El enfoque intercultural

This compact case concerns a real-life situation that will require students to develop awareness and discuss differences in disclosure as well as reporting on a balance sheet between US GAAP and IFRS. The case would be appropriate for an advanced introductory financial accounting student, or intermediate accounting student early in the course when the topic and related text chapter on the balance sheet is covered, typically the third or fourth chapter of the course.

Facts

Ryan Johnson for the past 15 years was CFO for Elixr Pharma, a drug company headquartered in New York. A large segment of Elixr’s business has been to manufacture and distribute generic drugs. These generic drugs produced are very common prescription and over the counter medication drugs that are beyond patent protection

from original developers, can be produced at low cost and sold to retail drug chains and local drug stores using customized store branding.

Elixr is not a major company, but does have a significant drug under development that has shown promise and looking to become a developer of other new drugs. This is Elixr’s first attempt at developing a new drug. Management at Elixr knows that the cost to take this drug through FDA studies and approval is significant and of high risk. Any roadblocks or failure will most likely bankrupt the company. In addition to the significant cost to take a drug to market, there is also a large volume of legal compliance and regulatory standards that Elixr is not familiar with. If this drug is to be taken to market by Elixr, it will require the assistance of another drug company with significant experience to partner and provide their expertise in their process. Elixr is a private held company majority owned by Walter Furman. Based on discussion with legal council and other experts in the industry who Walter has had close relationships with, it was decided that Elixr would approach MeaCate plc, a British company with significant experience in drug development and known to have complimentary projects underway in the same area as Elixr about a joint venture to develop and market the new drug under development by Elixr.

Following a period of negotiation, it was agreed that MeaCate plc would purchase Elixr Pharma. The purchase would be structured as an inversion transaction for tax purposes, common in the pharmaceutical industry. This transaction would pay Walter Furman a significant sum of money up front, and following the inversion and formation of the new company leave Furman as a 45% owner of the new company, which would be a subsidiary of MeaCate plc., Furman would no longer be a majority owner of his new business, but was OK with this, as the development of the drug in process if successful would increase his future income significantly. Additionally, with MeaCate being a British company, they would significantly increase the customer footprint of the present generic drug manufacturing of Elixr and distribution on an international scale. MeaCate has an interest to increase its efforts producing and distributing generic drugs as Elixr has been successful with, which will significantly increase future income of the new entity, and Walter Furman. As the purchase transaction was done through an inversion, following the purchase, Elixr Pharma emerged as a new company known as Elixr plc., a British company treated as a subsidiary of MeaCate. As a 45% owner, Walter Furman served as president and CEO of the newly formed subsidiary.

Prior to the purchase and inversion, Elixr did produce US GAAP financial statements annually, and they were audited statements per requirements of banking institutions that held significant debt. Following the purchase and inversion, the US banks that held debt of Elixr were paid off through a re-financing by three British banks. As a subsidiary, the new company Elixr plc now needs to convert and produce financial statements using IFRS to comply with British financial reporting requirements, as well as the British banks now holding the debt of the former Elixr Pharma.

Ryan Johnson, as CFO of Elixr Pharma for the past fifteen years and no previous work experience has no exposure with IFRS. As CFO of the new company, he now has to assure that all financial statements comply with IFRS and provide useful information. Jamus Martin is a staff accountant for parent company MeaCate plc and has been assigned on a temporary basis to Ryan, along with Jamus’s staff accountants to assure that he is properly trained to prepare and understand IFRS financial statements that Elixr plc needs to provide. To begin the process, Jamus took the prior year balance sheet from Elixr and converted it from US Currency to the British Pound and IFRS format. The balance sheet as prepared by Jamus is presented below:

Table 1: Elixr Pharma Balance Sheet Elixr Pharma Balance Sheet (amouts in £ millions) Non-Current Assets Goodwill 174.40 Other intangibles 31.20

Property, Plant and Equipment 449.12

Investments in affiliates 8.24

Trade and other receivables 32.44

Deferred tax assets 33.16

Post-employment benefit surplus 0.52

729.08

Current Assets

Inventories 236.32

Trade and other receivables 301.20

Recoverable income tax 19.60

Available for sale investments 0.48

Cash and equivalents 178.00

735.60

Assets held for sale 4.76

Total Assets 1,469.44

Current Liabilities

Bank overdrafts 1.92

Bank and other loans 4.48

Obligations under finance leases 0.40

Trade and other payables 271.04

Income tax liabilities 6.08

Provisions 40.12

324.04

Non-Current Liabilities

Bank and other loans 274.92

Obligations under finance leases 1.44

Trade and other payables 10.84

Post-employment benefit obligations 137.40

Deferred tax liabilities 10.12

Income tax liabilities 31.80

Provisions 7.68

474.20

Total Liabilities 798.24

Net Assets 671.20

Capital and reserves

Ordinary share capital 31.84

Share premium account 319.68

Own shares -3.28

Capital redemption reserve 368.72

Currency translation reserve -37.20

Available for sale reserve -0.36

Accumulated deficit -8.20

Part I

As Jamus presents this balance sheet to Ryan, Jamus needs to educate him on the significant differences this balance sheet has to GAAP and how to use it in order to gather useful information. Jamus asks you, his assistant to prepare a presentation which addresses the below points:

1. What are several significant differences in balance sheet reporting that Ryan needs to be aware of between a US firm and the current and future IFRS balance sheet of Elixr plc?

2. As Ryan reviews the revised IFRS balance sheet as provided by Jamus and his staff, how does the new format as presented provide information that can be used by financial statement users? Is the information provided different than when prepared under US GAAP?

Part II

Additionally, as Jamus and his staff assure Ryan is properly trained and able to operate in an IFRS environment, part of the transition also involves understanding of other issues concerning the disclosure of accounting policies, some of which are different than when Elixr was a US company under US GAAP. It is important that all disclosures are properly stated so that investors and creditors have all necessary information, and so there are no accusations against Elixr plc for improperly disclosing information in the event a disclosure not properly stated. To assure Ryan is properly trained, he was introduced to the official IFRS authoritative literature, which is available on the Internet at http://eifrs.iasb.org to collect the information needed. To assure that Ryan is proficient in application of IFRS rules, and necessary disclosures before setting Ryan off to work on his own, Jamus asks Ryan to in a memo address the following questions to him:

1. How are accounting policies defined in the official literature?

2. Per the literature, what are IFRS guidelines in the application of accounting policies? 3. What are the common disclosures that will be required in the Elixr plc financial statements?

It is important that two objectives be accomplished from the interaction between Jamus and Ryan to assure that there is an adequate background to properly produce IFRS financial statements. The first objective is that Jamus and his staff prepare the presentation in Part I to assure that Ryan has a basis for IFRS, and that for the second objective Ryan follow up with the information presented in Part II so it is documented to Jamus that he has an understanding of presentation and disclosure.

As the training comes to a close, Ryan does mention to Jamus that he has many concerns relative to accounting and calculations for Elixr plc’s inventory reporting, fixed asset valuation and receivable valuation under IFRS, but these issues will be addressed at a later time once the initial framework for reporting and financial statement format has been established.