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Appendix C:

IFRS Comprehensive Case

C-0

British Airways, Plc. (BA), a U.K. company, prepares its financial statements according to International Financial Reporting Standards. BA's annual report for the year ended March 31, 2009, which includes financial statements and disclosure notes, is included with all new textbooks and can be found at www.britishairways.com. This case addresses a variety of characteristics of financial statements prepared using IFRS often comparing and contrasting those attributes of statements prepared under U.S. GAAP. Questions are grouped in parts according to various sections of the textbook. When answering questions, focus on BA's “Group” financial information (which is equivalent to “Consolidated” under U.S. GAAP).

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Part A: Financial Statements, Income Measurement, and Current Assets

A1.

 

Describe the apparent differences in the order of presentation of the components of the balance sheet between IFRS as applied by British Airways (BA) and a typical balance sheet prepared in accordance with U.S. GAAP.

A2.

 

How does BA classify operating expenses in its income statement? How are these expenses typically classified in an income statement prepared in accordance with U.S. GAAP?

A3.

 

How does BA classify interest paid, interest received, and dividends received in its statement of cash flows? What other alternatives, if any, does the company have for the classification of these items? How are these items classified under U.S. GAAP?

A4.

 

BA changed how it accounts for BA miles that are earned by members of their “Executive Club.” How does BA account for that revenue? Is this accounting approach consistent with how U.S. GAAP accounts for multiple-deliverable contracts? Explain. Based on your reading of the notes to the accounts, how important do you think this revenue is for BA?

A5.

 

Examine BA's note 23, dealing with trade receivables. Do any aspects of that note appear unusual to you from the perspective of U.S. GAAP? Explain.

A6.

 

What method does the company use to value its inventory? What other alternatives are available under IFRS? Under U.S. GAAP?

A7.

 

BA's inventories are valued at the lower of cost and net realizable value. How does this approach differ from U.S. GAAP?

Part B: Property, Plant, and Equipment and Intangible Assets

B1.

 

What method does BA use to amortize the cost of computer software development costs? How does this approach differ from U.S. GAAP?

B2.

 

BA's property, plant and equipment is reported at cost. The Group has a policy of not revaluing property, plant and equipment. Suppose BA decided to revalue its equipment on March 31, 2009 and that the fair value of the equipment on that date was $280 million. Prepare the journal entry to record the revaluation assuming that the journal entry to record annual depreciation had already been recorded. (Hint: you will need to locate the original cost and accumulated depreciation of the equipment at the end of the year in the appropriate disclosure note.)

B3.

 

Under U.S. GAAP, what alternatives do companies have to value their property, plant, and equipment?

C-1

B4.

 

BA calculates depreciation of plant and equipment on a straight-line basis, over the useful life of the asset. Describe any differences between IFRS and U.S. GAAP in the calculation of depreciation.

B5.

 

How often does BA review the residual values of its depreciable assets? How does this approach differ from U.S. GAAP?

B6.

 

When does BA test for the possible impairment of goodwill and for other non-financial assets? How do these approaches differ from U.S. GAAP?

B7.

 

Describe the approach BA uses to determine goodwill impairment losses. (Hint: see Note 19). How does this approach differ from U.S. GAAP?

B8.

 

BA does not report any research and development expenses in its income statement. If it did, its approach to accounting for research and development would be significantly different from U.S. GAAP. Describe the differences between IFRS and U.S. GAAP in accounting for research and development expenditures.

B9.

 

The following is included in BA's summary of significant accounting policies disclosure note. “Intangible assets are held at cost and are either amortised on a straight-line basis over their economic life, or they are deemed to have an indefinite economic life and are not amortised, but tested annually for impairment.” Assume that on March 31, 2009, BA decided to revalue its Landing rights intangible assets and that the fair value on that date was determined to be $190 million. Amortization expense for the year already has been recorded. Prepare the journal entry to record the revaluation.

Part C: Investments

C1.

 

How does BA account for “other current interest-bearing deposits”? Is that consistent with U.S. GAAP? What is the amount of those investments that are maturing after three months, as of March 31, 2009?

C2.

 

How does BA account for “available-for-sale assets”? Is that approach consistent with U.S. GAAP? What is the amount of those investments as of March 31, 2009?

C3.

 

How does BA account for its investments in associates? Is that accounting approach consistent with U.S. GAAP? Explain.

C4.

 

BA accounts for its investment in Iberia airline using the equity method, even though it holds only 13.15% of Iberia's equity. Is that approach consistent with U.S. GAAP? Explain.

C5.

 

BA indicates that it sometimes recognizes impairments on held-to-maturity and available-for-sale investments. Describe how recognition of impairments could differ for IFRS and U.S. GAAP. (Appendix 12B)

C6.

 

BA recognized a £ 13 million impairment of their investment in Flybe for the year ended March 31, 2009. On what criteria did BA base their determination that the investment was impaired? Would that be handled similarly in U.S. GAAP? (Appendix 12B)

Part D: Liabilities

D1.

 

BA has an account entitled “sales in advance of carriage.” Explain the purpose of that account. Would transactions of this type be handled similarly under U.S. GAAP? What is the amount of “sales in advance of carriage,” as of March 31, 2009?

D2.

 

Note 30 lists “provisions for liabilities and charges.” Is the threshold for recognizing a liability associated with these items any different under IFRS than it is under U.S. GAAP? Explain. By how much has the total amount of the BA Group's “provisions for liabilities and charges” increased or decreased during fiscal 2009?

D3.

 

BA's note 37 lists contingent liabilities. Explain how the use of that term differs between IFRS and U.S. GAAP.

D4.

 

Sealy Corporation reported the following line items in its statement of cash flows for the nine months ended August 30, 2009:

Amortization of discount on secured notes .............................................351,000
Amortization of debt issuance costs and other ........................................2,925,000

C-2
 

   In British Airways' financial statements, Note 28: “Long-term borrowings” describes the company's long-term debt. Neither of the two items above is reported in the financial statements of British Airways, and neither is likely to appear there in the future. Why?

D5.

 

Examine the long-term borrowings in BA's balance sheet and the related note. What, if any, convertible securities does the company have outstanding? Suppose BA issued £ 300 million fixed rate 8.75 per cent Eurobonds, due 2031, at 101 in 2011 and that the bonds are convertible into shares of BA ordinary shares. Suppose, too, that the company simultaneously issued at 99, bonds similar in all respects except they are not convertible. Prepare the journal entry BA would use to record the issue of the convertible bonds. Prepare the journal entry BA would use to record the issue of the convertible bonds if BA used U.S. GAAP.

D6.

 

BA does not elect the fair value option (FVO) to report its financial liabilities. Examine Note 32: “Financial Instruments.” If the company had elected the FVO for all of its fixed rate borrowings, what would be the balance at March 31, 2009 in the Fair value adjustment account?

D7.

 

Is IFRS or U.S. GAAP more restrictive for determining when firms are allowed to elect the fair value option for financial assets and liabilities? Explain.

Part E: Leases, Income Taxes, and Pensions

E1.

 

In Note 2: Summary of significant accounting policies, part d: Leased and hire purchase assets, BA states that “Where assets are financed through finance leases or hire purchase arrangements, under which substantially all the risks and rewards of ownership are transferred to the Group, the assets are treated as if they had been purchased outright.” Is this the policy companies using U.S. GAAP follow in accounting for capital leases? Explain.

E2.

 

Look at BA's Note 28: Long-term borrowings and Note 29: Operating lease commitments. Does BA obtain use of its aircraft more using operating leases or finance leases? Do lessees report operating and finance lease commitments the same way? Explain.

E3.

 

Where in its March 31, 2009 balance sheet does BA report deferred taxes? How does this approach differ from the way deferred taxes are reported using U.S. GAAP? Using the Internet, determine how deferred taxes would be reported using IFRS at the time of your research. Explain why that approach might differ from the way BA reported deferred taxes at March 31, 2009.

E4.

 

Here's an excerpt from one of BA's notes to its financial statements:

Taxation (in part)

Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based on tax rates and laws that are enacted or substantively enacted at the balance sheet date.

   Is this policy consistent with U.S. GAAP? Explain.

E5.

 

Here's an excerpt from one of BA's notes to its financial statements:

Taxation (in part)

Deferred income tax assets are recognised only to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, carried forward tax credits or tax losses can be utilised.

C-3
 

   Is this policy consistent with U.S. GAAP? Explain.

E6.

 

Look at Note 36, part c. What amount of past service cost (called prior service cost under U.S. GAAP) did BA recognize in earnings for the year ended March 31, 2009? The Employee Benefit section within Note 2: “Summary of significant accounting policies” in BA's financial statements states that “Past service costs are recognised when the benefit has been given.” Is this policy consistent with U.S. GAAP? Explain.

E7.

 

The Employee Benefit section within Note 2: “Summary of significant accounting policies” in BA's financial statements states that:

   “The asset or liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date, less the fair value of plan assets, together with adjustments for unrecognised past service costs. Where plan assets exceed the defined benefit obligation, an asset is recognised to the extent that an economic benefit is available to the Group, in accordance with the terms of the plan and applicable statutory requirements.” Is this the way pension plans are reported under U.S. GAAP? Explain.

E8.

 

U.S. GAAP requires that unrecognized actuarial gains and losses be included as part of Accumulated other comprehensive income (AOCI) in shareholders' equity. Under IFRS, AOCI often is referred to as a “reserve.” Does BA report its unrecognized actuarial gains and losses this way? Explain. [Hint: see Note 35: Other reserves and minority interests.]

E9.

 

Locate Note 36: “Pension costs,” part c: “Amounts recognised in the income statement.” Which components of pension expense does BA actually report in the operating profit (loss) section of its income statement? Where are the other components reported? Is this approach consistent with U.S. GAAP? Explain.

Part F: Shareholders’ Equity and Additional Financial Reporting Issues

F1.

 

British Airways lists four items in the shareholders' equity section of its balance sheet. If British Airways used U.S. GAAP, what would be the likely account titles for the first three of those components?

F2.

 

Locate Note 35 in BA's financial statements. What three items comprise “Other reserves” as reported in the balance sheet? If British Airways used U.S. GAAP, what would be the likely account titles for the three items?

F3.

 

Describe the apparent differences in the order of presentation of the components of liabilities and shareholders' equity between IFRS as applied by BA and a typical balance sheet prepared in accordance with U.S. GAAP.

F4.

 

What is the amount that BA reports in its income statement for its stock options and other share-based compensation plans for the year ended March 31, 2009? [Hint: See Note 34: “Share options.”] Are BA's share options cliff-vesting or graded-vesting? How does accounting differ between U.S. GAAP and IFRS for graded-vesting plans?

F5.

 

What are the primary classifications into which BA's cash inflows and cash outflows are separated? Is this classification the same as or different from cash flow statements prepared in accordance with U.S. GAAP?

F6.

 

How are cash inflows from dividends and interest and cash outflows for dividends and interest classified in BA's cash flow statements? Is this classification the same as or different from cash flow statements prepared in accordance with U.S. GAAP?

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