Accounting Challenges for Cross-listed Companies | Global One Consultants (GOC)

Challenges faced by Accountants of Cross-listed Companies

You have been recently hired at Global One Consultants (GOC), an Accounting firm that specializes in assisting clients in listing their companies in multiple stock exchanges around the world. Your hiring comes after the sudden departure of Mr. Fares, a junior consultant who was in the middle of advising American Solutions Company (ASC), a company listed on the New York Stock Exchange (NYSE). Part of the expansion strategy for ASC was to be listed on the Australian Stock Exchange (ASX).

Mr. Fares’s main duty was to assist ASC in producing two sets of financial statements. The first set of statements was for maintaining listing requirements at NYSE, which would require using US GAAP. The second set of statements was for meeting ASX requirements, which would require the referral to IFRS. GOC was able to recover the following information from the records kept by Mr. Fares prior to his departure (All of the amounts are in US Dollars):

1. In 2014, ASC took on a long-term construction project. The company used the percentage of completion accounting method. The following is a summary of the information for that project

2. On January 1, 2014, ACS leased machines from Canada Finance Company. The lease term is for 8 years. The agreement specifies annual payments of $190,000 beginning January 1, 2014, the inception of the lease, and at each December 31. The useful life of the machines was estimated to be 8 years, with no expected residual value. ACS Company uses straightline deprecation. At time of signing the lease agreement, ACS’s implicit interest rate was 8%.

3. On January 1, 2014, ACS issued $1,500,000, 5%, 7-year bonds. Interest on the bonds is paid semimanual on June 30 and December 31. The market interest for bonds of similar risk and maturity was 6%. ACS was aware that the GAAP allowed companies to switch from the effective interest method to fair value method with little justification. On December 31, 2018, market interest rates increased to 8%, thus prompting ASC to switch to the fair value method to account for its bonds.

On that same date, the fair value of the bond issue was estimated at $1,418,321. Although, IFRS does allow the use of fair value
to account for liabilities, there are many restrictions and requirements. Unfortunately, ASC did not meet these requirements, which meant that the set financial statement produced for the listing on the ASX had to continue using the effective interested method.

4. ASC had ordinary as well as preference shares. However, the preference shares are considered “callable”. The par value for the preference shares is $30 and the dividends is 3.25%. It is important to note that according to IFRS, callable preference shares (also
known as mandatory redeemable preference shares) are treated as debt and not equity. This will have to be reflected in the statements that ASC has to produce for the listing on the ASX.

5. The following partial trial balance was on December 31, 2018 (some accounts may not be mentioned in this trial balance): 

1. Provide a brief memo discussing some of the challenges that face accountants worldwide when preparing accounting information for companies that are cross-listed in various stock markets. (1 Mark)

2. Discuss the major difference between GAAP and IFRS. (1 Mark)

3. Provide the income statement and statement of financial position for ASC on December 31, 2018 as per the GAAP requirements (provide the number in US Dollars and round to the nearest Dollar. For example, if the value of Construction in progress is $150,667.62689 it should be rounded to $150,668. Please make sure you round to the fourth decimal place. For example, if you get the following result 0.7512869, your answer should be 0.7513 or 75.13%). (3.5 Marks) 

Provide the income statement and statement of financial position for ASC on December 31, 2018 as per the IFRS requirements (provide the number in US Dollars and round to the nearest Dollar. Please round all numbers to the nearest dollar). (3.5 Marks)

4. Provide a brief recommendation to the client about which set of financial statements (those prepared according to GAAP or IFRS) will provide a more attractive representation with respect to risk (measured as total liabilities divided by total assets) and performance (measured as net income divided by total assets). (1 Mark)