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IFRS Implementation and the Responsibilities of Audit Staff
The purpose of this case is to challenge students to develop their IFRS infrastructure knowledge, and to apply that knowledge in the context of a real company that is currently experiencing complex issues involving IFRS conversions. The case concerns the Miller/Coors joint venture between Molson Coors Brewing Company, a listed company in the US and SABMiller plc, a listed company in the UK. The case will help you to understand the practical application of IFRS conversion, appropriately tailored to the knowledge expected of entrylevel audit staff. A. IFRS Infrastructure Knowledge The purpose of this part of the case is to ensure that students are fluent in their knowledge of IFRS and can be conversant with their peers and supervisors upon entry to the auditing profession. To achieve this goal, you will access IFRSrelevant websites so that you are familiar with standardsetting bodies and recent IFRS conversion activities both internationally and within the US. Requirements: 1. Access the following organizations at their respective websites listed below. For each organization, provide answers to the following questions: a.Describe the standard setting body, including its purpose, authority, leadership, and membership. Write your answers using one paragraph per organization. b.What initiatives or projects is the standard setting body currently undertaking (or that have recently been completed) that concern IFRS? Write your answers using a bullet point list. Websites: Securities and Exchange Commissionwww.sec.govInternational Auditing and Assurance Standards Boardwww.ifac.org/iaasb/International Federation of Accountantswww.ifac.orgFinancial Accounting Standards Boardwww.fasb.orgPublic Company Accounting Oversight Boardwww.pcaobus.orgAuditing Standards Boardwww.aicpa.org
B. Practical Application The purpose of this part of the case is to help students gain knowledge of a real company that experiences issues involving IFRS conversion, SABMiller plc. Requirements: 1.To help you gain familiarity with SABMiller plc, access their most recent annual report and answer the following questions. a.What is the company’s primary line of business?b.What are the company’s most important geographic segments?c.Where is the company’s stock traded?d.Summarize the company’s most recent financial results in terms of common ratios involving the income statement, balance sheet, and statement of cash flows. Present results in a table to summarize the ratios, and interpret the results in a summary paragraph. e.What financial accounting standards does the company use to prepare its financial statements? f.Who is the company’s auditor? What opinion(s) did they render regarding the company’s most recent financial statements?g.Summarize the disclosures the company made regarding its MillerCoors joint venture. Comment on the adequacy of those disclosures. 2.Below, we present information on the progression of conversions that legacy Miller and Coors went through from 2002 to present in the process leading up to and including the 2008 MillerCoors joint venture. Read the information and then complete the case requirements for this section. Background In July 2002, Miller Brewing Company (MBC) was acquired by South African Breweries (SAB), a company listed in the UK and which reported under UK GAAP. In 2002, MBC had to convert its accounting books and records from US GAAP to UK GAAP to comply with the reporting requirements of its new parent company, renamed as SABMiller plc. From 2002 through 2005, MBC reported under its parents' accounting framework which is the UK GAAP. In 2006, SABMiller adopted IFRS for the first time, which resulted in MBC again having to convert its accounting booksthis time from UK GAAP to IFRS. Move forward to 2008, SABMiller plc entered into a joint venture (JV) agreement with Molson Coors Brewing Company (MCBC) to merge their respective US operations into a 50:50 controlled JV called MillerCoors LLC. As a result, the JV is in a peculiar situation where it has to provide financial information to two parent companies that report under different accounting frameworks, i.e., IFRS for SABMiller plc and US GAAP for MCBC. To comply with the reporting requirements of its parents, the JV has to keep three sets of accounting records: a) under US GAAP for MCBC purposes, b) under IFRS as its own set of records per the JV agreement, and c) under a hybrid accounting framework for internal SABMiller plc
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reporting called "SABMiller plc IFRS", which is developed to address the difference in the accounting recognition of the JV formation under US GAAP and IFRS (book basis accounting under US GAAP vs FV accounting under IFRS). To get to three sets of accounting records, at the formation of the JV, legacy Miller accounts were converted to US GAAP from IFRS, while legacy Coors accounts were converted to IFRS from US GAAP.
The above background illustrates the complexity created for multinational companies by having different accounting frameworks. MillerCoors incurs a significant level of costs to maintain the three sets of books, from a monetary, administrative and operational standpoint. Clearly moving to a single set of GAAP which is robust, of high quality and generally acceptable would be very beneficial to companies like MillerCoors.
Key Accounting Adjustments
Below, you are provided information about several important adjustments that MillerCoors makes on a periodic basis to convert its books from IFRS to US GAAP and vice versa. These adjustments include the following:
Inventory US GAAP and IFRS differ in that the LIFO cost flow is acceptable under GAAP, but not under IFRS. Coors used LIFO, consistent with MCBC's accounting policies, and thus when its accounts were transferred to the JV (which reports under IFRS), the LIFO cost adjustment was taken as an adjustment to the JV opening balance sheet, charged against the capital accounts of MCBC. Pensions apart from the initial difference in the valuation of pension obligations between US GAAP and IFRS, the two frameworks differ with respect to the accounting for actuarial gains and losses. IFRS permits the use of three methods in which companies can recognize actuarial gains and losses, the most common of which is called the "corridor approach". IFRS, however, also allows the use of the "SORIE" method, which involves taking actuarial gains and losses straight to equity via the SORIE account. Lastly, IFRS allows the use of any systematic method that results in a faster recognition of actuarial gains and losses to the profit and loss accounts, i.e., amortization of actuarial gains and losses over the remaining service lives of employees.
On the other hand, US GAAP allows companies to record actuarial gains and losses in the period incurred within the statement of operations or to defer such gains or losses via the corridor approach or any systematic method that results in a faster recognition than the corridor approach. For US GAAP reporting purposes, MillerCoors uses the systematic method of recognizing actuarial gains and losses. For example, they charge accumulated gains and losses in the current period results over the remaining service lives of employees. For IFRS reporting purposes, on the other hand, MillerCoors uses the SORIE method, thus resulting in no current period charges in the PL arising from actuarial gains and losses.
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So, the accounting adjustment to convert MillerCoors' IFRS books to US GAAP is to charge the current period profit and loss accounts for the amortization of actuarial gains or losses (over the employees' remaining service lives) which were taken straight to equity via SORIE under IFRS. An adjustment is also made on the balance sheet to account for the difference in the equity section, i.e., accumulated earnings under US GAAP is reduced by the periodic amortization of actuarial gains and losses as for IFRS purposes no such amortization charges are made to the profit and loss accounts and subsequently to retained earnings as the actuarial gains and losses are taken to equity via the SORIE, as noted above.
Book value vs fair value at the formation of the JV, an accounting difference arose as to how the transaction was recognized under US GAAP versus IFRS. Under US GAAP, the joint venture formation was accounted for on a carryover basis, i.e., at legacy book values. This meant that assets and liabilities contributed to the JV by the respective venturers were recognized in the JV books at carryover, book value basis. This accounting is consistent with US GAAP literature on joint ventures. Under IFRS, however, the transaction was accounted for under IFRS' acquisition accounting literature, which meant that assets and liabilities contributed to the JV were recognized at their respective fair values on the day the transaction was consummated. In order to convert MillerCoors' IFRS books to US GAAP, an accounting adjustment must be made, from a balance sheet perspective, to strip out the fair value adjustments on assets and liabilities that were recognized in IFRS, but that were not accounted for or recorded under US GAAP. An adjustment is also made to reflect the periodic depreciation difference under both GAAPs.
Requirements (continued):
a.
b.
c.
Draw a diagram that shows the entities involved and the relevant accounting bases for each entity. Repeat this diagram to illustrate the differences in accounting bases over the following relevant time periods: pre2002, 20022005, 20062008, and 2008present.
Locate the relevant professional guidance under US GAAP, UK GAAP, and IFRS associated with the accounting issues articulated in the case (i.e., inventory, pensions, and acquisition accounting.
Read the SABMiller plc annual report to locate disclosures related to these three accounting issues, where applicable. Summarize the disclosures (where available) (one paragraph per issue) and comment on the adequacy of the disclosures.
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Appendix A International Auditing Unit PreTest The following pretest/posttest will be administered to students before and after completion of the international auditing unit of the course. As such, it will encompass more than simply the IFRS conversion case. Rather, it is intended to evaluate students’ knowledge improvements in this topic generally.1.I understand the need for major international accounting firms to enhance quality and consistency of their independent audits across the globe. 1 2 3 4 5 Strongly Disagree Disagree Neither Agree nor Agree Strongly Agree Disagree 2.I understand the factors that complicate the audit of multinational corporations. 1 2 3 4 5 Strongly Disagree Disagree Neither Agree nor Agree Strongly Agree Disagree 3.I understand the impact of differing cultural norms across the globe on the ability of the worldwide accounting profession to reach a consensus on important ethical principles. 1 2 3 4 5 Strongly Disagree Disagree Neither Agree nor Agree Strongly Agree Disagree 4.I understand the relevance of fundamental accounting concepts and principles within differing economic systems across the globe. 1 2 3 4 5 Strongly Disagree Disagree Neither Agree nor Agree Strongly Agree Disagree 5.I understand the unique challenges and problems faced by the accounting profession of the People’s Republic of China. 1 2 3 4 5 Strongly Disagree Disagree Neither Agree nor Agree Strongly Agree Disagree 6.I understand the relevance of the Foreign Corrupt Practices Act to foreign companies that sell securities on U.S. stock exchanges. 1 2 3 4 5 Strongly Disagree Disagree Neither Agree nor Agree Strongly Agree Disagree
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7.I am familiar with the various accounting and auditing standards setting organizations across the globe, and I possess knowledge of their various initiatives and current projects. 1 2 3 4 5 Strongly Disagree Disagree Neither Agree nor Agree Strongly Agree Disagree 8.I possess knowledge of a real company that experiences issues involving IFRS conversion, including the complexities involved and the various types of accounting issues that an auditor and client must resolve in such a situation. 1 2 3 4 5 Strongly Disagree Disagree Neither Agree nor Agree Strongly Agree Disagree
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Appendix B International Auditing Unit PostTest 1.Do you have any suggestions for improving the case? 2.Did you find any aspects of the case unclear or unrealistic? 3.Would you recommend that this case be used again in this course next semester and/or shared with instructors at other universities? Why or why not? To help me understand how your knowledge may have improved over the course of the international auditing unit, please provide answers to the questions below. I will compare your answers on these questions to those you provided prior to completing this unit. 4.I understand the need for major international accounting firms to enhance quality and consistency of their independent audits across the globe. 1 2 3 4 5 Strongly Disagree Disagree Neither Agree nor Agree Strongly Agree Disagree 5.I understand the factors that complicate the audit of multinational corporations. 1 2 3 4 5 Strongly Disagree Disagree Neither Agree nor Agree Strongly Agree Disagree 6.I understand the impact of differing cultural norms across the globe on the ability of the worldwide accounting profession to reach a consensus on important ethical principles. 1 2 3 4 5 Strongly Disagree Disagree Neither Agree nor Agree Strongly Agree Disagree 7.I understand the relevance of fundamental accounting concepts and principles within differing economic systems across the globe. 1 2 3 4 5 Strongly Disagree Disagree Neither Agree nor Agree Strongly Agree Disagree
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8.I understand the unique challenges and problems faced by the accounting profession of the People’s Republic of China. 1 2 3 4 5 Strongly Disagree Disagree Neither Agree nor Agree Strongly Agree Disagree 9.I understand the relevance of the Foreign Corrupt Practices Act to foreign companies that sell securities on U.S. stock exchanges. 1 2 3 4 5 Strongly Disagree Disagree Neither Agree nor Agree Strongly Agree Disagree 10.I am familiar with the various accounting and auditing standards setting organizations across the globe, and I possess knowledge of their various initiatives and current projects. 1 2 3 4 5 Strongly Disagree Disagree Neither Agree nor Agree Strongly Agree Disagree 11.I possess knowledge of a real company that experiences issues involving IFRS conversion, including the complexities involved and the various types of accounting issues that an auditor and client must resolve in such a situation. 1 2 3 4 5 Strongly Disagree Disagree Neither Agree nor Agree Strongly Agree Disagree
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