Deutsche Autoparts, LLC-Reconciling U.S. GAAP TO IFRS

By Weisel, James A. | Journal of the International Academy for Case Studies, August 2015 | Go to article overview

Deutsche Autoparts, LLC-Reconciling U.S. GAAP TO IFRS


Weisel, James A., Journal of the International Academy for Case Studies


LEARNING OUTCOMES AND TEACHING APPROACH

Questions #1-2 focus on understanding of IFRS vs. U.S. GAAP standards in general. While the historical causes for the differences between U.S. GAAP and IFRS is probably beyond the scope of the case, students should understand the current context of the convergence effort of the FASB and IASB and why it is important. Question #3 links the general status of convergence to the issues specifically identified for Deutsche Autoparts LLC. Finally, questions #4-5 focus on the computations to complete the reconciliation.

Recommended Questions:

1. Why is convergence of accounting standards considered important? Identify potential benefits to convergence in addition to those listed at the beginning of the case.

2. In 2002 the FASB and the IASB agreed to work together to remove differences between U.S. GAAP and international accounting standards. The agreement is documented in the Memorandum of Understanding (MoU), also known as the Norwalk Agreement. What is the current status of the convergence effort by the FASB and IASB?

3. What is the current degree of similarity (or difference) between U.S. GAAP and IFRS standards specifically related to the 5 items identified for Deutsche Autoparts LLC?

4. Complete the reconciliation of U.S. GAAP After-tax Operating Income and Shareholders' Equity to IFRS.

5. Compare After-tax Return on Shareholders' Equity under U.S. GAAP to the return under IFRS.

Recommended Discussion and Solution:

The first learning objective (question #1) focuses on students' understanding of why the convergence of IFRS and U.S. GAAP is important. Numerous reasons are put forth by proponents.

Sir Bryan Carsberg, former secretary-general of the International Accounting Standards Committee (IASC), in 1998 explained how accounting diversity affects international capital markets:

"Imagine the case of an international business, with operations in many different countries. It is likely to be required to prepare accounts for its operations in each country, in compliance with the rules of that country. It will then have to convert those accounts to conform to the rules of the country in which the holding company is resident, or the preparation of group accounts. If the company has listings on stock exchanges outside its home country, these exchanges or their regulators may require the accounts to be fled under some other basis. The extra cost could be enormous. Heavy costs also fall on investors in trying to compare the results of companies based in different countries and they may just be unable to make such comparisons.... But the biggest cost may be in limiting the effectiveness of the international capital markets. Cross border investment is likely to be inhibited."

Additional arguments for accounting standard harmonization have been made. These include:

1. Harmonized accounting standards would significantly reduce the costs of reporting consolidated financial statements for multinational companies and those companies seeking foreign source investors. A worldwide set of standards would eliminate the need for companies to prepare their financial statements based on a variety of local standards.

2. Harmonized accounting standards would reduce the costs and complexity of auditing consolidated financial statements for multinational companies.

3. Comparability of financial statements worldwide is necessary to reduce impediments to global market capitalization. A worldwide set of financial reporting standards would make it easier for investors to evaluate potential investments and reduce risk through international diversification.

4. Convergence would improve the quality of financial accounting and reporting, thereby increasing the credibility of financial information. Improved quality of financial information should reduce the costs of raising capital from global investors. …

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