Laura Tomasetti January 31, 2014 AC 207 Air France- KLM Case Part B: Property, Plant, and Equipment

and Intangible Assets B1. AF uses the straight-line method to amortize the cost of computer software development

costs. This can be found in note 3.12 where it states that, Software development costs are capitalized and amortized over their useful lives. This approach differs under U.S. GAAP because as found from the text on page 562 it states that, The percentage we use to amortize computer software development costs under U.S. GAAP is the greater of (1) the ratio of current revenues to current and anticipated revenues or (2) the straight-line percentage over the useful life of the software. This approach is allowed under IFRS, but not required. (Spiceland, Sepe, Nelson, 562). B2. From what was found from the text, the differences between U.S. GAAP and IFRS in

accounting for research and development expenditures are, Except for the software and development costs incurred after technological feasibility has been established, U.S. GAAP requires all R&D expenditures to be expensed in the period incurred. IAS No. 38 draws a distinction between research activities and development activities. Research expenditures are expensed in the period incurred. However, development expenditures that meet specified criteria are capitalized as an intangible asset. (Spiceland, Sepe, Nelson, 561). B3. The difference between IFRS and U.S. GAAP in accounting for government grants as

found in the text is, For government grants, though, the way that value is recorded is different under the two sets of standards. Unlike U.S. GAAP, donated assets are not recorded as revenue under IFRS. IAS No. 20 requires that government grants be recognized in income over the periods necessary to match them on a systematic basis with the related costs that they are intended to compensate. IAS No. 20 allows two alternatives for grants related to assets: 1. Deduct the amount of the grant in determining the initial cost of the asset.

2. Record the grant as a liability, deferred income, in the balance sheet and recognize it in the income statement systematically over the assets useful life. (Spiceland, Sepe, Nelson 545). B4. The journal entry to record the reevaluation would be: Dr. Flight Equipment Cr. Accum. Dep. Flight EquipmentTotal gross value * new FV/ old FV 18,486*12,000/11,040 = 20,093 20,093-18,486=1,607 1,607 mil. 647 mil.

Accum. Dep.Total deprecation*new FV/old FV 7,446*12,000/11,040 = 8,093 8,093-7,446=647

B.5

As found in our accounting textbook, under U.S GAAP a company reports property,

plant, and equipment in the balance sheet at cost less accumulated depreciation (book value). U.S. GAAP prohibits revaluation. (Spiceland, Sepe, Nelson 600).

B6.

The differences between IFRS and U.S. GAAP that were stated in the text were, IAS

No. 16 requires that each component of an item of property, plant, and equipment must be depreciated separately if its cost is significant in relation to the total cost of the item. In the United States, component depreciated is allowed but is not often used in practice. U.S. GAAP and IFRS determine depreciable base in the same way, by subtracting estimated residual value

from cost. However, IFRS requires a review of residual values at least annually. (Spiceland, Sepe, Nelson 597).

B7.

AF tests for possible impairment of fixed assets when there is an indication of

impairment. Assets with an indefinite useful life are tested at least once a year on December 31. This information can be found in Note 3.14 of AFs financial report. As per our textbook, U.S. GAAP differs with when they test for an impairment by testing, When events or changes in circumstances indicate that book value may not be recoverable.

B8.

The approach AF uses to determine fixed assets impairment is mentioned in Note 3.14. It

states that, the Group deems the recoverable value of the asset to be higher of market value less cost of disposal and its value in use. The latter is determined according to the discounted future flow cash method The measurement of an impairment loss under U.S GAAP contains two steps. Step one is the recoverability testan impairment loss is only required when the undiscounted sum of future cash flows is less than book value. If it is a loss, then one would follow step two which is the measurement of the impairment loss. This is the difference between book value and fair value of the asset (Spiceland, Sepe, Nelson 614).

B9.

The journal entry would be:

Dr. Revaluation expense Cr. Other intangible assets

13 mil. 13 mil.

Book value-FV 373-360=13 * Book value came from AFs financial report, Note 16.