Air France, a French company, prepares its financial statements according to IFR

Question

Air France, a French company, prepares its financial statements according to IFRS. AF’s annual report for the year ended March 31, 2011, which includes financial statements and disclosure notes, provided with all new textbooks.

Required:

1) Read Notes 3.6 and 3.1. What do you think gave rise to total deferred income of €121 as of the end of fiscal 2011? Would transactions of this type be handled similarly under U. S. GAAP?

2) Is the threshold for recognizing a provision under IFRS different than it is under U.S. GAAP? Explain.

3)Note 29 lists “provisions and retirement benefits.”

A – Do the beginning and ending balances of total provisions and retirement benefits shown in Note 29 for fiscal 2011 tie to the balance sheet? By how much has the total amount of AF’s “provisions and retirement benefits” increased or decreased during fiscal 2011? (show work)

B – Prepare JE’s for the following changes in the litigation provision that occurred during fiscal 2011, assuming any amounts recorded on the income statement are recorded as “provision expense”, and any use of provisions is paid for in cash. In each case, provide a brief explanation of the event your JE is capturing.

I.New provision

II.Use of provision

III.Reversal of unnecessary provisions

          C – Is AF’s treatment of litigation provision under IFRS similar to how it would be treated under U.S. GAAP?

4) Note 29.3 lists a number of contingent liabilities. Are amounts for those items recognized as a liability on AF’s balance sheet? Explain.

Explanation / Answer

Answer:1) There was an increase in deferred income possibly due to an increase in people scheduling flights into the following fiscal year instead of the current one. Yes, transactions of this type would be handled very similarly under U.S. GAAP.

Answer:2) Yes. Under U.S. GAAP, the most likely outcome within range should be accrued. When no one outcome is more likely than the others, the minimum amount in the range of outcomes should be accrued. However, under IFRS, the best estimate for a single obligation may be the most likely outcome, although other possible outcomes should still be considered.

Answer:3)

A. Those that were labeled “noncurrent” are consistent with the amount on the balance sheet. This amount has increased during fiscal 2011.

B. i. New provision

    Provision expense A/C Dr. €604                                                         

   To cash A/C €604

Entered to record the use of a new provision

ii. Use of provision

Provision expense A/C Dr. €(479)      

            To cash A/C                           €(479)

Entered to recorded the use of a provision

iii. Reversal of unnecessary provisions

Provision expense A/C Dr. .€(19)   

     To cash                             €(19)

Entered to record reversing any unnecessary provisions.

Answer:4 Yes, under the current portion of long-term debt section.

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