BWC will be impacted by the IFRS’ practice for measuring contingent (accrued liabilities). IFRS offers criteria to account for and disclose gain and loss contingencies. For example, BWC’s potential litigation matter and warranty costs were not recognized under GAAP. Converting to IFRS, the probability of a loss in the legal case and the likely hood of computer chip defects met IFRS’ measurement criteria and were recognized as accrued liabilities.
Furthermore, BWC’s method for inventory will change under IFRS. Though GAAP offers more rules to account for inventories, IFRS’ identification of items sold and unsold is a huge contrast from BWC’s current practice. BWC uses the Last-in, First out (LIFO) method to match the cost of goods sold; IFRS doesn’t permit LIFO so BWC must implement the First in-First (FIFO) to match costs of its inventory. This means that BWC will have to pull the LIFO reserve back into their taxable income. Of course, this could potentially lead to increased taxes. The European rate of 30% will be far less than the 50% rate BWC experiences in the U.S. However, BWC has to pay attention to the IFRS regulations and implications.
Ratio Analysis:
Current Ratio. The current ratio analysis offers an analysis of a company’s ability to pay back its short term liability. The table below illustrates the impact of the IFRS conversion on BWC. Under GAAP the company had a ratio over 1 suggesting that BWC could pay off obligations. The ratio under IFRS falls below 1. Current Assets Current Liabilities Ratio
GAAP 482,000 434,000 1.11
IFRS 434,000 624,000