accountant and must therefore convert all the existing financial statements of the company from the local GAAP to the global IFRS. The process requires him to consider specific intricate features of the previous financial statements at the company thus converting the information to the new system. The conversion includes changing both the structures and contents of the documents owing to the revision of accounting principles and the introduction of yet other new policies. In doing this, the company will have a consolidate and synchronized financial information thus communicating such vital information as the company’s cash flow, financial performance and financial position among others in a universally accepted format. As Chris settles down in his new job as the chief accounting officer at Ruckman, Inc., his preliminary job will include converting the company’s financial statements in order to comply with the dictates of IFRS. The new standards affect the accounting system at the company but results in the creation of internationally accepted financial documents that will harmonize the financial documents of the global company. Among the financial documents affected by the change in the standards, include income statement and balance sheet besides the effects it has on the financial ratios among other intricate features of a business. Ruckman, Inc.’s financial statements The IFRS outlines a number of financial statements considered paramount. Some of the documents differ from those required by the US’ GAAP. The documents of financial statements include the balance sheet, income statement, cash flow statements and changes in equity. Ruckman, Inc. already has some of the statement and Chris will therefore work with such documents to create those not provided. Additionally, he must investigate the specific documents in order to change and convert them into the prerequisite structures. TABLE 1 Consolidated Income Statement Ruckman, Inc. Year ended December 31, 2011 (in $ thousands) Revenues $191,685 Cost of sales 120,638 Gross profit 71,047 Selling expenses 16,370 General and administration expenses 18,077 Research and development costs 15,317 Other operating income 8,293 Other operating expenses 1,135 Total expenses 59,192 Operating result 11,855 Interest income 235 Other income 756 Interest expense (56 ) Net income from ordinary activities before tax 12,790 Income tax 789 Net income from ordinary activities 12,001 Extraordinary expense 2,872 Net income for the year $9,129 The table above shows the company’s income statement developed in accordance with the America’s GAAP. The document presents all the company’s revenues and expenditure thus portraying the company’s net annual income of the year 2011. Changes in income statement I. Construction contracts The income statement will anticipate changes owing to the new policies regarding the construction of contracts. IRFS prohibits the estimation of the cost of projects. This implies that the new standards recognize the contract extent and profits after the completion of a project. Chris cannot therefore use the completed contract method of accounting under the new financial system. II. Goods sold The effects of FIFO reverse will affect the financial position of the company as presented in the income statement. IFRS prohibits the use of LIFO implying that companies must convert all inventories to the FIFO. The difference arising from the conversion is known as the FIFO reverse. Its effects on the vital financial document include lower COGS and lower inventories. The two will change the financial positions as captured by the income statement. III. Operating expenses Unlike the US GAAP that provides clear differentiation between losses and expenses, the new IRFS does not. This implies that Chris will include all the loses the business incurs in the operating expenses. Table 2 Consolidate balance sheet Ruckman, Inc. December 31, 2011 Total non-current assets 71,454 Total assets $235,897 Liabilities and shareholders’ equity Short-term debt $1,251 Accounts payable 23,761 Accrued income taxes 254 Other accrued liabilities 2,820 Other current liabilities 4,878 Deferred revenues 24,877 Total current liabilities 57,841 Debt 10,103 Other non-current liabilities 16,475 Total non-current liabilities 26,578 Total liabilities 84,419 Common stock: 29,713,000 shares issued and outstanding 29,713 Additional paid in capital 71,228 Retained earnings 52,906 Accumulated other comprehensive loss (2,369) Total equity 151,478 Total liabilities and shareholders’ equity $235,897 Balance sheet is a vital financial document that shows the company’s financial position at any time. The sheet outlines the company’s assets and liabilities thus communicating the company’s financial condition at any given time. Since it remains a vital document in the IRFS, Chris will convert this document in order to show the new assets and liabilities the company may have given the new standards. In doing this, Chris must carry out effective substantiation of the balance sheet. In doing this, Chris will use such accounting system records such as SAP and Oracle. Changes in the balance sheet I. Goodwill Goodwill is an example of an intangible asset in any business. The US GAAP does not permit for any upward marking of goodwill in the balance sheet. The IFRS just as explained above permits the inclusion of both appreciation and depreciation of property and equipment in a company. This implies that Chris will calculate and include the value of goodwill, an invaluable intangible asset in the company’s balance sheet. Furthermore, he must do this annually as he acknowledges the fact that the value of goodwill appreciates annually. II. Inventory The fact that the new system does not permit the use of LIFO as an accounting method will force Chris to convert all the existing inventories created through the previous LIFO to FIFO and place such details as footnotes in the balance sheet. III. Equipment and property The US GAAP does not permit the inclusion of such fundamental effects of both depreciations and appreciations in the values of property and equipment owned by a company. IRFS on the other acknowledges the effects of the two. This implies that Chris must calculate and include the values of both appreciation and depreciation in all the assets of the company. This affects the values in the balance sheet. TABLE 3 Statement of Cash Flows Ruckman, Inc. Year ended December 31, 2011 (in $ thousands) Cash flow from operating activities Net income for the year Reconciliation between net income and cash flows from operating activities Impairment expense $9,129 2,872 Depreciation and amortization 7,844 Deferred income taxes Other changes in Asset accounts 232 (27,777 ) Liability accounts 29,006 Cash flow provided by operating activities 21,306 Cash flow from investing activities Capital expenditures in property, plant, and equipment (2,181) Capital expenditures in intangible assets (184) Cash flow used for investing activities (2,365) Cash flow from financing activities Issuance of convertible bonds 4,000 Cash flow provided by financing activities 4,000 Effect of changes of exchange rates on cash and cash equivalents (390) Net change in cash and cash equivalents 22,551 Cash and cash equivalents at the beginning of the period 49,392 Cash and cash equivalents at the end of the period $71,943 Supplemental disclosure of cash flow information: Interest paid (42) Interest received 253 Income taxes paid (923) Just as the name suggests, statements of cash flow are vital financial document that shows the flow of money in a company. It records the effects that changes in the balance sheet have on the finances of a company. According to the International Financial Reporting Standards, statements of cash flow remain vital financial document that help in financial management. Chris must therefore convert the details in the sheet above to the IFRS required document. In doing this, he will include the changes that arise from the new policies. List of accounting areas with sufficient information Among the accounting areas that have sufficient data to enable Chris carry out an effective conversion of the company’s financial information from the current US GAAP to the internationally accepted IRFS include The creation of a Balance sheet Creation of income statement Changes in equity Cash flow statement New requirements under IRFS The balance sheet for example will require the separation of the current assets and non-current assets and current liabilities and non-current liabilities. This implies that Chris must change the current balance sheet and state the existing current assets and non-current assets. Each of such category of assets and liabilities are essential in understanding the financial position of a company. The same applies to the liabilities, which also influence the financial might of a business. Under the new systems, Chris must show the deferred taxes in the balance sheet but on a separate line. Such is a new provision that differs with the previous US GAAP in which the deferred taxes are included with the assets and liabilities. The IRFS prohibit the inclusion of extraordinary events. Such events as accidents are considered extraordinary since they do not occur at regular interval. However, they affect the financial position of a business. The new standards do not recommend the inclusion of such events in any financial document. The US GAAP on the other hand permits the inclusion of such unregularly events especially when they are infrequent. List of financial areas with insufficient information Changes in equity Inventories The two are vital financial documents that record the flow of money within the company. As such, Chris must develop appropriate and functional documents by converting the current documents as provided in the case. Doing this is difficult owing to the lack of adequate information as explained in the case. New Requirements under IRFS The IRFS changes numerous accounting systems key among which is inventory costs. The systems eliminates such previous methods of accounting as last-in, first-out (LIFO) and first-in, first-out (FIFO). The standards recommend a single system of inventory costing. The method enhances compatibility among countries besides eliminating the need to adjust the LIFO constantly in varying accounts. As such, Chris must implement the new method of accounting. The new standards introduce new ways of handling intangibles in the financial records. Unlike the US GAAP, which recognizes intangible assets as of fair value, the new IRFS recognizes such assets only if they have futuristic value to the business. As such, Chris may only include such intangible assets as goodwill among others if they have futuristic value to the company. Unfortunately, such do not have any value for Ruckman, Inc. since the company does not plan to evaluate any of its current premises in any part of the country. This implies that the goodwill remains an intangible asset that may never have any actual financial value to the company. IRFS provides for unique ways of managing write-downs. The US GAAP prohibits any change on an inventory. The new financial standards on the other hand permits any form of change provided the accountant follows specific criteria. This implies that Chris will enjoy immense control of the inventory since he can easily change the write-downs provided he follows the specified criteria. Conclusion In retrospect, Chris must make fundamental changes to the company’s accounting system in order to convert to the internationally accepted IRFS. In doing this, he must investigate all the existing financial documents in the company thus change them accordingly. At present, he has sufficient information to convert such documents as the Balance sheet income statement, changes in equity and the cash flow statement. He however lacks adequate information to convert the inventories and equity. Read More