US GAAP Conversion To IFRS: A Case Study Of The Cash Flow Statement

Peter Harris,Moade Fawzi Shubita,William Stahlin

doi:10.19030/jbcs.v10i1.8325

Abstract

International Reporting Standards (IFRS) has become the required framework for most of the world financial market economies as of January 1, 2011. This includes, in a non-comprehensive listing, the many European Union countries - Canada, Australia and New Zealand. In the United States, US Generally Accepted Accounting Principles (GAAP) is still required. However, plans are presently in place by the SEC to abandon US GAAP and to adhere to IFRS requirements by as early as for the period ending December 31, 2014. As such, it is important to introduce IFRS accounting rules in the college curriculum and make it a major component of accounting classes. This case study takes a US GAAP Prepared Cash Flow Statement and, based on the facts of the case, requires students to prepare an IFRS-based Cash Flow Statement. The need to understand both US GAAP and IFRS rules is required to adequately address this case study, which is most suitable for an Intermediary Accounting, Accounting Theory and a Financial Statement Analysis class, as well as an Investment Finance course, at the graduate level.

Highlights

The controller would like to see the different effects on Cash Flow presentation between US GAAP and IFRS
A Capital Lease – per US GAAP, termed as a Financing Lease under IFRS - is treated as a purchase of Property, Plant and Equipment and is capitalized as such on the Balance Sheet
LIFO is allowed under US GAAP and, if used for financial reporting purposes, has to be used for tax purposes - known as the conformity rule

Summary

Background

XE Corp, a publically traded NASDAQ company (symbol AXEC), is a manufacturer of electrical light bulbs. Its major clientele is Home Depot and Lowes and has captured about 10 percent of the world market of light bulbs sales Their Cash Flow Statement presented below for the Year Ending December 31, 2011 has been prepared using US GAAP. Axe entered into a lease on January 1, 2011 with the following terms: Axe leased specialized machinery manufactured by the lessor, Bell Corp., which will enable Axe to manufacture their light bulbs in a much more efficient manner. This machinery does not have a resale market and was made for AXE to meet its specifications. NOTE: The focus here is only on the Cash Flow Statement

Part 1

Part 2: Effects on IFRS Cash Flow Statement

Notes:

Findings

CONCLUSION