Case Study 1 Having spent 20 y

Case Study 1
Having spent 20 years in a US based company as ChiefAccountant, Mohammed faced a lot of challenges upon joining the VHManufacturing Company in his hometown in India. He was appointed asChief Accountant and, at the same, was also involved incoordinating the various projects of the company outside thecountry. Basically, Mohammed followed US-GAAP based guidelines forfinancial reporting in his earlier portfolios, hence shifting to anew company posed him challenges as he must follow IFRS guidelinesfor financial reporting. Though both the US GAAP and IFRS areauthoritative statements, there were significant differences in theguidelines. Mohammed believed that adopting US GAAP is morecomfortable as it provided him detailed and specific rules forfinancial reporting, which is not the case with IFRS.
It was during an internal audit carried out in the accountingdepartment, the auditors came out with a report of the followingobservations related to treating various revenue andexpenses.
1. All the expenses towards the repair and maintenance ofplant and machineries are treated as operating expenses in thefinancial statements.
2. Mohammed was strict in reporting revenues; hence, therevenues were under- estimated. As per the audit, they estimatedthat RO240,000 which the company may consider as revenue from thevarious projects are reported as unearned revenue (customeradvances).
3. The company used the FIFO method for valuing inventoryconsistently over the last few years. Since Mohammed joined thecompany, he has used LIFO method for valuing inventory.
4. During the year, the company has taken a loan for capitalexpenditure, but due to a temporary cash crunch the money was usedthe cash to pay salaries to the staff. The issued was discussedwith the bank and thereafter the bank has issued a letterinstructing the company to repay the loan on the grounds ofviolation of the covenant/loan agreement. Mohammed has reported theloan as non-current liability in the financial statements.
5. While writing off impairment losses, Mohammed has usedtwo-step method for write- offs as he mentioned that this was thepractice he followed in the previous company where he worked.
The management called Mohammed for an explanation regardingthe above observations. Yasir, a friend of Mohammed, has beenalways a critic of using accounting standards. He considered thatadherence to the conceptual frameworks are not necessary to preparereliable financial statements. As the purpose of financialstatements is to communicate the financial results and financialposition to internal and external stakeholders, the organizationshould
follow a customized accounting framework that best suits itinstead of using accounting standards set by internationalbodies.
Based on the above case, answer the following;
(Maximum word count for Case Study is 400 Words)
(3+4+3 = 10 Marks)
1. “Mohammed believed that adopting US GAAP is morecomfortable as it provides the accountant a detailed and specificguideline for financial reporting, which is not the
case with IFRS”. Do you agree with Mohammed? Justify youranswer.
2. Do you consider that Mohammed followed IFRS while preparingthe financial statements? (The arguments should be based on thefindings of the auditor. Briefly discuss each of the auditor’sobservation and verify whether Mohammed followed the
prescribed reporting standards.
3. In your opinion, do you consider that accounting standardsare required for preparing
financial statements? Do you think that following accountingstandards (for example, reporting fixed assets at their cost priceless accumulated


1) Mohammed in right in his argument that adopting US GAAPprovides an accountant a detailed and specific guideline forfinancial reporting than IFRS. The reason is that IFRS areprinciples-based whereas GAAP are rules-based. As a result ofwhich, there is more scope for different interpretations whileapplying the theoretical framework and principles of IFRS for whichdetailed disclosures need to be made in the financial statements.However, principles contained in IFRS are more logically correctbecause they represent the substance of business transactions in abetter way.

2) No, Mohammed has not followed IFRS due to the followingreasons-

A) After his joining, the company has followed LIFO method forinventory valuation which is not allowed as per IFRS rules but USGAAP allows its use.

B) Mohammed has used two step method for writing off impairmentlosses which is not in accordance with IFRS rules where one stepapproach requires impairment testing to be performed on existenceof impairment indicators.

C) Mohammed has not reported revenues as per IFRS on revenuefrom contracts with customers which recommends a five step modelfor recognition of revenue. However, he has underestimated revenuesby following a much strict policy.

D) Mohammed is not following IFRS because he has not reportedthe loan on which the bank has issued a letter to the company forrepayment under current liabilities, however as per IFRS,liabilities which are to be settled within a period of 12 monthsshould be classified as current liabilities.

E) All the expenses towards the repairs and maintenance of plantand machinery are treated as operating expenses in the financialstatements where IFRS provides for capitalisation of costs of apreviously identified component if there is a probability of futureeconomic benefits for the entity and its measurement can be donereliably.

3) Yes, accounting standards are required for preparing thefinancial statements because their main objective is to facilitatetransparency, reliability, comparability and consistency offinancial statements. They help in standardisation of accountingpolicies and principles of a country with a view to record thetransactions of all companies in a similar manner. They provide theframework of rules and regulations for reporting and accounting ina country with a view to enhance the confidence of the users offinancial statements. Accounting standards present a true and fairview of the financial position of an entity.

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