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Klugen Corporation: Financial Reporting Standards Case Study

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Updated: Dec 16th, 2020


The shift from GAAP to IFRS is an actively debated topic in the corporate domain. The difficulties associated with the transition prompted FASB to issue FAS 141R and FAS160 intended to eliminate the majority of differences, thus streamlining the process. Nevertheless, many companies are still discouraged by the complexity and short-term expenses. The following paper provides an overview of the difficulties and recommended directions for action based on the example of Klugen Corporation.

Main body

The introduction of FAS 141R and FAS160 is intended to enhance the approaches to accounting by providing a more accurate and representative assessment of the economic setting. The positive effect is to be through changes in several financial ratios. The first key ratio is the cost of transactions, which will be viewed as incurred expenses rather than included in the purchase price (IAS Plus, n.d.). Similarly, in-process R&D expenses will be considered intangible assets and, therefore, classified as expenses unless some future use is possible for the resources. Several technical differences will also factor in, such as value equity securities, which will be valued as a consideration after the deal’s termination, rather than initiation. In the same way, charges associated with restructuring will be incurred separately as expenses rather than initially as an acquisition. As a result, it is reasonable to expect changes in debt to equity ratio, which indicates total liabilities per share and return on investment, which measures total shareholder’s equity.

The effects of the changes described in the case study on Klugen’s acquisition strategies are twofold. From the strategic perspective, one of the goals of the IFRS implementation is the improvement of compatibility and consistency of financial information, including the data on acquisitions (James, 2010). Therefore, it would be reasonable to expect the increase in efficiency, seamlessness, and transparency of the process in the long run. By extension, the improvement will encourage the company to facilitate acquisitions, having a positive effect on growth. On the other hand, in the short term, the conversion of IT and accounting systems required for a switch to IFRS would require significant expenses, both to large-scale corporations and smaller business entities. As a result, some of them may be discouraged from participating in an acquisition, which will inhibit growth for Klugen Corporation.

FAS 141R and FAS 160 were issued primarily as a way to optimize the transition from GAAP to IFRS. In their current form, GAAP and IFRS result in significantly different consolidated financial statements. Admittedly, it is possible to convert between the two formats to facilitate business combinations. However, the process is relatively complex and requires the allocation of time and resources. To mitigate the difficulties, it was decided to introduce intermediary changes in the form of FAS 141R and FAS160. The former is focused on business combinations whereas the latter targets non-controlling interest in consolidated statements (James, 2010). This change allowed decreasing the entry barrier and eliminating the majority of the anticipated difficulties.

Another effect of the transition to IFRS is the concept of a qualifying special-purpose entity (SPE). In the broadest sense, an SPE is a legal entity or trust that falls under the conditions presented in FAS 140 (James, 2010). Currently, SPEs are not recognized under IFRS since the introduction of FAS166. As a result, all entities classified as SPEs need to be reassessed for the possibility to be consolidated with respective companies. The described change has several positive effects for Klugen Corporation. First, the company receives the possibility of directing the actions of former SPEs and, as a result, absorb greater gains and losses (James, 2010). In the long run, this option is expected to enhance convergence between the two systems.

The most important area of changes that need to be communicated to the management related to the IFRS adoption is the difference between the short-term and the long-term outcome. Currently, the majority of experts agree that IFRS allows for more efficient accounting practices. However, as was mentioned above, it also requires significant resources for a complete adoption, which may be incorrectly perceived as a detriment, while in fact, it would be more appropriate to consider it a long-term investment. Therefore, the potential strategic benefits should be outlined along with the likely short-term losses. Simultaneously, the main difficulties expected to occur as a result of the transition should be identified and assessed to determine whether the company can handle them. Finally, the ethical issues accompanying the decisions, such as the timing of the adoption, should be acknowledged.

One way of summarizing the benefits of IFRS is by identifying its principal differences from GAAP. The first difference is the fundamental shift from a rule-based framework towards a principle-based one. The concept of principles allows for a less rigid interpretation of scenarios and eliminates the need for exclusions pertinent to each rule. It also simplifies the research process by focusing on the fact pattern rather than the literature search for an applicable rule (Nguyen, 2018). Also, IFRS introduces several technical details, such as the elimination of a LIFO method, from permissible accounting practices, segregation of extraordinary items in income statements, and certain specificities of earnings-per-share calculation.


As can be seen, IFRS is intended as a more universal, flexible, and efficient accounting approach. However, in the short term, its adoption is associated with noticeable barriers that need to be overcome to attain long-term benefits. To facilitate a seamless transition, it is necessary to communicate the expected challenges and benefits to the management of the company.


IAS Plus. (n.d.). Web.

James, M. L. (2010). Accounting for business combinations and the convergence of international financial reporting standards with US generally accepted accounting principles: A case study. Journal of the International Academy for Case Studies, 16, 95-108.

Nguyen, J. (2018). Web.

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