Q on Multinational Operations

Given: Melwood is based in the USA with a wholly owned subsidiary outside of the USA calle Victorian. Melwood decided that the functional currency for Victorian should be the local currency. This implies that method for translation should be REMEASURED. Melwood prepares using US GAAP. Victorian uses IFRS, and these statements must be converted to GAAP for consolidating purposes. On page 207: If Melwood retains Victorian’s existing accounting policies except where prohibited by US GAAP, what will be the impact of converting Victorian’s IFRS financial statements to US GAAP? The only accounting policy differences between Melwood and its subsidiary are: * Victorian uses the FIFO accounting method for inventory, wheras Melwood uses LIFO. * Victorian expenses all interest costs and classifies them as operating cash flows. Melwood captitalizes interest costs attributable to self-constructed assets. Q9: With respect to these issues, the *MOST LIKELY* effects on Victoria’s 2005 cash flow from operations and net income would be: CFO would increase and NI would increase. Q1: WHERE WAS THE NOTES FOR THIS QUESTION? I CAN’T FIND THIS MATERIAL ANYWHERE REGARDING IFRS. Q2: I THOUGHT THAT IN US GAAP *DID* EXPENSE THE INTEREST COSTS, AND NOT CAPITALIZED IT? AFTER ALL, LOOK AT THE INCOME STATEMENT AND YOU’LL SEE THAT EXPENSE IS DEDUCTED FROM EBIT. Q3: ULTIMATELY, HOW WAS I SUPPOSED TO ANSWER THIS QUESTION AND WHERE ARE THE NOTES/MATERIALS FOR THIS QUESTION?

You don’t need to know IFRS here. You just need to realize that they will be changing their policy from expensing interest cost to capitalizing it. Therefore, CFO will be higher, CFI will be lower, depreciation expense will be higher, interest expense lower, and NI higher. Level 1 texts say that for GAAP, interest expense for construction should be capitalized, but for analytical purposes, it should be treated as an expense.

In that case, this question doesn’t deal so much with multi-national accounting treatments, but it has more to do with expensing *VS* capitalizing and CFO/NetIncome. q1: Is LIFO prohibited by GAAP? Which one of these inventory methods is prohibited? q2: Melwood prepares using US GAAP. Victorian uses IFRS, and these statements must be converted to GAAP for consolidating purposes. On page 207: If Melwood retains Victorian’s existing accounting policies except where prohibited by US GAAP, what will be the impact of converting Victorian’s IFRS financial statements to US GAAP? The only accounting policy differences between Melwood and its subsidiary are: * Victorian uses the FIFO accounting method for inventory, wheras Melwood uses LIFO. * Victorian expenses all interest costs and classifies them as operating cash flows. Melwood captitalizes interest costs attributable to self-constructed assets.

I reckon the qn assumes that Victorian must have some construction related interest costs. Agree that both LIFO and FIFO no different under US GAAP. Also if LC= FC it should be all current method not remeasurement as stated in the qn. Where was this qn? CFAI or Schweser?