Ms.Dudas would like you to recommend the proper classification of the lease under both U.S. GAAP and...

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Ms.Dudas would like you to recommend the proper classification of the lease under both U.S. GAAP and IFRS. As part of your research, she expects you to develop the necessary journal entries for the first month of the lease. If capitalization is recommended, she would like to know what the impact would be on AVE’s classified balance sheet at fiscal yearend (December 31st). Finally, based on your analysis of the lease agreement, Conmuchas would like to know whether you recommend AVE pursue early adoption of IFRS or wait until 2012 when IFRS becomes mandatory for publiclytraded Argentine corporations. AVE has a healthy balance sheet and is currently a “darling” of Wall Street bond trader
	
Document Preview: ACCT 352 Intermediate Accounting III 
Fall 2012 – Case 2 
 
Alta Velocidad Esperanza de L’Argentina, S.A. 
Alta Velocidad Esperanza de 
L’Argentina, Sociedad Anónima 
(AVE), a high-speed railway operator 
domiciled in Rio Norte, Argentina, is a 
Foreign Private Issuer as defined by the 
U.S. Securities and Exchange 
Commission. AVE currently files Form 
20-F annually with the Commission in 
which it reconciles its calendar year 
financial reporting to U.S. GAAP from 
Argentine GAAP. Rather than waiting 
until 2012 when Argentina switches to IFRS, AVE is considering early adoption of IFRS. 
This would allow AVE to take advantage of SEC Release No XXXXXXXXXXUnder such a 
plan, AVE would be eligible to file financial statements with the Commission prepared in 
accordance with International Financial Reporting Standards (IFRS) as issued by the 
International Accounting Standards Board (IASB) without reconciliation to generally 
accepted accounting principles (GAAP) as used in the United States.  
Conmuchas Dudas, AVE Chief Financial Officer, has hesitated making the move to 
IFRS because she is unsure what impact, if any, IFRS adoption will have on the 
company’s financial position. Ms. Dudas has asked you to determine if there is a 
difference in the accounting treatment between U.S. GAAP and IFRS for the following 
transaction: 
On April 1, 2011, AVE, entered into a non-cancelable agreement with 
Gastos Financieros Reál (GFR), to lease five new high-speed locomotives 
for a period of eight years. The economic life of this type of powered 
rolling stock is 11 years on average, assuming no residual value. 
However, there is a significant market for second-hand locomotives that 
allows AVE to estimate what the expected residual value of the 
locomotives might be. Ms. Dudas projects that this amount will be 20% of 
the fair value on April 1, 2011.  
The lease term will commence once the locomotives have been delivered 
to AVE’s train depot and have been accepted by an...

David · Accepted Answer

November 12, 2012
Chief Financial Officer, 
Alta Velocidad Esperanza de 
L’Argentina, Sociedad Anonima 
(AVE) 

Dear Ms. Dudas: 
 
I am pleased to get the opportunity to guide you on the decision of leasing method to be followed for the 
asset to be taken on lease by AVE. After a careful  study and analysis on the FASB, I recommend that 
your company should follow IFRS in 2011 itself rather than waiting for 2012. 
  
As per the lease in the given case is a capital lease or as per it’s 
a finance lease. According to the IFRS , “In case of Finance lease for recognizing the value of 
asset taken on lease lower of present value of minimum lease payments or fair value of asset should be 
taken  and for calculation of minimum lease payments discount rate to be followed is the borrowing rate 
of the same amount of the same asset at the same time .” Therefore ACEC should follow IFRS as they 
provide much realistic discount rate to be used and hence much realistic value of asset as compared to US 
GAAP which provide for use of implicit rate of interest as the 
discount rate which is not a rational financial criteria for valuation of lease for lessee. 
 
  
ACE will be recognizing more asset value ie $ 1,05,00,000 as per IFRS as compared to $ 
1,04,44,803 as per US GAAP & (Refer 
calculations below). Over the period of elven years it will be providing more depreciation 
as well and claiming less finance charge as expense ie $ 46,400 instead of $47,494 
per month. A reference can also be made to the extract of balance sheet & journal entries as produced in 
the appendix for a detailed comparison.  
  
Therefore, ACE should incur follow IFRS in 2011 itself and not to wait for 2012. It should also disclose 
information that enables users of the financial statements to understand the reasons for advance following 
of IFRS and leaving behind the US GAAPs.
Thank you for choosing me to assist you with these issues. If you have any questions, please don't hesitate 
to call me.  

Kind regards,  

XYZ
 
 
Ms. Dudas, CFO 
November 12,

Ms.Dudas would like you to recommend the proper classification of the lease under both U.S. GAAP and IFRS. As part of your research, she expects you to develop the necessary journal entries for the...

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