The adoption of FAS 141R and FAS 160
Financial ratios that will be affected when FAS 141R and FAS 160 are affected are the company’s debt to asset and debt-equity ratios. The adoption of FAS 141R and FAS 160 will decrease the value of these ratios because equity will increase. After all, non-controlling interest will be reclassified according to the new accounting standards. Furthermore, the successive acquisitions result in the likelihood that the equity and assets will increase due to revaluation. Therefore, the ratios will decrease because revaluation will target higher market values.
The company’s acquisition strategies and potential growth will be affected by recent and forthcoming changes. The adoption of FAS 141R and FAS 160 means that future acquisitions will be valued at the market value. It means that the goodwill will increase and assets undervalued, leading to an increase in controlling interest because their price is based on full market value. Also, the high costs are linked with the acquisition; hence, they are expensed, leading to a decreased income. If the company’s focus is the earning target, then acquisition decisions will be affected because Klugen Corporation’s assets and liabilities will be revalued if it acquires less than 100% of the firm.
Furthermore, depreciation and amortization will increase. Depreciable and amortizable assets are revalued using higher market value; hence, reduced income. The stockholders’ equity will increase because non-controlling interest will be reclassified as equity with the new standards, unlike previously classified as other revenues. Non-controlling part of the income will be withheld from the consolidated income and attributable to shareholder’s control.
IFRS is considered principled based because of the rules set to remain uniform and standard globally in reporting financial statements, unlike US GAAP that gives mangers a discretion to determine their assumptions and what not to report; hence no consistency, reliability, and comparability. IFRS tries to appeal to all firms globally to avoid discrepancies in reporting compared to US GAAP that insulates only against the liability that is highly litigious in the United States, making it unreliable and easy to manipulate. Furthermore, the principle difference between IFRS and US GAAP is the methodology used in assessing accounting treatment and reporting. IFRS review and use the facts in a pattern and procedure approved and standardized, unlike US GAAP, where its reporting focused on research literature. Therefore, IRFS is principled based, and US GAAP is rule-based, hence no convergence. IFRS is recognized and applied by more than 110 countries globally, unlike US GAAP, which is administered by companies in the USA only, making it difficult for accounting for their companies outside their national boundary.
The FASB’s primary objective in the issuance of FAS 141R and FAS 160 was to enhance and improve on the information being reported, especially in a business combination. FAS 141R and FAS 160 will ensure global convergence is achieved in conformance with IASB and IFRS standards as outlined by FASB. Promoting international convergence in the accounting standards will ensure uniformity in interpretation and understanding of financial reports globally. Furthermore, comparability, consistency, reliability, and relevance in financial statements will be improved significantly. Additionally, it will help businesses use business combinations accounting with ease rather than acquisition method, which is complicated. It will be easy to identify the acquirer of business combinations by use of fair value and entity theory for measurement and implementation. Lastly, the FAS 160 will ensure non-controlling interest in the financial statements is consolidated.
Qualifying Special-Purpose Entities (SPE’s) are legal entities or other trusts that conform to the FAS 140 set conditions based on FASB Codification requirements. These entities or trusts are involved in the securitization of mortgages by providing guidance and the requirements to be met when accounting for mortgages. SPE’s do not exist under IFRS. The International Accounting Standards Board (IASB) does not accept the belief in the qualifying SPE’s concepts. It means that it does not recognize its use; hence, eliminating the qualifying SPE’s that do not allow convergence. The FAS 166 standards are sufficient in the facilitation of convergence when reporting financial statements in accounting.
If qualifying SPE’s are eliminated, it will improve the financial reporting to minimize inconsistencies. Besides, the exceptions provided during consolidation guidance are not required for qualifying special-purpose entities. It allows for sale accounting, especially for mortgage securitization, where the transferor must surrender control over the financial asset transferred. Reliability, consistency, relevancy, and comparability of transferred financial assets, will improve because it provides clarification and required information, including limitations of the financial asset that is eligible for sale.
Moreover, financial statements information transparency will be enhanced, involving the transfer of financial assets. The financial assets that could have been derecognized are not eligible for derecognition using the previous standards. Enhanced disclosure concerning all the probable risks that can occur during the transfer process is exposed; therefore, an informed decision will be made, considering there will be no hidden information. The convergence of the accounting standards is required to ensure conformity with all the international standards to ease the comparison of companies in the same industry globally.
If the company adopts IFRS, the management should be aware of issues involving business cost combinations that must be incurred. The direct costs are recognized as expenses during acquisition while in IFRS are partially capitalized. The management should be aware of these changes when reporting financial statements to enhance consistency and ease comparability. Additionally, the administration should understand that the financial statements can be used by its competitor globally because they are standardized with the same procedures and guidelines. Companies with subsidiaries in foreign countries will help investors to analyze the information quickly without misinterpretation because financial reporting is accepted globally. Lastly, the management must understand that transparency, consistency, and reliability of information must be complied with to avoid misinterpretation and unclear financial statements.