MAC 7600 International Accounting and Taxation
Case Study Project
The Case Study project entails five parts and it will be based on situation and examples from the textbook. This project will test your ability to determine the differences between U.S. GAAP and IFRS including the adjustments and explanation of the differences and adjustments, to prepare reconciliation schedules, analyze the need to hedge the foreign exchange risk, to determine the foreign exchange gains and losses, to compute the tax liability and foreign tax credit, and to write memo to executives.
The project will follow CLA Limited, a technology, U.S. – based company. The CLA Limited will undergo several scenarios on the international business scale performing transactions and trades outside of their country of origin. The company will be using the GAAP as well IFRS accounting rules and taxation in foreign countries.
Students will be required to answer the question at the end of each part. The information to address each question are in the description of the parts; however, students are encouraged to utilize the textbook information as well as web resources for better understanding and comprehensive answers to the part’s questions. Students are encouraged to read the each part before answering the questions.
Introduction of the Company
CLA Limited has been established in 1989 by Steven Clarke. The company focuses on parts and components that are being utilized in major digital and analog wireless devices ranging in use from communications systems to test equipment, wireless application and military systems. The company conducts business in four continents and has subsidiaries and partnerships in more than 20 countries.
CLA Limited is a U.S based company and taxpayer. The company prepares consolidated financial statements in accordance with U.S. GAAP. CLA operates in several foreign countries across the globe and must report under the foreign accounting rules as well under the U.S. GAAP. CLA Limited fiscal year ends December 31.
Steven Clark is the company’s CFO and he is also the majority shareholder of this multinational company. CLA Limited has various governmental and business contracts with local governments and mid-sized companies creating competitive position among its main rivals. The company has established solid 20% market share in this division and has been actively seeking for new opportunities across the world.
Case Study Project Part I (due in Week 2)
CLA Limited is a U.S based company operating in the technology industry. The company prepares consolidated financial statements in accordance with U.S. GAAP. CLA Limited operates in several foreign countries across the globe and must report under the foreign accounting rules as well under the U.S. GAAP.
To be able to compare CLA’s financial statements with those of companies in their home country, financial analysts in Country A and Country B prepared a reconciliation of CLA’s current year net income and stockholders’ equity. Adjustments were based on the actual accounting policies and practices followed by biotechnology companies in Country A and Country B. The following table shows the adjustments to income and stockholders’ equity made by each country analyst:
|Country A||Country B|
|Income under SKD GAAP||1,050.00||1,050.00|
|Depreciation related to capitalized interest||(20.00)||(20.00)|
|Depreciation related to revalued fixed assets||–||(8.00)|
|Income under local GAAP||1,380.00||972.00|
|Stockholders’ equity under SKD GAAP||15,000.00||15,000.00|
|Revaluation of fixed assets||–||56.00|
|Stockholders’ equity under local GAAP||15,930.00||14,786.00|
Description of Accounting Differences
Goodwill – CLA Limited capitalizes goodwill and amortizes it over a 20-year period. Goodwill is also treated as an asset in Country A and Country B. However, goodwill is not amortized in Country A, but instead is subjected to an annual impairment test. Goodwill is amortized over a 5-year period in Country B.
Interest – CLA Limited expensed all interest immediately. In both Country A and Country B, interest related to self-constructed assets must be capitalized as a part of the cost of the assets.
Fixed assets – CLA Limited carries assets on the balance sheet at their historical cost, less accumulated depreciation. The same treatment is required in Country A. In Country B, companies in the biotechnology industry generally carry assets on the balance sheet at revaluated amounts. Depreciation is based on the revalued amount of fixed assets.
- With respect to the adjustment related to goodwill, answer the following:
- Why does the adjustment for goodwill amortization increase net income under Country A GAAP but decrease net income under Country B GAAP?
- Why does the goodwill adjustment increase stockholder’s equity in Country A but decrease stockholders equity in Country B?
- Why are the adjustments to stockholders equity large than the adjustments to income?
- With respect to the adjustments made by the analyst in Country A related to interest, answer the following:
- Why are there two separate adjustments to income related to interest?
- Why does the adjustment to income for capitalized interest increase income, whereas the adjustment for depreciation for depreciation related to capitalized interest decreases income?
- Why is the positive adjustment to stockholders equity for capitalized interest smaller than the positive adjustment to income for capitalized interest?
- With respect to the adjustment made by the analyst in Country B related to fixed assets, answer the following:
- Why does the adjustment for depreciation related to revalued fixed assets decrease income, whereas the adjustment for revaluation of fixed assets increases stockholders’ equity?