Accounting Chapter 11 Comparative Analysis Case Continued 2 Profit Margin

COMPARATIVE ANALYSIS CASE (Continued)

(2) Profit margin on sales:

(3) Return on assets:

Puma

adidas

(d) Puma’s capital expenditures were €79.0 million in 2015 while adidas’s

capital expenditures were €464 million in 2015.

FINANCIAL STATEMENT ANALYSIS CASE

(a) Carrefour used the straight-line method for depreciating its tangible fixed

assets.

(b) Depreciation and amortization charges do not increase cash flow from

operations. In a cash flow statement, these two items are often added

(c) The schedule of cash flow measures indicates that cash provided by

operations is expected to cover capital expenditures over the next few

ACCOUNTING, ANALYSIS, AND PRINCIPLES

ACCOUNTING

(amounts in €000,000)

(a) Book value = €36 – €10 = €26

(b) (€2.72 X PVF – OA10.6%) = (€2.72 x 7.36009) = €20.021648

ANALYSIS

If the stores are in the process of being sold, they would likely be considered

‘held for sale’ for financial reporting purposes. If they are held for sale, the

impairment test is based on a lower-of-cost-or net realizable value approach.

ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)

PRINCIPLES

Under IFRS, there can be a recovery of impairment loss, as long as the

RESEARCH CASE

(a) The authoritative guidance for asset impairments is IAS 36: Impairment of

Assets. This Standard shall be applied in accounting for the impairment

of all assets, other than:

a. inventories;

b. assets arising from construction contracts;

c. deferred tax assets;

d. assets arising from employee benefits;

This Standard applies to financial assets classified as:

a. subsidiaries, as defined in IAS 27 Consolidated and Separate

Financial Statements;

RESEARCH CASE (Continued)

(b) In assessing whether there is any indication that an asset may be

impaired, an entry shall consider, as a minimum, the following indications.

(para. 12):

External sources of information

a. during the period, an asset’s market value has declined significantly

more than would be expected as a result of the passage of time or

normal use.

b. significant changes with an adverse effect on the entity have taken

place during the period, or will take place in the near future, in the

Internal sources of information

e. evidence is available of obsolescence or physical damage of an

asset.

f. significant changes with an adverse effect on the entity have taken

place during the period, or are expected to take place in the near

RESEARCH CASE (Continued)

Dividend from a subsidiary, jointly controlled entity or associate

h. for an investment in a subsidiary, jointly controlled entity or

associate, the investor recognizes a dividend from the investment

and evidence is available that:

(i) the carrying amount of the investment in the separate financial

The list in paragraph 12 is not exhaustive. An entity may identify other

indications that an asset may be impaired and these would also require

Evidence from internal reporting that indicates that an asset may be

impaired includes the existence of:

a. cash flows for acquiring the asset, or subsequent cash needs for

RESEARCH CASE (Continued)

(c) Different situations may lead to best evidence of fair value (i.e. could be

market value, revalued asset, etc.).

a. if the asset’s fair value is its market value, the only difference between

the asset’s fair value and its fair value less costs to sell is the direct

incremental costs to dispose of the asset:

(i) if the disposal costs are negligible, the recoverable amount of

the revalued asset is necessarily close to, or greater than, its

b. if the asset’s fair value is determined on a basis other than its

market value, its revalued amount (i.e., fair value) may be greater or

lower than its recoverable amount. Hence, after the revaluation

GAAP CONCEPTS AND APPLICATION

GAAP11.1. Similarities include:

1. The definition of property, plant, and equipment is

essentially the same under U.S. GAAP and IFRS.

2. Under both U.S. GAAP and IFRS, changes in depreciation

method and changes in useful life are treated in the current

5. Under both U.S. GAAP and IFRS, interest costs incurred

during construction must be capitalized. Recently, IFRS

converged to U.S. GAAP.

6. The accounting for exchanges of non-monetary assets is

Differences include:

1. Under U.S. GAAP, component depreciation is permitted but

is rarely used. IFRS requires component depreciation.

2. U.S. GAAP does not permit revaluations of property, plant,

equipment, and mineral resources. Under IFRS, companies

GAAP11.2 While there is a single key difference, it is an important one–the

issue of revaluations. With respect to revaluations, the IASB and

the FASB are working on a joint project to converge their

GAAP11.3 Using revaluation accounting, Moncrief would record an

increase of $60,000 ($460,000 – $400,000) in assets and equity.

GAAP11.4

Liberty

Kimco

(a)

(1) ROA

£125

= 2.2%

= 6.32%

$297

Liberty

Kimco

(3) Asset

£741

= .13

$517

= .11

Turnover

£5,577

$4,696

Based on return on assets (ROA), Kimco is performing better than

Liberty. The main driver for this difference is strong profit margin, which

GAAP CONCEPTS AND APPLICATION (Continued)

(b) Summary Entry

(c) Relative to U.S. GAAP, an argument can be made that assets and equity

under IFRS are overstated. Note that in the entry in (b) above, the

revaluation adjustment increases Liberty’s asset values and equity. To

This is still lower than Kimco’s ROA but the gap is narrower after

adjusting for differences in revaluation.

Note to instructors: An alternative way to make Liberty and Kimco compar-